🟠 3 BIG tax strategies utilized by entrepreneurs to avoid capital gains at exit

The SMB Scoop is highlighting the IESE report titled “Tax Strategy as a Capital Allocation Consideration in Entrepreneurial Acquisition” today.

It outlines 3 BIG tax strategies utilized by entrepreneurs to reduce or eliminate taxes both during and at exit. It really is a ‘must read’ report:

1. Opportunity Zones

2. QSBS (Section 1202)

3. Puerto Rico Act 60 (relocating biz to PR)

All 3 require decisions BEFORE acquiring ➡️ millions saved!

Full report link is here and at the end of this post.

1st strategy: Opportunity Zones

It's not just real estate who can participate in the OZ program, it's businesses too

✅ If held >10 yrs, no capital gains tax!

You can also relocate a biz outside of OZ to an OZ and qualify

➡️ 2-3% post-tax IRR increase over 10 yr hold horizon

OZ zones are all across the US, many times bankers/brokers don't even know the biz they are selling is located in one (many owners don't know either)

Link to online OZ map / address search tool: https://opportunitydb.com/tools/map/

Requirements to qualify as an OZ business:

If in an OZ with an operating business, you'd also be smart to consider buying the real estate

It's a risk mitigant and diversifier for your biz

Double OZ benefit on your operating business + real estate is a powerful combo if you have a LONG hold mentality (10+ yrs)

2nd strategy: QSBS Section 1202

✅ 100% exclusion of the capital gains upon sale of qualified stock up to $1`0M if held for 5 years

A $10M QSBS exit would be savings of 20% LT capital gains + 3.8% net investment income tax ($2.38M)

➡️ 3-6% post-tax IRR increase over 5 yr hold

QSBS structuring SMB considerations:

Downside to the QSBS strategy is you have to elect to be taxed as a C corp which means if you plan to make distributions / consistent profit, double taxation will be painful (corp + personal)

Lots of other issues - changing tax laws, asset sale could remove benefit down the road

3rd strategy: Puerto Rico Act 60

Move biz to PR & become a bona fide resident

✅ 0% income taxes on capital gains, dividends, and interest for bona fide Puerto Rican residents

Works extremely well for relocatable businesses including SaaS, data, e-commerce, ip heavy biz, etc

It seems tough to become a bona fide resident of PR and become eligible, and is a very hot topic with the IRS for individuals attempting to abuse the program

Majority of the report is dedicated to PR Act 60, probably due to the complexity & nature of this program

Full IESE report link is here.

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Ben Tiggelaar

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