End of Year Tax and Audit Strategies to Protect Your Wealth

‘Tis the season to tie up loose ends before the year closes.

The dreaded taxes and year-end audits always come to mind just about now.

A few thoughts on these two necessary evils of running a business:

Is Your Auditor Truly Independent? 
  1. Independently audited financial statements are often required to meet a loan covenant. An audit provides credibility to your financial statements and gives the bank confidence that the accounts are true and stated fairly. The auditor is tasked with examining the financial statements and all related data.


The key word above that I want to focus upon is “independent.”

As a privately held business owner you may be very comfortable with your auditor. Perhaps you have known them for decades as you have built your business. They have provided expert guidance in your decisions and you trust them. You may even socialize with them. Go on vacations together. Go fishing. Play in a weekly game of tennis. You have established a close relationship and as a result, your CPA may want to please you. After all, you are a key client of theirs and they have a nice repeated revenue stream year-over-year from auditing your business.

Independence is critical.

Larger companies require that the audit partner and staff be rotated every 3-5 years. This is done to ensure that due professional care is exercised which requires independence as they critically assess all audit evidence.

As you prepare for the audit of your company, pause and ask yourself, “Is my CPA truly independent and not influenced by our relationship?” and consider rotating to a new firm every 3-5 years. A new team will provide fresh objective insight and guidance you may need to further de-risk your business, which will move your business value to a higher level.


Can You Minimize Your Tax Impact?


  1. Tax mitigation is always a focus as we prepare our clients to sell their business and requires planning well in advance of the transaction. There are a variety of tax minimization strategies and they are categorized into three groups.
    1. Estate Freezing and Transfer Techniques – These strategies freeze the value of the business at its current valuation and transfer the asset to the children. When the business sells in the future, after it has appreciated, the gift or inheritance tax is mitigated on the liquidity created from the appreciation.

The most common strategies used include:

Annual Gifting – Transfer up to $16,000 of stock to an individual.

Installment Sale to an Intentionally Defective Grantor Trustee All or part of the business is sold to an irrevocable trust to benefit the children in exchange for a note. When the business is sold, the note is paid off to the seller and the growth in value of the business from the transfer date remains in the trust to benefit the children free of gift and estate tax.

Grantor Retained Annuity Trust (GRAT) – Shares of a business are transferred to a trust in return for an annuity typically equal to the value of the shares. Subsequent appreciation upon sale passes to the beneficiaries free of gift and estate taxes.

Charitable Lead Annuity Trust (CLAT) – Shares of a business are transferred to a trust that pays an annuity to a charitable organization. At the end of the annuity term the remaining value passes to the non-charitable beneficiaries (the children in most cases) and the appreciation of the remaining interest for the family benefit is again free of gift and estate taxes.


    1. Rollovers, Exclusions, Tax Deferrals Unlike the previous strategy, which requires the business owner to enter into a transaction and create a special legal entity, the following are just tax code.

S 1042“Tax Free” rollover from the sale of a business to an ESOP. This strategy defers federal and sometimes state tax on the transaction by rolling proceeds into a qualified replacement property (QRP) – stocks or bonds of a domestic company. The differed taxes are then extinguished at death when the children receive a step-up in basis.

S 1202Capital gains exclusion allows a small business owner to exclude up to 100% of gain capped at $10MM or 10X the basis that is held for 5-years or longer in a qualified small business stock (QSBS), which is a domestic C-corp with gross asset basis that does not exceed $50MM.

S 1045Rollover of a taxable gain of a QSBS into another QSBS within 60 days, therefore deferring the recognition of gain until the new entity is sold.


    1. Income Tax Mitigation

Qualified Opportunity Zone Investment – Capital gain investment in a QOZ fund within 180 days defers tax until 12/31/26. If the funds in the QOZ remain for 10 years the appreciation on the invested proceeds is excluded from capital gains tax.

IC-DISC – Interest Charge Domestic International Sales Corp – An entity is created in order to enable exporters to convert ordinary income from sales to foreign unrelated parties into qualified dividend income so the income is taxed at capital gains rate as opposed to ordinary income tax rates.

INGT – Incomplete Gift Non-Grantor Trust – A trust structure that allows a business owner to shift tax exposure from high tax states i.e.– NY or CA to low tax states – FL or TX. This is designed to be an incomplete gift for gift tax purposes and as a separate taxpayer resident in a state with favorable trust income tax laws for state income tax purposes.


It takes time to create and implement an effective tax minimizing strategy so be sure to design your Master Exit Plan well in advance of your anticipated departure from the business.

Keep reading:

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