As an independent insurance agency owner, understanding the tax implications of your business decision is critical, especially when considering a sale or transfer of ownership. The first article in this series examined the impacts of goodwill versus capital gains taxation, and how the tax implications can significantly affect the financial outcomes for both buyers and sellers. This article will examine some strategies for minimizing tax liabilities.
Tax Planning Strategies Independent Insurance Agencies
When an agency owner decides to sell their agency, there are many things to consider. Owners need to decide if they are selling internally to family members or key employees. They also need to consider the timeline of the sale and to better understand all of the moving parts. And, as this is likely the owners’ largest asset, they need to understand how to minimize the tax liabilities tied to the sale. Independent insurance agencies should consider the following tax planning strategies.
Corporate Structure
The agency’s corporate structure should also be considered, and if the runway is long enough, changed. Agency acquirers generally prefer to purchase assets, versus stock, due to the tax benefits associated with an asset purchase, along with reduced liability exposure. An agency that is structured as an LLC or an S-Corp avoids double taxation, whereas an agency structured as a C-Corp is subject to double taxation.
It might be prudent to convert from a C-Corp to one of the other pass-through agency structures as soon as possible. There is a waiting period of five years to convert to an S-Corp, so time is of the essence if considering a sale in the foreseeable future.
Installment Sales
One strategy for managing the tax impact of a sale is to use an installment sale, where the buyer pays for the business over time. This allows the seller to spread out the capital gains tax over several years, potentially lowering the total tax liability. By receiving payments over multiple tax years, the seller may also avoid pushing themselves into a higher tax bracket, which could result in a higher overall tax rate (source).
Section 1031 Exchange
While traditionally associated with real estate, some businesses can defer capital gains taxes by using a Section 1031 exchange, which allows for the reinvestment of proceeds from the sale into a smaller business. However, the applicability of Section 1031 exchanges to goodwill is limited and should be discussed with a tax advisor before being implemented.
Proper Allocation of Sale Proceeds
As mentioned, careful attention must be given to how the purchase price is allocated. Working with a tax professional to ensure that as much of the purchase price as possible is allocated to goodwill can significantly reduce the tax burden on the seller.
Stay Updated on Tax Laws
Tax laws, particularly those related to capital gains and business sales, are subject to change, especially following a presidential election. For example, changes to capital gains tax rates or new regulations on the treatment of goodwill could alter the tax implications of selling an insurance agency. It is important for agency owners to stay informed about these changes and adjust their tax planning strategies accordingly.
Conclusion
Selling an independent insurance agency requires careful tax planning to minimize liabilities and maximize the financial return from the transaction structure and tax-saving strategies, agency owners can significantly reduce their tax burden. IA Valuations recommends working closely with your tax professional to ensure that the sale is structured in the most tax-efficient manner, allowing you to retain more of the value you’ve worked hard to create. With the right planning and expert advice, agency owners can make informed decisions and maximize their value. To learn more about tax planning and to discuss your unique situation, reach out to Craig at craig@iavaluations.com.
By: Craig Niess, CVA, MBA, Director of Business Planning & Valuations
About IA Valuations and Agency Link – Founded in 2017, the IA Valuations team has performed over 270 valuations to independent insurance agencies across the U.S. Our advisors have 25+ years of experience guiding agency owners on maximizing their agency value, planning, and legal needs for ownership transition. In addition, IA Valuations has provided perpetuation planning, financial modeling and business planning for independent insurance agencies. Finally, IA Valuations has advised dozens of agency owners on selling their agencies through our Agency Link process. Agency Link is a platform that connects buyers and sellers together to further the growth and strength of the IA system. To learn more about IA Valuations, please visit IAValuations.com or contact@iavaluations.com.
The information provided in these documents is general in nature and shall not be construed as personal legal, tax or financial advice for your situation. Please contact@iavaluations.com to discuss your personal situation.
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