Massachusetts Pharmacy Transactions and Capital Gains Tax

By Brad MacLiver
Authorship and profile at Google


Virtually everything you own and use for business or personal purposes is a capital asset in Massachusetts. When a pharmacy owner sells a capital asset, the difference between the amount you sell it for and the amount that you paid (the basis) is called either a capital gain or a capital loss.

One possible type of capital gain is "investment income" that increases due to real assets such as financial assets, property, and intangible assets like goodwill.  In Massachusetts and the U.S., you must report all capital gains and pay the appropriate tax.

When selling a drug store or pharmacy in Massachusetts, there are several tax strategies one can use to help offset the tax liabilities.  However, unless the large number of pharmacy acquisitions are handled by professionals, most people do not know the federal regulations which allow for reduction of tax liability for the pharmacy owner.

During this era where it can be difficult to finance a business, pharmacy sellers may be forced to lower their asking price so pharmacy buyers are able to qualify for the financing required.  In addition to the reduced offers, they are also required to pay higher percentages in taxes.

For pharmacy sellers that would like as much possible money out of a deal, this is a dilemma.  For most pharmacy owners in Massachusetts, the largest asset they will ever own is their business, and selling their business at a specific dollar amount has been key to their retirement and estate planning.  The knowledge that they will need to cut out a sizable chunk of the process in taxes may cause some pharmacy owners to reconsider their plans for retirement.  The good news is that there are strategies and financial tools which allow pharmacy owners to proceed with their plans anyway.

One strategy that is currently available to help with capital gains taxes in Massachusetts are Family Foundations.  Family Foundations are tax exempt-nonprofit organizations that grant tax advantages and provide control over philanthropic activities.  Typically, Family Foundations are private entities that do not conduct widespread fund-raising activities and get funding from a small number of sources.  They may receive gifts from limited sources or friends.  Family members serve as trustees, directors, and officers. As private foundations they can make grants, or donations to other organizations. Having a Family Foundation provides a number of benefits including, income tax deductions, exemptions from estate and gift taxes, along with the reduction or elimination of other taxes.

One strategy, but not the only one, that is currently available to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). CRT’s are legally described as Split Interest Trusts. The term is used because of the blend of philanthropic motivations and personal financial aspects. CRT’s can decrease tax liabilities, increase a business owner financial wealth, and at the same time provide a vehicle for charitable giving.

CRT’s are formed when a person donates assets to this special type of Trust. Assets can be cash, stocks, real estate, etc. The CRT is set up for a set period of time, or until the donor’s (pharmacy owners) death. An individual (pharmacy owner or family member) can receive income from the Trust’s assets. Upon the donor’s death the assets go to a designated charity. Part of the income from the Trust can be used to purchase life insurance on the donor. The proceeds of the life insurance go to a designated heir(s) who receive the money without incurring any estate tax liability.

Some tax strategies including the use of CRTs are not widely known. It would be advisable for pharmacy business owners to be aware of the different tools that are available in structuring a business transaction. They should also be aware that only a professional with vast experience in CRTs should be used to setup a Charitable Remainder Trust. Not following the strict IRS guidelines could be cause for increased taxes, penalties, and in some cases criminal charges.

Over the years there have been unscrupulous individuals who have tried using CRTs and similar financial tools in illegal scams. With the increase in capital gains taxes there are expectations more scams will be floating around out there. Be knowledgeable about the possibilities, but be confident you are working with experts in your industry.

Washburn & Associates has extensive experience in pharmacy and drug store acquisitions. This pharmacy consulting firm and others who have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a pharmacy owner large sums of money when a pharmacy is sold.

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Buy-Sell Agreement for Massachusetts Pharmacy owners

By Brad MacLiver
Authorship and profile at Google


When a Massachusetts pharmacy is owned by two or more shareholders partners should have a Purchase-Sale Agreement. A buy-sell agreement is a written document that contains procedures and controls the future sale of the Massachusetts pharmacy business.

      
Pharmaceuticals buy-sell agreements cover the interest of the parties who own a Massachusetts pharmacy and control the actions triggered by a shareholder to leave the business because of death, disability, divorce, dissolution, or retirement. Agreement will control how and when the shares of the pharmacy business is sold or transferred. It will also provide guidance on how the pharmacy will be evaluated together with the obligations of the remaining shareholders in the Massachusetts pharmacy.

Buy-sell agreements are important because the various elements of a future sell is predetermined, and does not need to be negotiated during a heated conflict, or during a grieving period. It offers both the shareholder and the family a comfort level that when the inevitable time comes for an exit strategy that the process was carefully considered in advance.

Disadvantages of not having a buy-sell agreement between Massachusetts pharmacy owners is that a disability can leave a partner who works more and another does not add to productivity. In the event of a death, without an agreement, one party will have a nonproductive heir, or a new partner can be inserted that has personality conflicts with the surviving partner. The wrong partner can be debilitating for the Massachusetts pharmacy business.

There are various types of buy-sell agreements: Entity Buy-Sell Agreement, Cross-Purchase Buy-Sell Agreement, wait and see Buy-Sell Agreement, Disability Buy-Sell Agreement. Buy-sale agreements are also known as a company will or a buyout agreement.

Possible elements of a buy-sell agreement in Massachusetts:

1. Shareholders name and number of shares and voting rights of each.

2 Guide for certified pharmacy valuation and purchase of shares a shareholder.

3 Mutual covenants and considerations.

4. Restrictions on the transfer, purchase or encumber the company stock.

5. Protocol in case of a shareholder's divorce or termination of a shareholders' agreement of employment.

6. Obligation to purchase   sale of shares from an estate.

7 Purchase of insurance to ensure the ability to meet obligations.

8. Purchase of shares paid in lump sum or in installments.

9 Remedies for breach of contract or non-payment.

10 Until the transfer is complete, the right to inspect books and records.

11. Amendments and notices of promotions or legal issues.

12. Enforcement of the agreement, the binding effects and arbitration procedures for disputes.

13. Process for the dissolution or liquidation of the company.

14. Maintenance of the property for a transitional period.

15. Preserve the representations and warranties.

16. The conditions for transfer.

17. Bill of Sale.

To ensure that the necessary funds available, buy-sell agreements are often funded with life insurance. If the death of one of the Massachusetts pharmacy owners occurs, the life insurance settlement provides funding for the remainder of the pharmacy owner to buyout partners share of the estate.

Life insurance for each partner must be in place, because without a way to gain purchase of the pharmacy's share buy-sell agreement will not be functional. As the business grows and develops how much insurance must be adapted to provide adequate coverage. Without insurance, the surviving shareholders may not have enough money to buy the required amount of the estate to meet - leaving the survivor with an unwanted partner.

To have adequate insurance coverage and to determine the details of the buy-out terms, is a certified Massachusetts pharmacy business valuation necessary. There are a large number of companies offering business valuations. Because of the dynamics and the current market of the pharmacy industry, a valuation firm should have extensive pharmacy experience. Accounting Simple formulas and multipliers will be adequate or realistic valuation does not provide for a Massachusetts pharmacy business.

Pharmacy buy-sell agreements are very important documents that must be completed with care and seriousness. Even with a long term partnership, it's just too late to create a buy-sell agreement, when an event has already happened that would require the document.

Tips:

1 Buy-sell agreements are important documents that should not be taken lightly. Consult a licensed professional.

2 Documents must take the appropriate laws and regulations that vary from state to state. Search the right guidance.

3. Premiums for insurance that the buy-sell agreement, the Fund will be deductible.

4 Ensure that the pharmacy valuation performed by an established pharmaceutical industry expert.