Best Tax Strategy for $100k bonus from sale of business
A friend of mine works for a small laundry mat chain that is for sale. His boss agreed to a 20% bonus upon sale because he is an essential employee and is responsible for the growth and success of the business over the past 20 years. My friend ran this business well by himself, did all the repairs, plowing, maintenance, etc.
One location has sold and the closing is scheduled. My friend stands to receive a nice bonus check. He plans to buy one of the laundry mat locations and is creating an S-Corp for the business.
My question is; what is the best tax strategy he can use in receiving this bonus? Should he create the new S-Corp and deposit the bonus into the corporate account? He will need the entire bonus plus more money in order to purchase the one laundry location.
Well, hopefully he doesn't take Title to the real estate with the S-Corp if he is buying the place...
I'm guessing he has a choice? Honestly, not sure as it could depend on "anything" that might be his financial situation....
For one, does his current income max out FICA? That would be the main reason to pass it through the S-Corp... If he other startup expenses to pass through the S Corp that could help offset the income, but depending those losses could be passed through anyway so it wouldn't matter.
Well, if he needs the funds to buy the laundramat, then it does and doesn't matter... The funds will need to be "collected" for the purchase, and the Closing Agent will generally want to know where the funds came from. So, its just a matter of how long of a paper trail do you want. And, to maintain your corporate veil (if the S-Corp received the bonus), it might just be lots of transfers to explain (e.g. draw from the S corp to personal account, then contribution from the personal account to whatever entity is taking Title).
just not a lot to go on.. I'd be happy to chat if you'd like. Good luck.
- New York NY, USA
- Votes |
- Bonus Payment: Depending on the terms of the bonus agreement, the bonus may be paid directly to your friend as an individual. In this case, he should be prepared for income tax on the bonus amount at his individual tax rate.
- Corporate Structure: If your friend plans to buy one of the laundry mat locations through an S-Corporation, he can create the S-Corp and have the business purchase the location. However, the bonus would typically be considered personal income when paid to him as an individual, and it should be deposited into his personal bank account.
- Tax Planning: To minimize the tax impact, your friend should work closely with a tax professional to strategize how to structure the sale of the business and the purchase of the new location. This may involve considering options such as installment sales, which can spread the tax liability over several years.
- Use of Bonus: Once your friend receives the bonus, he can use it as capital for the S-Corporation to fund the purchase of the laundry mat location. It's essential to keep clear records of how the funds are used within the business to ensure proper accounting and tax compliance.
- Consultation with a CPA: It's highly advisable for your friend to engage a Certified Public Accountant (CPA) or tax advisor who specializes in business and individual taxation. They can provide personalized advice based on your friend's financial situation and the specific details of the business sale and S-Corporation setup.
- Legal and Business Structure: Your friend should also consult with an attorney experienced in business transactions to ensure the legal aspects of the business sale and the creation of the S-Corporation are handled correctly.
Remember that tax laws can be complex and vary depending on the jurisdiction, so professional guidance is essential to optimize tax strategies and ensure compliance with all relevant regulations. Your friend's specific financial situation and the terms of the bonus agreement will play a significant role in determining the most effective tax strategy
Not financial advice.
Tell your friend to do an LLC and not an S Corp
Have him ask the owner to NOT pay him a bonus
Have the owner lower the price on the location he buys. This saves the owner paying taxes on both the profit and payroll taxes on the bonus.
Ask the owner to assign part of the sales price to a non compete agreement. He can write this off in year one or a large portion.
Do a cost segregation this year as soon as you buy. Lot of cost seg in a laundry mat.
If there is one, have him pick a location that does cash. Then switch to credit card. His revenue will increase 30% immediately.
If equipment needs to be replaced do it this year. Cost seg year one writeoff is 80% this year. Next year 60% and so forth.
Was this a dry cleaner before. If so have him check on any epa issues.
This should be a great deal since he did the maintenance and that is the main issue with a laundry mat.