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Q&A with Tom Madison, CFA, CPA – Eide Bailly

Posted in   |  May 10, 2016

Eide Bailly logoA question from conference keynote Jolene Brown’s presentation: How can the family business owners be “the bank” for a buyout? What are the tax benefits?

A: The primary tax benefit for serving as “the bank” is the ability to defer capital gains tax over the period in which installment payments are received. Generally when considering whether or not to take advantage of this benefit the selling parties should think carefully about the credit risk they are taking with the buyers by serving as “the bank”.

If the buyers are family members there can also be issues with equitability as providing financing is potentially a significant economic benefit provided to family members taking over the business that are not received by family members not involved in the business. The tax benefit is only available relative to capital gains taxes applicable to the sale of the business. If there is ordinary income from the transaction there is no option to defer the taxes on that portion of the transaction. It is prudent to visit with a tax advisor before agreeing to any particular deal structure to make sure the most tax advantageous structure is achieved.