If You Own a Home Care or Social Services Agency, Tax Panning Begins Now!

Current tax rates are likely the lowest we will see in our lifetimes. At some point, the burgeoning budget deficits, ballooning costs of social programs and the War on Terror must be paid. So expect tax increases.

For most home care business owners, this means the tax bill due on exchange of ownership will rise. We have compiled a list of actions you can take immediately to reduce your future tax bill.

Prepare to sell sooner rather than later. This doesn’t mean rushing to market; it means now is the time to begin planning. Your planning goals serve to increase your home care business valuation and to decrease future taxes. If we know taxes will rise, it just makes sense to prepare.

Recognize the importance of careful tax planning. Minimizing taxes is not your only goal. The tax consequences for your eventual buyer are also vital. The greater the tax on your buyer’s income stream, the lower the offered purchase price maybe be and the longer it will take to pay off.–neither is particularly attractive to you or the buyer. Proactive tax planning can help cushion your business from tax increases. Obviously, you need to first consult an experienced tax advisor.

Don’t ignore estate taxes. These may increase along with income and social security taxes. Don’t expect a reduction in or elimination of estate taxes. If you delay estate and gift tax planning, the IRS may benefit rather than you and your family.

Check your entity. If your business is currently organized as a “C” corporation, talk to your tax advisor about the advantages and disadvantages of converting to an “S” corporation. Also discuss the creation of multiple entities for tax benefits and asset protection.

Evaluate capitalization. Beware of over-capitalization. Delaying cash distribution may cost you in future taxes. Consult your advisors about taking out cash now.

Examine various tax-advantaged tools. With planning, you and your business may be able to utilize tax-advantaged transfer tools such as Employee Stock Ownership Plans (ESOPs), Charitable Remainder Trusts (CRTs), or tax-free exchanges. Examine the costs and benefits of each tool, and remember that when it comes to tax benefits, when the IRS “giveth” it usually also “taketh away.”

Consider a partial ownership transfer. If you are thinking of passing part of your business to your children or employees who have little cash–and who must look to the business for cash flow and pay taxes on it–consider beginning the transfer ASAP. Today’s low tax rates will have less impact on cash flow.

The bottom line is that when (not “if”) tax rates increase, you may end up with less money. Remember that if your goal is to leave your company with a bushel of cash, the IRS may take a larger share of that bushel–based not only on the size of that bushel but also on the government’s needs.

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About Risa Baker

Risa is Managing Director of PARTNERS 31. Her natural enthusiasm and years of industry experience will successfully guide your business, whatever its size or specialty, through every aspect of exit planning, from strategy to sale.

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