When you sell an item that is valuable, something that is an asset you are expected to declare capital gain on the asset you sold for the payment of your capital gain tax. Capital gain tax is a tax you pay on the profit you made when you sell something valuable usually an asset that has increased in value from when you bought it. Some assets that you are expected to pay capital gain tax are; real estate, stock, precious metals like gold, silver, diamond, company or business.
Putting it in a lay man’s understanding, you purchased an item and the price of that item appreciated in value over the years. After you sell that item, you are expected to pay a type of tax called capital gain tax on the sales of the item. Let’s take for instance, you invested in gold some five years back and the prize was $50 per carat back them, and five years down the line, the prize appreciates to $250 per carat and you wish to sell the gold you to make profits. You are expected to pay capital gain tax from the profits you make from the sales of the gold.
Likewise, if you bought or started out a company or business and the value appreciates over the time, you will be charged capital gain tax anytime you sell the company or business. In most countries, capital gain taxes are charged from 10% to 20% of the profits made from the sales of the asset. Avoiding capital gain tax is considered illegal or an offense and offenders are liable to face prison terms as a punishment.
For this article, I will focus on capital gain tax as it relates to selling you business and how you can avoid paying such tax legally.
5 Smart Ways to Avoid Capital Gain Tax When Selling a Business
I have mentioned above that if you are selling your business at a price that is higher than the purchase price or you made profits over the year while running the business; anytime you decide to sell, you will required to pay capital gain tax on the profits you made. Paying up to 20% of your profits can be uncomfortable especially if you already made plans to channel your profits to another venture. These 5 ways listed below can help you avoid or reduce the amount payable on capital gain tax without incurring any punishment from the law.
1. Open a Private Annuity Trust Account-: If you sell your company, the capital gain tax will be calculated based on the monetary profits you made from the sales; one way to avoid this is to use a private or charitable trust account to avoid payment of capital gain tax. This process involves transferring all the shares in your company to a trust account or a charitable trust before selling the company. After the company has been sold, the profits are ploughed back into the trust account, while you will be paid little percentage from the account monthly. After your death, your beneficiary may be taxed after your death when the trust fund will be willed to them but the amount will be very little compared to the amount you would have paid on capital gain tax.
2. Reinvest the Profits and Start up a New Business-: Another way to avoid capital gain tax is by using the profits made from the sales of the company to start up a new business. If you are in a country like the united states, the Internal Revenue Services (IRS) permits you to use capital gain income made from the sales of your old company to offset expenses for starting a new business. Meaning that if you can show proofs that the profits will be used to start a new business, IRS will waive the capital gain tax on the profits made from the sales of your old business.
3. Invest in Retirement Account-: Another way to avoid payment of capital gain tax when selling your business is to open a retirement account and putting the money made from the sales into the retirement account. The account may be surcharged for taxes when you start receiving your retirement funds, but by then you have succeeded in slashing the amount that you would have paid on capital gain tax by over 70 percent.
4. Apply the Installment Payment Method-: This method is kind of risky and depends mostly on trust. I will explain why I said this later. You can make an agreement to the buyer to pay you the price for the company on installments over a period of more than one year. Since you are required to pay tax on amount or installments paid within one year, you will get to pay little amount on capital gain tax. Remember that I mentioned that this method is kind of risky; why I said so is that if the buyer is not trustworthy to pay you the installments over the agreed period of time, you may have a problem recovering your money.
5. Open a College Account-: If you have a child that will be going off to college soon, you can use the profits made from the sales of your company to open a college account for your child to help offset college bills. This type of account does not attract tax payment and can be used as an exemption from payment of capital gain tax from profits made from sales of your company.
So far, I have explained how capital gain tax works and assets that you are required to pay capital gain tax on. I went further to mention five ways you can reduce or avoid payment of capital gin tax for profits made from selling your business. In conclusion, just note that sometimes, avoiding or reduction of capital gain tax comes with future payments that would out cost the initial amount that would have been paid for the gain tax. Before implementing any of the above, consult your financial advisor or account officer to help you make a better decision.
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