Structured Installment Sale Business Sale-MetLife

Small Business

Selling a small business is a great opportunity to profit from on the hard work you put into your company. However, a sale can have tax implications as well. If you receive the sale proceeds in one lump sum, you might face not only significant capital gains taxes, but also significant net investment income taxes and state income taxes, which are due in the year of the sale.1

To help defer all or a portion of your capital gains, you have the option to turn the proceeds of your small business sale into a protected stream of income.2 This means you will only have to pay taxes on the income in the year it is received, which will defer and may decrease the total taxes on the sale. Additionally, you can shield those funds from market volatility. This solution is called a Structured Installment Sale.

A case example

Jose is a 55-year-old dentist and business owner in California who, for many years, owned a major dental practice. As he considers his retirement plan, he decides to sell his practice to fund the next phase in his life. The dental practice is in good shape but needs a refreshed marketing strategy and capital improvements to bring the next generation of customers. Selling the dental practice now will help Jose avoid an outlay of capital and help reduce his responsibilities in retirement.

After putting his practice on the market, he accepts an offer of $2,500,000. The dental practice’s adjusted basis is $1,000,000 and the selling expenses associated with the transaction are $50,000 resulting in a gain of $1,450,000. The dental practice’s property is not subject to a mortgage.

Comparing options: Structured Installment Sale vs. Lump Sum

During the sales process, Jose consulted with his legal, tax, and financial advisors who advised that he should receive the proceeds in a Structured Installment Sale. This was the best option for Jose because he didn’t need the sale proceeds in full immediately, and this structure would defer and reduce associated capital gain, net investment income and state income taxes.

He structures his $2,500,000 sale to be payable as follows: $183,570 payable in equal amounts for 20 years per the Purchase and Sale Agreement.* Structured Installment Sale Metropolitan Tower Life Insurance Company If Jose had received the proceeds in full at the time of the sale, he would have to pay close to $243,500 in federal capital gain taxes (at a marginal 20% federal capital gains rate, as well as about another $45,600 due to the 3.8% net investment income tax. Additionally, since Jose is a resident of California which has graduated tax rates depending on income level, he would be subject to higher rates resulting in over $142,000 of associated state income taxes.

However, if he utilizes a Structured Installment Sale, he will pay approximately $5,383 of federal income taxes annually over the 20-year period (taking advantage of the 0% and 15% capital gains tax rates with respect to the capital gain portion of the payment). In addition, by spreading the gain over a period of years, he will avoid net investment income taxes altogether. His associated state income taxes would be about $5,568 annually. This results in a federal income tax (including net investment income tax) and state income tax savings of over $200,000. His savings is due to the tax rules applicable to installment sales which generally provide that each installment payment, which comprises a return of basis, capital gain and interest (with the interest taxed as ordinary income), will be taxable over time when paid to the seller. As a result, Jose was able to manage his annual taxable income and leverage lower tax brackets.

How was Jose’s taxes calculated?

The capital gain taxes were computed by first determining the amount of gross profit (none of which is subject to depreciation recapture rules): Selling price of $2,500,000 less adjusted basis (including expenses of the sale) of $1,050,000 equals a gross profit of $1,450,000. The gross profit factor is 58% ($1,450,000 gross profit divided by $2,500,000 contract price). During the 20 year period starting in the year of the sale, Jose will receive $183,570 annually . In applying the gross profit factor of 58% to $125,000 of each payment ($2,500,000/20), Jose must report $72,500 of capital gain income each year. This computation assumes the remaining $58,570 ($183,570 - $125,000) of each annual payment is taxable as interest. Annually, this results in about $5,383 of federal income taxes, $0 net investment income tax and about $5,568 of associated state income tax. Computational assumptions include: Jose’s filing status is married filing joint and the standard deduction for federal purposes is $27,700; capital gain qualifies as long-term capital gain; sale property is eligible for installment sale treatment; no other income was factored into this example; 2023 federal and state income tax rates apply for the life of the arrangement.

How does a Structured Installment Sale work?

Instead of receiving one lump sum, all parties agree to periodic payments for a stated number of years as a condition of the property sale. The periodic payment obligation is then transferred to MetLife Assignment Company, Inc. (MACI) by the Buyer, who pays the full premium to cover the payments. MACI takes the Buyer’s premium check for the periodic payments and purchases an annuity from Metropolitan Tower Life Insurance Company (Met Tower Life). Met Tower Life then issues the scheduled payments to the Seller on behalf of MACI. Both entities are wholly owned, U.S. based subsidiaries of MetLife, Inc. and, as such can provide great confidence for all parties.

The Met Tower Life Advantage

The Structured Installment Sale is provided by Metropolitan Tower Life Insurance Company, (Met Tower Life), an insurance industry leader and a leader in the structured settlement market. Met Tower Life holds an A+ rating from A.M. Best, an Aa3 rating with Moody’s, an AA- with Fitch and an AA- with Standard & Poor’s.4 The promise of financial security is only as solid as the company making the guarantee. When you select our annuity, you are choosing a leader who will partner with you every step of the way and can provide you with a steady, dependable income stream — both now and in the future.