Capital Gains Tax and Nebraska Pharmacy Transactions

By Brad MacLiver
Authorship and profile at Google


Almost everything you own and use for personal, or business, purposes is a capital asset. When NE pharmacy owners sell a capital asset, the difference between the amounts you sell it for and the amount you paid for it (the basis), is a capital gain, or a capital loss.

Capital gains may also refer to "investment income" that arises in relation to real assets, such as property, financial assets, and intangible assets such as goodwill. In the U.S., all capital gains must be reported and the appropriate tax paid.

When selling a pharmacy or a drug store in Nebraska, there are specific tax strategies that can be used to help offset the tax liabilities. Unless a professional is handling a large number of pharmacy acquisitions, they usually do not know these federal regulations that allow for reducing the tax liability for the Nebraska pharmacy owner.

During this period of history where it is more difficult to finance a business, pharmacy sellers may already be required to lower their asking price, so a pharmacy buyer can qualify for the financing required. On top of the lower offers they will be required to pay higher percentages in taxes.

This is a dilemma for the pharmacy seller who wants as much money out of the deal as possible. For most Nebraska pharmacy owners their business is the largest asset they will ever own and selling the business at a certain dollar amount has been part of their retirement and estate planning. Knowing they will need to cut out a larger chunk of the proceeds to give to the government will cause some NE pharmacy owners to reconsider their retirement plans. The good news is there are financial tools and strategies that allow the pharmacy owner to proceed with their plans.

Family Foundations are tax exempt/nonprofit organizations, which provide tax advantages and control over philanthropic activities. Family foundations are typically private foundations that are funded by a small number of sources, and do not conduct widespread fund-raising activities. They may receive gifts from friends and limited sources. Family members serve as trustees, directors, and officers. As private foundations they can make grants, or donations to other organizations. Having a Family Foundation provides a number of benefits including, income tax deductions, exemptions from estate and gift taxes, along with the reduction or elimination of other taxes.

One strategy, but not the only one, that is currently available to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). CRT’s are legally described as Split Interest Trusts. The term is used because of the blend of philanthropic motivations and personal financial aspects. CRT’s can decrease tax liabilities, increase a business owner financial wealth, and at the same time provide a vehicle for charitable giving.

CRT’s are formed when a person donates assets to this special type of Trust. Assets can be cash, stocks, real estate, etc. The CRT is set up for a set period of time, or until the donor’s (NE pharmacy owners) death. An individual (pharmacy owner or family member) can receive income from the Trust’s assets. Upon the donor’s death the assets go to a designated charity. Part of the income from the Trust can be used to purchase life insurance on the donor. The proceeds of the life insurance go to a designated heir(s) who receive the money without incurring any estate tax liability.

The various strategies to reduce taxes, including CRTs, are not widely known. It is advised for Nebraska pharmacy business owners to be aware of the different tools that are available when structuring a business transaction. They should also take into account that only a professional with extensive experience in CRTs should be used to setup a Charitable Remainder Trust. Failure to comply with strict IRS guidelines can cause increased taxes, incur penalties, and, in some cases, raise criminal charges.

There have been some seedy individuals who have tried using CRTs and similar financial tools in illegal scams over the years.  With rising in capital gains taxes, there is an expectation that more scams will be lurking about, so be knowledgeable about that possibility.  Be confident that you are working with experts in your industry.

When choosing a firm, consult one with extensive experience in the acquisition of pharmacies and drug stores.  Consult a firms that has the knowledge and expertise to structure the transaction appropriately for tax considerations.  The right firm can save a pharmacy owner vast sums of money when a Nebraska pharmacy is sold.

************************

Buy-Sell Agreements for in Nebraska Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


When a NE pharmacy is owned by two or more people the stockholders/partners should have a Buy-Sell Agreement. A buy-sell agreement is a written document that provides the procedures and governs the future sale of the pharmacy business.
               
Nebraska pharmacy buy-sell Agreements protect the interest of the parties who own the NE pharmacy and directs the actions triggered by a stockholder leaving the business due to death, disability, divorce, dissolution, or retirement. The agreement will govern how and when the shares of the pharmacy business can be sold, or transferred. It will also provide guidance as to how the pharmacy will be valued along with the obligations of the remaining shareholders of the pharmacy.

Buy-sell agreements are important because the different elements of a future sell are predetermined and won’t need to be negotiated during a heated dispute, or during a grieving period. It provides both the stockholder and the family a comfort level that when the inevitable time comes for an exit strategy that the process was thoroughly thought out in advance.

Disadvantages of not having a buy-sell agreement between NE pharmacy owners is that a disability may leave one partner working more and another not adding to the productivity. In the event of a death, without an agreement, one partner may be left with a nonproductive heir, or a new partner may be inserted that has personality conflicts with the surviving partner. The wrong partner could be devastating for the pharmacy business in Nebraska.

There are various types of buy-sell agreements such as: Entity Buy-Sell Agreement, Cross-Purchase Buy-Sell Agreement, Wait and See Buy-Sell Agreement, Disability Buy-Sell Agreement. Buy-sell agreements are also known as a Business Will or a Buyout Agreement.

Potential elements of a Buy-Sell Agreement in Nebraska:
1. Stockholders names and the number of shares and voting rights of each. 
2. Guidance for the certified pharmacy valuation and purchase of a stockholder’s shares.
3. Mutual covenants and considerations.
4. Restrictions on transferring, purchasing or encumbering the company’s stock.
5. Protocol in the event of a shareholder’s divorce or termination of a shareholders employment.
6. Obligation to buy/sell shares from an estate.
7. Purchase of insurance to ensure ability to meet obligations.
8. Purchase of stock paid in lump sum or by installments.
9. Remedies for breach of the agreement or default of payment.
10. Until transfer is complete the right to inspect books and records.
11. Amendments and notices for offers or legal matters.
12. Enforceability of the agreement, the binding effects, and arbitration procedures for disputes.
13. Process for dissolution, or liquidation, of the corporation.
14. Maintaining the premises during a transition.
15. Preserving representations and warranties.
16. The terms of transfer.
17. Bill of Sale.

To make certain that the necessary money is available, buy-sell agreements often use a life insurance policy for funding. In the event that a death of one of pharmacy owners occur, the life insurance settlement will then provide funds for the remaining pharmacy owner to buyout the partners shares from the estate.

It necessary to have life insurance coverage for each partner in place.  Without the means to accomplish the purchase of the Nebraska pharmacy shares, the buy-sell agreement will be effectively useless. As the business flourishes, the amount of insurance needs to be adjusted so adequate coverage can be provided.  Without life insurance, it is likely that the surviving stockholder will not have enough cash to satisfy the amount required to buy out the estate.  This leaves the survivor with an unwanted partner.

A certified NE pharmacy business valuation is necessary in order to have the adequate insurance coverage and to determine the specific terms of the buy-out.  Several companies exist that provide business valuations.  However, considering the dynamics and current market conditions of the pharmacy industry, the valuation firm consulted should have extensive experience in the pharmacy industry because simple accounting formulas and multipliers will not provide a realistic or even adequate valuation for a pharmacy business in Nebraska.

Nebraska pharmacy buy-sell agreements are extremely serious documents that need to treated with utmost importance and care.  Even with a solid, long-standing partnership, it will be too late to create a buy-sell agreement when an event has already occurred which requires the document.

Tips:
1. Buy-Sell Agreements are critical documents that should not be taken lightly. Consult a licensed professional.
2. Documents must address the proper laws and regulations which vary from state to state. Seek the proper guidance.
3. Premiums for insurance that will fund the buy-sell agreement might be deductible.
4. Ensure that the NE pharmacy valuation is performed by an established Nebraska pharmacy industry expert.