Attorney
Benjamin Franklin once observed that “in this world nothing can be said to be certain, except death and taxes.” Death, thankfully, is not something that is triggered by divorce, but taxes most certainly are.
We’ve talked before about taxes tied to alimony and child support payments because those are the tax questions Attorney Bob Matteucci is most frequently asked. But for high-net worth couples who have business assets to split up, there is another tax issue that can catch you off guard: taxes tied to business buyouts.
As a business-savvy attorney, Bob makes sure his clients are aware that their divorce can have tax consequences. He’s not afraid of doing the math that shows how choices today will play out when tax time rolls around.
The Transfer May Be Tax-Free
Under IRC §1041, the transfer of property between spouses (or between ex-spouses if the transfer is “incident to the divorce”) doesn’t trigger a taxable gain or loss like any other transfer of assets might.
This is a good thing! Nobody should have to write the IRS a check in order to end their marriage.
If there is a downside to this deviation from the typical system where transferred property gets taxed, it’s that the property transferred at divorce retains its original, carryover basis. There is no stepped-up value for property transferred at divorce, even though it is changing hands.
This sort of retained tax liability is something that must be considered as a divorcing couple approaches the negotiating table. Two ownership interests that look equal on a spreadsheet aren’t equal if one carries a much larger embedded tax liability than the other.
Where It Gets More Complicated: How the Buyout Is Structured
To make matters even more complicated, §1041 was written with straightforward spouse-to-spouse transfers in mind. But many buyouts aren’t structured that way, particularly if the assets are business-related.
Oftentimes, the business entity itself is the one buying out a departing spouse’s interest. How that buyout is funded, as well as the underlying business structure, can shift who owes tax, and when.
As a former business owner who has an MBA as well as a law degree, Bob Matteucci isn’t afraid to get into the financial weeds and sort things out. But it doesn’t hurt to call in a tax attorney and/or CPA to help iron out the details when business interests are changing hands and we want to be certain that the choices made today aren’t going to cause problems in the future. When taxes are involved, an ounce of prevention is always worth a pound of cure, so the more people that can put eyeballs on a complex transfer, the better.
Where Business Owners Can Reduce the Impact
To make a long story short, Uncle Sam is always going to get his cut. But there are legitimate ways to structure a business buyout during a divorce to avoid making unnecessary payments:
- Account for embedded, unrealized tax liability when negotiating the value of any exchange of property between spouses.
- Structure buyouts as a direct interest purchase between spouses whenever possible.
- Time the transfer within the §1041 window.
Serving Families with Dignity & Compassion
There’s a meaningful difference between a buyout structured with tax consequences in mind and one that wasn’t. Working with a family law attorney like Bob Matteucci means you have someone in your corner who understands that difference.
If you’re weighing how to structure a business buyout in a New Mexico divorce, the earlier tax planning enters the conversation, the better. Contact Bob today to get the ball rolling.