IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Justin Young of Opal Advisors (https://opaladvisors.com/):
How Tax-Aware Equity Investing Can Help Business Owners Reduce or Eliminate Capital Gains Taxes When Selling a Company
Selling a business is often the culmination of years of hard work. While the liquidity event can be life-changing, it can also trigger a significant capital gains tax bill. Fortunately, thoughtful planning well before the sale can materially reduce or potentially eliminate the taxes owed and increase wealth.
One increasingly powerful strategy involves tax-aware separately managed equity accounts (SMAs) designed to generate capital losses that can offset any capital gains including those from selling a business.
What Is a Tax-Aware Separately Managed Account?
A separately managed account is a professionally managed portfolio of individual stocks owned directly by the investor, rather than through a pooled vehicle like a mutual fund or ETF. Because the investor owns each security individually, the portfolio manager has far more flexibility to manage taxes—particularly by harvesting capital losses.
A tax-aware SMA typically tracks an index such as the S&P 500 and holds hundreds of individual stocks. The process is typically done using software and looks weekly or sometimes daily for opportunities to realize losses while maintaining the portfolio’s overall investment exposure.
An example would be selling Delta Airlines to realize a capital loss and purchasing a similar stock such as United Airlines. These realized losses can then be used strategically to offset capital gains from other sources.
Enhancing Loss Harvesting with Long/Short Equity Strategies
Some tax-aware strategies go a step further by investing in portfolios that include both long and short stock positions. These long/short equity strategies increase the opportunity set for tax-loss harvesting.
Because short positions generate losses when stocks rise and the stock market goes up more than down, managers have flexibility to realize losses in up or down markets. This expanded toolkit can significantly increase the portfolio’s ability to generate usable capital losses which can add to the investors return.
Using Capital Losses to Offset Business Sale Gains
When a business is sold, the resulting capital gain is often large and taxable in the year of sale. Capital losses generated inside a tax-aware equity SMA can be used to directly offset those gains, potentially reducing or even eliminating the immediate capital gains tax liability.
The key is timing. Ideally business owners should implement this strategy prior to selling their business, allowing time for the portfolio to accumulate sufficient realized losses. Waiting until after the sale may be too late to generate losses especially if the sale happens later in the year.
Capital Losses Can Be Used Forever
If capital losses generated by a tax-aware SMA exceed the gains from the business sale, the excess losses are not wasted. Unused capital losses can be carried forward indefinitely and applied against future capital gains from any source — such as real estate sales, portfolio rebalancing, or future liquidity events.
This makes tax-aware investing not just a one-time planning tactic, but a long-term tax management strategy.
Investing Sale Proceeds and Eliminating Future Capital Gains
By investing the proceeds of the sale into a SMA, business owners can continue to accumulate capital losses and participate in long-term market appreciation. Even more compelling, under current tax law, those gains may never be taxed at all.
If appreciated securities are held until death, heirs typically receive a step-up in cost basis to the market value at the date of death. This means the accumulated appreciation escapes capital gains taxation entirely, allowing wealth to transfer far more efficiently to the next generation.
Planning Early Makes All the Difference
By implementing a tax-aware separately managed equity strategy in advance of a planned business sale, a business owner has more time to accumulate meaningful capital losses, increasing the likelihood of offsetting a large portion of the eventual capital gains. Properly executed business owners can defer, reduce, or even permanently eliminate capital gains taxes and significantly improve after-tax wealth and legacy outcomes.
If you have questions relating to the content of this article or investment strategies associated with selling a business or wealth creation, Justin Young would welcome the opportunity to answer them. Mr. Young can be reached at (206) 519-2357 and [email protected].
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.