In most divorces, there was no pre-planning when the entrepreneur marched down the aisle with their beloved. When the entrepreneur is facing a divorce, tax consequences must be considered before finalizing the divorce agreement.
The tax consequences should be determined for both the entrepreneur’s business and personal assets.
You may have to sell the business(s) or buy out a spouse. A competent, well-referenced attorney is the entrepreneur’s advocate in the divorce process. Many times the hiring of a tax expert is overlooked in the divorce process. Big mistake!
Many attorneys work with litigation support experts and tax preparers including CPAs (Certified Public Accountants) and CVAs (Certified Valuation Analysts). Tax planning is often overlooked relating to settlements, business valuations, forensic accounting, alimony scenarios, and financial assistance in mediations.
In some instances the financial expert is subject to deposition by counsel for the other spouse and provides expert witness testimony in the entrepreneur’s court of jurisdiction. While the attorney is the entrepreneur’s advocate, the financial expert should be independent and not serve in an advocacy role.
Selling a Business.
If selling a business, some of the concerns include: (1) what is the business worth; (2) is there a market for this business and potential buyers; (3) what is each party entitled to from the proceeds of a business sale; and (4) what are the tax consequences if the business is sold.
Your valuation should account for federal and state taxes, which affect the business value, and your valuation expert should also be knowledgeable in taxes.
The type of business has a bearing on the value and subsequent taxes. Many financial experts have the expertise and databases to research various business entities to arrive at a fair market value. Some specialize in valuing certain types of businesses. If the entrepreneur is one of a just a few or many owners, the business agreements and/or franchise agreements may provide valuable information on the selling, transferring and valuing the ownership interests.
Buying Out a Spouse.
Just as in selling a business, the entrepreneur needs to know the value before agreeing to any buyout amount.
Again, the valuation should deduct any embedded taxes, as if the business would be sold. If the business is valued without accounting for taxes, the entrepreneur may pay too much for the buyout.
Your tax expert should assist the entrepreneur in accounting for the buyout note on the books if paid from the business via cash or a new loan for the business.
A business buyout of a spouse could be considered a business liability and interest expensed on the tax return if a properly executed promissory note is in place. In the final property settlement between the entrepreneur and spouse, there may be an offset of the business value with other marital assets.
Let me take you back to school and Math 101 for Entrepreneurs. If your business is worth $500,000 and the other marital assets are $1 million after debts, total assets are $1.5 million. Therefore, splitting this in half would equal $750,000. This is where many entrepreneurs make a mistake. They can’t pay the spouse off because they don’t have the cash. I’ve seen many business owners have to liquidate the business due to divorce.
Instead, as a business owner, you may negotiate to keep the business and receive another $250,000 from other marital assets. Other options to save your business include payments over time; you may be able to get a loan against the business to pay off your spouse and keep your doors open.
Entrepreneurs have various tax issues to consider when going through the divorce process and before finalizing the divorce agreement. Besides the valuation of your business, you will need help related to investments, real property, retirement assets, and alimony.
I can’t overstate how crucial it is to have a competent tax professional walk this path with you. Knowing your options can save your business.
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