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.
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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