Using Structured Installment Sales to Reduce Capital Gains on the Sale of a Professional Practice

Today I'm going to be talking about the topic of whether a professional practice can be sold and take advantage of a structured sale so as to spread out a tax hit and lock in cash flow as lawyers, accountants, doctors and others start to retire and transfer their professional practices. Most people think of structured sales for just real estate, but you can use them for the sale of a professional practice and reap many of the same benefits provided you are properly organized and prepared at time of sale. 

Now when I talk about a structured sale, let's keep in mind that it's essentially a very common tax strategy called an installment sale. Installment sales have been enshrined in the US Tax code since just about forever, the process is well understood by just about every CPA and tax professional, as well as business brokers who work with you to sell professional practices. Just because someone decided to brand these as "structured sales" doesn't mean they take on some mysterious tax strategy, in fact it's just the opposite. It's pretty vanilla at it's core.

Where it does differ from an installment sale is that instead of the seller relying upon the credit worthiness and business acumen of the buyer to make the future payments, a structured installment sale TRANSFERS that obligation for the payments to a secure third party institution such as a life insurance company or trust company. This assignment of liabilty is a pretty simple process and essentially transfers the obligation to the third party with no strings attached to the buyer. That's a simple explanation but for now if you want to know more on the mechanics of that, go to my web page at Wahlstrom & Associates and you can see in greater detail how the assignment works. 

However, this video is about selling your professional practice so lets hit the three key points quickly that you need to know. They are Qualify, Notify and Planning. 

1. What is your business entity organized as? Sole proprietor, single member LLC, multiple member LLC, S Corp, etc. All of this matters big time as to how the IRS will classify the sale of your practice, so the first step before you even consider a structured sale is get top level tax advice as to the best entity organization for your company ahead of your exit strategy or asset sale. This has to be done first so you know what, if any, parts of your business qualify as capital assets. 

2. Is the buyer on board with you selling in an installment sale basis and agreeing to the assignment of the obligation to make payments to a third party. So many people wait until the very end to raise this with a buyer, who in many cases gets spooked by their unfamiliarity with the concept and refuses to execute the assignment or installment sale. I can't stress enough the importance of NOTIFYING the buyer early you intend to use this concept. 

3. Have a clear plan for your distribution of the installment payments. By this I mean look at the rates offered by the life insurance company on the funds held, decide how long you want payments to be spread out over time, but most importantly how you plan to reinvest or use those assets once they arrive each year. Map out your post retirement expenses, investment plans or estate planning and maximize the value of each year's payments to insure you leverage this tax planning tactic to it's maximum value. 

If you have questions, go to my web page at Wahlstrom & Associates.com or call my office at 480-478-0183. I'm happy to help you and your team of advisors understand how to make structured installment sales work for you.