Tax Implications for Divorcing Business Owners
For business owners, divorce presents a unique and often daunting challenge – the potential division of a business they have built with years of hard work, dedication, and sacrifice. A business owner will likely have emotional ties to a business that they own and have poured so much of themselves into. In the midst of a divorce, when so much is having to be redefined and built anew – it can be very scary to think that your business could be impacted. Navigating this complex process requires a clear understanding of the financial and legal implications, particularly when it comes to taxes.
The division of a business depends on various factors, including when the business was formed, how it is structured, and whether any legal agreements (such as a prenup or postnup) exist. In California, a business may be considered a marital asset even if only one spouse was actively involved in its creation and operation.
In most cases, ex-spouses will not remain business partners post-divorce. Typically, one spouse will walk away with full ownership of a business – oftentimes by doing a buyout or trading their share of other community assets in order to secure full ownership rights. Given the financial complexities involved, it is crucial to consult with financial and legal professionals to assess how taxes can potentially impact divorce settlement and long-term financial stability of your business.
Tax-Free Property Transfers
Many kinds of assets can be transferred between parties without a capital gains tax being triggered, so long as the transfer is incident to a divorce. This will generally apply when the transfer is made within a year of the marriage ending, or up to six years after the marriage ends if the transfer is pursuant to the divorce agreement. Business ownership interests can be transferred in the same manner, if it is an asset of the marriage that is transferred incident to the divorce.
In these transfers the asset will retain its existing cost basis and holding period. The recipient of the asset/interest will be responsible for any taxes that might be owed on the proceeds when the property is sold.
This could mean, for instance, that a spouse who receives a share of business stock in a divorce and sells it years down the line for a profit, will then have to pay capital gains taxes on that sale. What readers need to understand with this is that an asset may seem to be of equal value at the time of divorce. However, if the value is going to be taken by selling the business interest in a way that triggers a high tax bill, you need to really consider how to approach the final settlement agreement to ensure fairness.
Contact Cardwell Steigerwald Young, LLP
To better understand your own options moving forward and receive precise legal strategy in your case, contact the divorce attorneys at Cardwell Steigerwald Young, LLP.
