One of the areas to consider, prior to the sale of a business, is the tax planning that goes into an effective sale. All too often, business owners do not consider tax planning until after a letter of intent has been signed which is often too late. If possible, begin your tax planning as soon as possible before the sale. 

Tax planning is divided into two parts, income tax planning and estate tax planning. The latter becomes somewhat difficult because of the lack of an estate tax in 2010, but in all likelihood the estate tax will return to the scene in 2011 and thereafter.

• You need to be sure to convert as much of the sale proceeds to capital gains rather then ordinary income. This may start with the initial decision to do a sale of stock of the corporation rather than a sale of the assets of the business.
• You also need to try to insure that any expenses related to the sale are fully deductible as related expenses. For example, try to characterize attorney and accounting fees as ordinary income deductions rather than additions to basis, which are offsets to capital gains and taxable at a 15% rate.
• You may also want to gift stock to family members who are in lower income tax brackets and pay a lesser amount of tax.
• Finally, an area to always consider prior to a sale is charitable gifting such as charitable remainder trusts and charitable lead trusts. A gift to a charitable remainder trust, which is a trust for a term or for the life of an individual, then to a charity will reduce or eliminate income tax on the sale. 

• One way to reduce taxes is by making sure some of the ownership of the business is in the seller’s spouse’s name in order to take full advantage of the Federal estate tax marital deduction.
• Another option to consider is to gift to family members, or to other donees, well before the sale when the value of the business for purposes of determining the gift tax may well be less than the ultimate value received on the sale of the business.
• It is always beneficial to place the shares of the business in a charitable remainder trust to eliminate any estate tax on the sale.
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• The important point to remember is that tax planning begins well in advance of the sale of your business, and the further in advance you beginning planning, the better for purposes of insuring the validity of the tax planning.

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