In the Adam Sandler movie Big Daddy, Adam’s girlfriend leaves the lovable slacker for a much older man because “he has a five-year plan.” Steven P. Larson, an associate with McCarthy, Lebit, Crystal & Liffman, says in his blog that in an ideal world, business owners should have the time to take both a short-term and long-term look at the future, and develop a formal five-year or ten-year plan. In reality, many are too busy with current operations to begin planning for the next five years down the road, let alone ten.
However, for C-corporation business owners nearing retirement age or looking to cash out on their years of hard work, it is particularly important to start preparing sooner rather than later for a sale. By properly planning and timing the conversion from C-corporation to S-corporation, a business owner may avoid the C-corporation double taxation gains upon the sale of the business’ assets and significantly increase the cash that will help fund retirement or the next venture.
Shawn Donovan, a CPA with Santos, Postal & Company, P.C. – one of Topline’s co-founders – notes the importance of the PATH Act, which was permanently signed into law at the end of 2015. As a result, many business owners were given new guarantees with regards to certain popular tax provisions. Since 2012, Congress had been waiting until the last minute and then granting a one-year extension to these provisions. Unfortunately, these one-year extensions did not give business owners and tax professionals any confidence about longevity.
One of these popular tax provisions was a reduction to a five-year, built-in gains holding period for S-corporations as opposed to a ten-year, built-in gains holding period. With many business owners in the baby boomer generation nearing retirement age, planning an exit strategy has become a hot-button issue for them.
The permanent extension of the PATH Act gives business owners clarity; should they go the route of selling their S-corporation business, they can be assured and plan accordingly knowing that the holding period for built-in gains tax provision will definitely be the law and no surprise double standard will occur upon sale.
So, what’s your five year plan?