EOT: New $10 Million Exemption on Business Succession

February is the month to focus on retirement savings for a future of financial security.  For business owners that is particularly important as they often have all their retirement eggs in one basket:  the business.  It’s not easy to sell a business and when the time comes, it’s important to know about the latest tax-advantaged succession option, which comes with a $10 million Capital Gains Exemption.

Starting January 1, 2024, business owners will be able to sell their businesses to their employees through an EOT – Employee Ownership Trust.  This plan features some interesting twists from the usual incentives, which include a capital gains exemption of just over $1Million on the sale of Qualifying Small Business Corporations, Farms or Fishing Properties. 

Under the EOT, a tax exemption for the first $10 million in capital gains realized on the sale of a business to an EOT will be a big feature.  However, the legislation provides for only a three year period for this exemption: tax years 2024, 2025 and 2026.

Rules for an extension to the capital gains reserve rules for qualifying sales to an EOT (from 5 to 10 years), an exemption from the 21-year deemed disposition rules and an exemption to the shareholder loan and deemed interest benefit rules, will also be allowed.

Under usual rules, taxpayers who receive a shareholder loan must include the loaned amount in income in the year the loan is received, unless the loan is repaid within a year.  Legislative proposals introduce an exception to these rules, which will be made to extend the shareholder loan repayment period from one to 15 years for amounts loaned to the EOT from a qualifying business to purchase shares in a qualifying business transfer.

Unfortunately, the legislation has not yet anticipated changes to the Alternative Minimum Tax (AMT) carry forward rules, which still sit at only 7 years.  Hopefully this will be corrected in the near future.

Make a Big Difference:  Business owners who are interested in this new business succession option should speak to their tax and legal advisors as soon as possible to make sure the opportunity for a $10 Million exemption is not overlooked.

Excerpted from the Advanced T1 Tax Update Course.  You can register in this certificate course now and take it online for CE Credit – completion date is 3 months.  This course provides one full course credit in the DMA™ Tax Services Specialist Program.  Recorded instructor presentations are included.

Graduates of the CE Summit version of this program need only 5 more certificate courses to earn their DMA™ designation. 

Also, don’t miss the Deep Dive on Retirement and Estate Planning at the Virtual CE Summit on May 22.