Can I avoid/defer IncomeTax in the partial purchase of a business?

Question

I have the opportunity to buy into the company I work for. The purchase price will be paid in seven annual payments out of my portion of the proceeds from the business, covered by a promissory note. The annual payment will be almost $150,000.00. Is there any way to avoid, defer, or offset the onerous income tax implications of such an arrangement?

Answer 1

What "onerous income tax implications" are you concerned about? Would need a LOT more information on the structure of the company and exactly what tax issues you are concerned with.

Answer 2

I would assume that you are receiving your share of the profits as either wages, or your share of S-corp, LLC, or partnership earnings. If so, the amount you receive is subject to tax. So the total amount that you are receiving each year from the business must be enough to pay the purchase price payments of $150,000, the income tax on the total amount that you receive, and still have enough left to live on. This is a typical arrangement when the buyer does not have the funds for the buy-in. But the buyer must realize that he will not really be getting his share of the profits for 7 years.

The alternative is to borrow the funds for the buy-in from relatives, or possibly, but not likely, from a bank. This does not change the taxability, but it allows payment over a longer period of time. But in my opinion, your current arrangement is a good deal if the business has a future. You should consult with a CPA to work out the figures.