by: Steve Whitehill
When selling your business, you always want to go with the strategy that is most beneficial to you. In some cases, an outright sale may be limiting. As an alternative, you may want to consider an Intermediated Installment Sale.
First, let’s start with the basics. What is an Intermediated Installment Sale? It is when you sell an asset to a trust and receive the payments as installments over a defined period of time. Revenue and expense are recognized at the time of cash collection instead of at the time of sale. Thus, you pay taxes as you go rather than in one lump sum.
This sale structure offers numerous benefits that an outright sale does not, including:
- Deferring capital gains payment
This method is useful for taxpayers who wish to defer capital gains to future years. Since you pay taxes little by little over time, you can defer the payment of capital gains taxes while lowering your tax liability and keeping you within a desired tax bracket.
- Asset protection against creditors and lawsuits
By law, your Intermediated Installment Sale is protected from creditors and lawsuits. This law can only be changed by congress.
- Alternative income throughout the sales process
This method is common with real estate sale, so that you don’t lose the revenue stream as you would with an outright sale. Installment sales require the buyer to make regular, annual payments (installments). For example, a best use case scenario is a property with no mortgages, creating a steady stream of income throughout a number of years.
- Increased investment options
Income is reported and taxed as it is received from the trust. Since taxes are not deducted upfront, you’ll have more funds to allocate to your portfolio than you would with a direct sale.
- Improved risk management
With more funds available, you’ll be able to better diversify your portfolio thus eliminating overall, potential risk.
Now, you may be thinking than an Intermediated Installment Sale sounds like a great option for you. Before you move forward, you should know that there are some restrictions:
- This type of structure can not be used when the property or asset is sold at a loss or sold by dealers
- An Installment sale can not be used for inventory that is sold during the normal course of business
- Stocks or other investment securities can not be used for an installment sale
- Installment sales are restricted to individual buyers and sellers
Ready to talk to an experienced professional and determine whether or not an Intermediated Installment Sale is right for you? Contact us today.