Dealing with taxes when selling an insurance agency can be stressful. As an independent insurance agent, I know because I’ve been there. While I am not qualified to give tax advice, I do understand the importance of minimizing tax liabilities and maximizing your sale value. I’m providing you with my six best tax tips but remember that you should always talk with a tax professional about your specific situation when you’re selling an insurance agency.
While you’re here learning about my experience and how you might be able to benefit from it, don’t forget to sign up for my email list. You’ll be glad you did.
Your independent insurance agency is a valuable asset. When you sell an asset, it has a certain dollar value. In your agency’s case, the way you structure the sale could create tax liabilities that cause you to pay more taxes than you may have planned on. . Corporate assets are often bound by certain tax laws, which means they are taxed differently.
And while you want your independent insurance agency to be as valuable as possible so that you get a great selling price, you also want to minimize the potential capital gains tax. This is crucial because the tax rules and classifications change every few years.
In fact, a year ago, it looked like we would have many sellers rushing to sell their agencies to maximize their tax advantages before the capital gains rates went up.
Yet, since proper planning for an agency sale can take three to five years, it’s important to have the right expert tax advisor. Because, again, this is not tax advice. It’s only my experience dealing with insurance taxes after the sale of an agency.
Because we are talking about selling an insurance agency and minimizing your tax liability, we want to look at your balance sheet. First, look at whether you have any depreciation as part of your balance sheet. You don’t want to sell any assets that are depreciated.
The key to selling the agency with tax efficiency in mind is not selling those assets on the balance sheet, such as furniture and fixtures. You want to sell those assets for an as negligible price as possible. Not doing so puts more dollars in the capital gain tax column instead of the ordinary income tax column. Remember: we’re trying to avoid getting dinged for capital gains!
Next, watch for amortization. If you’ve purchased an insurance agency in the past, you may have a significant amount of amortization in your balance sheet. You want to sell in those instances. In order to minimize tax implications, you want to sell the income statement.
If your independent insurance agency is smaller, let’s say under $1 million in revenue (although it can happen at any agency size), the buyer may decide that they want to keep you around for a specific period of time to ensure the successful transition of their new corporate asset. They want to ensure its continued production of cash flow until they get their loans paid back or until they’ve recovered their equity. So, an employment agreement may be part of the purchase agreement.
If you’re not sticking around, the seller has a natural concern about the risk that you may want to work for or start another independent insurance agency and take the accounts they just bought away from them. That’s where the non-compete agreement comes in.
The potential tax implication or tax liability that may come in here is that you need to get paid as little as possible through the employment agreement or the non-compete. You want the money you’re taxed on to come out of the transaction and be taxed at capital gains rates not from a paycheck over the earn-out period as those dollars will be taxed at ordinary income rates.
You may feel like, "Hey, I'm going to work the next three or four years for free," but you’re not. You’re actually working for more than you would have gotten on an after-tax basis. Make sure that you minimize non-compete agreements and employment agreements.
Deferring the capital gains tax is a huge goal when selling your agency — but there are a handful of methods to do this.
One option is to defer more income from the sale of the insurance agency for future years. The way to do this is to make use of an installment sale for the company assets. This defers the receipt of taxable income and the payment of federal income tax.
Another alternative is to structure the deal to give you compensation as an earn-out provided to you in future years. If you’re afraid that the capital gains tax may go up in the future, you will pay those taxes now. So, you can estimate your earn-out for federal income tax purposes and prepay it in the year of the transaction.
The tax rules have something known as a Qualified Opportunity Zone. Qualified Opportunity Zones exist in certain parts of the country. These are areas that the federal government wants businesses to develop and grow within.
Talk with your tax advisor about this because businesses located in these areas can defer the payment of capital gain taxes for up to seven years in some cases.
Another deferral technique is a Deferred Sales Trust. This is particularly valuable if you’re selling real estate as a part of the transaction. These include the use of 1031 Exchange Trusts, Grantor Retained Annuity Trusts and Charitable Lead Annuity Pre-Planning Trusts. These allow you to avoid paying capital gains trusts and gain economic benefits from the sale either through the use of giving assets to family members or giving them a form of charity.
Yes, these are very complicated and sophisticated in terms of tax planning. If you’re receiving millions of dollars in a transaction, this could save you a lot of money in taxes by providing you with pre-planning opportunities.
You probably didn’t think you’d see this tip in a tax tip article. Sometimes when an agency owner sells, they decide to reward long-term employees because they helped build value into the business. There are a couple of options for the agency. The first is to pay bonuses of the agency income in the transaction year. This reduces the ordinary tax liability they would’ve otherwise paid in the transaction year. The second is to pay it out as part of the sales proceeds. This lowers the sales proceeds and reduces the capital gains paid in the transaction. It’s more tax-efficient to do this out of ordinary income for most agency sales.
State tax rules may provide you with capital gains help, too. Certain taxes aren't charged on Qualified Investment Businesses in some states like Oklahoma (where I live). So, understanding if that’s available to you in your state and what the tax rules are can help you avoid tax liabilities.
And I’ll say it again: it’s always best to talk with a qualified tax expert to learn more about tax planning and tax rules.
One often-overlooked tax strategy by independent insurance agents is to complete a merger instead of a sale. This may be useful if you are selling to a public company whose stocks are traded on some basis on an exchange. The reason is that mergers aren’t sales, so there is no capital gains tax until you actually receive the money. If you don’t need the cash now, this can be a good way to defer taxes. If you pick your buyer carefully, you may receive a significant post-transaction increase in value as their stock appreciates.
Whether you’re buying, selling, starting, or running your independent insurance agency, I know that you’re looking to become the greatest independent insurance agent that you can be. I’m here to help you by providing you with expert advice no matter where you are in your career.
Questions about your journey as an agent? Reach out to me! I’d love to talk to you about it.