As an independent insurance agency owner, understanding the tax implications of your business decisions is critical, especially when considering a sale or transfer of ownership. The first article in this series examined the impacts of goodwill versus capital gains taxation and how these tax implications can significantly affect the financial outcomes for both buyers and sellers. This article will explore strategies for minimizing tax liabilities.
Tax Planning Strategies for Independent Insurance Agencies
When an agency owner decides to sell their agency, there are many factors to consider. Owners must determine whether they are selling internally to family members or key employees. They also need to consider the sale’s timeline and gain a clear understanding of all the moving parts. Since this is likely the owner’s largest asset, minimizing tax liabilities tied to the sale is crucial. Independent insurance agencies should consider the following tax planning strategies:
Corporate Structure Considerations
The agency’s corporate structure should be carefully evaluated, and, if there is sufficient time before the sale, adjusted accordingly. Buyers generally prefer to purchase assets rather than stock due to the tax benefits associated with an asset purchase, as well as reduced liability exposure. An agency structured as an LLC or an S-Corp avoids double taxation, whereas a C-Corp is subject to double taxation—meaning taxes apply both at the entity level and at the owner’s personal tax rate. To avoid this, it may be prudent to convert from a C-Corp to a pass-through entity such as an S-Corp or LLC as soon as possible. However, since there is a five-year waiting period to convert to an S-Corp, time is of the essence if a sale is anticipated in the foreseeable future.
Installment Sales
One strategy for managing the tax impact of a sale is to use an installment sale, in which the buyer pays for the business over time. This allows the seller to spread out capital gains taxes over several years, potentially lowering their total tax liability. By receiving payments across multiple tax years, the seller may also avoid moving into a higher tax bracket, which could otherwise result in a higher overall tax rate. (Source)
Section 1031 Exchange
While traditionally associated with real estate, some businesses may defer capital gains taxes through a Section 1031 exchange, which allows for the reinvestment of proceeds from the sale into a similar business. However, the applicability of Section 1031 exchanges to goodwill is limited and should be discussed with a tax advisor before implementation.
Proper Allocation of Sale Proceeds
As previously mentioned, careful attention must be given to how the purchase price is allocated. Working with a tax professional to ensure that as much of the purchase price as possible is allocated to goodwill can significantly reduce the seller’s tax burden.
Stay Updated on Tax Laws
Tax laws, particularly those related to capital gains and business sales, are subject to change, especially following a presidential election. For example, modifications to capital gains tax rates or new regulations regarding goodwill treatment could alter the tax implications of selling an insurance agency. It is crucial for agency owners to stay informed about these changes and adjust their tax planning strategies accordingly.
Conclusion
Selling an independent insurance agency requires careful tax planning to minimize liabilities and maximize financial returns. By understanding and selecting the right transaction structure and tax-saving strategies, agency owners can significantly reduce their tax burden. IA Valuations recommends working closely with a tax professional to ensure the sale is structured in the most tax-efficient manner, allowing owners to retain more of the value they have worked hard to create. With the right planning and expert advice, agency owners can make informed decisions and maximize their value.
If you have any questions, please reach out to Craig Niess, Director of Business Planning & Valuations, at (216) 288-8409 or craig@ohioinsuranceagents.com.
About the Author:
Crag Niess is the Director of Business Planning & Valuation for IA Valuations. Between his time with OIA/IA Valuations and MarshBerry, Craig has over a decade of financial and operational consulting experience with independent insurance agencies. He has advised many independent agency owners on their transition and perpetuation plans, created financial models to support an ownership transition, and developed producer hiring and business planning for agency growth. In addition, he has completed hundreds of valuations and consulting projects for independent agencies of all sizes. He holds a BA in Economics from Ohio Wesleyan University and an MBA in Finance from the University of Iowa. He also earned the highest and most prestigious designation in the valuation profession – the Certified Valuation Analyst designation.
