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February 8, 2023
February 8, 2023
February 8, 2023
February 15, 2023
by Danelle
Jenetayeva
February 8, 2023
Preserving wealth can be harder than creating it. Founders often lose tens of millions of dollars in taxes because they are not aware of the obscure tax benefits available to them.
Out of the 77,000 pages, 20 pages are about what's taxable. The rest of it is about how to avoid tax, and the majority of those tax benefits are available exclusively to founders.
Five years after founding his tech startup, Chris had a $23 Million exit offer. This was life-changing money. It would create a lot of opportunities, but also some uncertainty.
Of course, Chris anticipated paying a large tax bill. But he didn’t know that he could avoid much of it. He knew that he qualified to exclude at least $10 Million from taxation. But he wasn’t aware that he could also stack multiple $10 Million exclusions and have a tax-free exit.
He was expecting to walk away with $16.9 Million, but he actually banked $21.3 Million. He reduced his effective tax rate from 26.5% to 7.4% by integrating multiple strategies to his benefit.
While Chris banked $21.3 of $23 Million, these strategies could be applied to a $50 Million exit. Instead of a $35.5 Million payday, the founder could potentially take home $43.4 Million. That's an extra $7.9 Million just by having the right strategies in place.
Schedule a quick virtual coffee here to find out how much your exit could be worth.
Founders can exclude a minimum of $10 Million from federal capital gain tax upon the sale of their business. This is known as a Section 1202 or QSBS exclusion. It stands for Qualified Small Business Stock, which the founder must have held for at least 5 years prior to the exit.
The founder can also ‘stack’ multiple QSBS exclusions and avoid tax on tens of millions of dollars. This is done using certain types of trusts or carefully structured gifts to individuals.
A QSBS status can be life-changing, so it's critical to avoid the pitfalls that can compromise the benefit. Some examples of potential hazards include recapitalization, restructuring, and owning certain types of assets within the corporation.
The easiest way to ruin the QSBS tax exclusion is to structure the exit as an asset sale instead of a stock sale. An asset sale usually benefits the buyer more than the seller because of the tax benefits and liability protection. So it’s crucial to get expert guidance before negotiating the transaction.
California often doesn’t conform to federal laws, including the QSBS tax exclusion. You could consider leaving California (read about it here). However, it's possible to avoid state tax through the use of a trust. There are a few rules to follow, but it's easily accomplished.
QSBS rollover is another way for founders interested in angel or venture capital investing. The founder can defer capital gain tax by reinvesting the sale proceeds into a replacement QSBS within 60 days of the exit.
Streamlining all the strategies is a balancing act. You can go to an extreme and save the most in tax, but become asset-rich and cash-poor. Or lose the hard earned windfall to bad investment decisions. Expert guidance helps you coordinate the optimal business exit with your personal financial plan.
What to learn more about how you can maximize your win?
by Danelle
Jenetayeva
February 8, 2023
Preserving wealth can be harder than creating it. Founders often lose tens of millions of dollars in taxes because they are not aware of the obscure tax benefits available to them.
Out of the 77,000 pages, 20 pages are about what's taxable. The rest of it is about how to avoid tax, and the majority of those tax benefits are available exclusively to founders.
Five years after founding his tech startup, Chris had a $23 Million exit offer. This was life-changing money. It would create a lot of opportunities, but also some uncertainty.
Of course, Chris anticipated paying a large tax bill. But he didn’t know that he could avoid much of it. He knew that he qualified to exclude at least $10 Million from taxation. But he wasn’t aware that he could also stack multiple $10 Million exclusions and have a tax-free exit.
He was expecting to walk away with $16.9 Million, but he actually banked $21.3 Million. He reduced his effective tax rate from 26.5% to 7.4% by integrating multiple strategies to his benefit.
While Chris banked $21.3 of $23 Million, these strategies could be applied to a $50 Million exit. Instead of a $35.5 Million payday, the founder could potentially take home $43.4 Million. That's an extra $7.9 Million just by having the right strategies in place.
Schedule a quick virtual coffee here to find out how much your exit could be worth.
Founders can exclude a minimum of $10 Million from federal capital gain tax upon the sale of their business. This is known as a Section 1202 or QSBS exclusion. It stands for Qualified Small Business Stock, which the founder must have held for at least 5 years prior to the exit.
The founder can also ‘stack’ multiple QSBS exclusions and avoid tax on tens of millions of dollars. This is done using certain types of trusts or carefully structured gifts to individuals.
A QSBS status can be life-changing, so it's critical to avoid the pitfalls that can compromise the benefit. Some examples of potential hazards include recapitalization, restructuring, and owning certain types of assets within the corporation.
The easiest way to ruin the QSBS tax exclusion is to structure the exit as an asset sale instead of a stock sale. An asset sale usually benefits the buyer more than the seller because of the tax benefits and liability protection. So it’s crucial to get expert guidance before negotiating the transaction.
California often doesn’t conform to federal laws, including the QSBS tax exclusion. You could consider leaving California (read about it here). However, it's possible to avoid state tax through the use of a trust. There are a few rules to follow, but it's easily accomplished.
QSBS rollover is another way for founders interested in angel or venture capital investing. The founder can defer capital gain tax by reinvesting the sale proceeds into a replacement QSBS within 60 days of the exit.
Streamlining all the strategies is a balancing act. You can go to an extreme and save the most in tax, but become asset-rich and cash-poor. Or lose the hard earned windfall to bad investment decisions. Expert guidance helps you coordinate the optimal business exit with your personal financial plan.
What to learn more about how you can maximize your win?
February 8, 2023
February 8, 2023
How a Founder Scored $23M Tax-Free Win
February 10, 2023
How to Leave California Without Lingering Tax Consequences
February 9, 2023
