Selling your business: The tax secret that can save you millions

If you have plans to sell your ecommerce or DTC Shopify brand, even if it's years out, there is a way to save millions on the capital gains tax from the sale.

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Here's a thread we shared recently about how to set yourself up to benefit from this ridiculously valuable tax exemption.

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It’s called qualified small business stock exemption, or QSBS. If you qualify, you can get a 100% tax exemption on capital gains from a sale.

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This is not an error: 100% tax exemption!

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Do you qualify for QSBS?

Here's what you need:

• Acquire shares directly from an active US C corporation, not an investor
• Hold shares for 5 year minimum before sale
• Corp assets <$50m before & after stock issuance

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Doesn’t apply to:

• Pre-2010 stock (only 50-75% exemption available)
• Prohibited industries (like personal services)

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How does QSBS work?

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If you sell, you pay $0 in federal taxes on the gain, up to a limit of $10m or 10x your investment, whichever is greater… per taxpayer.

Each cofounder, investor, or family that owns shares has an additional $10m limit.

Most states also give a tax break, but some don’t - like CA, PA, & NJ.

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With no exemption, QSBS is taxed at 28%.

So, if you have a capital gain of >$10m, at a minimum you save $2.8m in taxes. If there are two co-founders, it could be $5.6 million, etc.

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That’s a whole lotta Kombucha and mindfulness retreats.

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If you sell in <5 years, you can roll over your gain into other QSBS stock within 60 days.

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Let’s say:

• You exit 3 yrs after getting your shares
• In <60 days you invest in QSBS for a new brand
• New brand exits 3 yrs later

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Since it's been >5 yrs, you pay $0 federal taxes!

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If this applies to you, get it set up ASAP because the 5 years only start running when the company officially becomes a C corp for tax purposes.

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It’s better to make this change at the beginning of the year to save hassle + admin costs.

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Other considerations

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Before making a change, you need to consider the big picture. C corporations have 2 layers of tax:

• 21% Corp federal tax paid by the company
• Up to 20% dividend tax paid by the owner when money is distributed.

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But it still might be worth it.

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Important note: Becoming a C corp can change the tax entity & EIN. This causes friction for payment processors and stores set up with the EIN, especially Amazon.

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Ask a tax advisor about doing this as a tax free reorganization. Play it right & you can keep the same EIN and save on taxes.

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About Finaloop

We are a technology company providing automated end-to-end accounting service to ecommerce businesses. Our system connects to your apps, syncs all your data and reconciles your books in real-time, replacing your bookkeeper, your accounting software, and your ecomm integrations. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.

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*The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.*

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