How To Make the Most of Tax Deferrals?

Our tax system provides special tax planning rules to meet the business succession needs of small businesses. These rules enable businesses to benefit equally, whether they are owned personally or through a partnership or corporate structure. If you plan your business in the right manner, at the right time in your life, you might be able to benefit from the tax-exemption policies.

The Enhanced Capital Gains Exemption

An enhanced lifetime capital gains exemption of $750,000 may be available on the sale of your qualifying property, subject to some conditions. If your business meets the “ownership and usage” criteria that are somewhat less stringent if you acquired the property prior to June 18, 1987, you may be eligible for the exemption. If you have previously claimed the exemption on a disposition of qualified property, the amount you claimed will reduce the amount of exemption available on the sale or transfer of your property.

If you transfer the property to a qualifying family member at its fair market value or at less than fair market value, there may be an opportunity to multiply the use of the lifetime capital gains exemption. This way you can utilize your personal exemption and your successor can also use their exemption when they sell. Talk to your professional legal and tax advisors to determine whether these opportunities could work for you and your business.

Tax-Deferred Transfers to Family Members

Our government supports certain types of business by allowing the owners to transfer their property to their children on a tax-deferred basis during their lifetime, or when their estate is settled. This also applies when shares of a family corporation or an interest in a family partnership are transferred from a parent to their child. As discussed in my post Success Tips for Small Businesses, all newbies need to start off on the right foot by avoiding legal, tax and financial problems that often trip up the freshly self-employed, just like all small and big business owners. Here are some tips for making your launch successful. Whether to operate as a sole proprietorship or as a corporate entity is one of the first questions that every small-business owner has to consider. Initially, you automatically start out as a sole proprietorship. This costs no money because you don’t have to pay to create corporate documents and tax returns as a sole proprietor. Whether you want to continue to operate as a sole proprietor, however, depends on your personal risk tolerance and the kind of business that you plan to start.

If your business qualifies for a tax-deferred transfer at the time of death or if you choose to transfer it during your lifetime, you may be able to postpone the payment of tax on any taxable capital gain until the child to whom you have transferred sells the property. You can also transfer such business property to your spouse or common law partner during your lifetime and potentially postpone payment of tax on capital gains until your spouse decides to sell.

Inheritance

When deciding who will inherit your family business, there are many factors to consider. The choices you make can determine how the business will prosper in the years ahead, so take some time for discussions with family members. A large percentage of agricultural businesses consider it important to keep the business in the family but relatively few family businesses survive to the second generation.

Do you intend to retire from the business and pass it on to the next generation during your lifetime, or on your death? If one of your children/grandchildren is to take over the business, ask yourself whether they have the business acumen, experience or desire to do so successfully. If there are several children in the family, are any other children likely to be involved in the ongoing ownership and management of the business and, if not, are you making other arrangements for these children? Have other family members made a commitment to the business, financial or otherwise, or a contribution that you should recognize?

Fair Deal

Treating your children fairly does not necessarily require that you provide each of them with an identical inheritance. If only one of your children will inherit the business, and there are insufficient funds to provide an equivalent-sized inheritance to your other children, try to structure a division of property that is fair to everyone. If there are children who are not involved in the family business, have you already provided gifts to them?

HyperEffects can work with you to devise a business strategy that is consistent with your needs and goals and, if necessary, act as an objective third party to help you identify issues that may need to be addressed. Contact us for our free one-hour session to discuss the critical issues of your business and media and let our experts chart out a plan for you!

Disclaimer: The information provided here is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any issue or problem. The opinions expressed here are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.