Something most rags-to riches stories have in common is that a good budget is always needed to help anyone achieve financial security. If you want to significantly improve your credit, you have to learn how to pace your spending and increase your savings.
This is the fifth article in a five part series that reviews the Section 1042 Capital Gains Tax Deferral. In this last installment we will briefly discuss how to potentially eliminate capital gains taxes on proceeds from the sale of a business and we will discuss the summary points on a C-Corp vs. S-Corp sale. One of the more powerful uses of the Section 1042 capital gains tax deferral is the elimination of capital gains taxes in their entirety. This requires planning, but in certain circumstances, the seller may be able to entirely eliminate capital gains taxes on the sale of their business.
Elimination of Capital Gains Taxes under Section 1042
We mentioned earlier that the deferral of capital gains taxes using Section 1042 could be turned into the elimination of capital gains taxes in their entirety. This occurs when the seller holds the investment in QRP until death. At that time, the QRP passes on to the seller’s heirs with a step up in basis. As the basis in the assets is now equal to the value of the investments, there is no capital gain to tax and, therefore, no capital gains taxes due. Please note that the overall estate, including the QRP, may be subject to Federal or state estate taxes, unless some other exemption exists. Still, avoiding a 30% or more in capital gains tax remains attractive and offers significant savings.
As we move towards the close on the sale of a Refrigerated Motor Carrier it comes to mind the various issues that can occur during the contract / due diligence period and how to avoid them in the future:
a. Negotiate your LOI closely and with detail, as much detail as can reasonably be put into the document. This closes the gap between LOI terms and contract / due diligence.
b. If at all possible get a schedule in place for the due diligence period. Keeping everyone on track and targeting a hard date.
c. Extended closes rarely close. A long closing period, one that is greater that 90 days is often a sign of a reluctant buyer. Tight fast closes with everyone on task are the best unless there are legal and regulatory filings to be completed.
d. Stay in the “Loop”, intermediaries are sometimes cut out of the contract process, This often leads to un wanted surprises such as a “blown deal” or a fee cut at close to the banker.
e. KNOW YOUR CLIENT! Spend extra time in the due diligence so you understand each line item of the financial statements and the schedules behind thme. Beware of unspoken non-finance issues as transitioning off of a family run company.