Tax Implications for Business Owners Going Through Divorce

– Divorcing business owners can divide their assets, including business ownership interests, with their soon-to-be ex-spouse without federal income or gift tax consequences.
– The spouse who receives the asset takes over its existing tax basis and holding period.
– Tax-free transfers can occur before or at the time of the divorce, as well as within a year after the marriage ends or within six years if made pursuant to the divorce agreement.
– Eventually, there will be tax implications for assets received tax-free in a divorce settlement, as the ex-spouse who ends up owning an appreciated asset may need to recognize taxable gain when it’s sold. 1. If an ex-spouse receives 49% of highly appreciated small business stock in a divorce, there is no tax impact when the shares are transferred, thanks to the tax-free transfer rule.

2. The ex-spouse will continue to apply the same tax rules as if the individual had continued to own the shares, including carryover basis and carryover holding period. When the ex-spouse ultimately sells the shares, he or she will owe any capital gains taxes, while the original owner will owe nothing.

3. It is important to take taxes into account when negotiating a divorce agreement, as appreciated assets are worth less from a net-of-tax perspective.

4. The tax-free transfer rule is now extended to ordinary-income assets, such as business receivables or inventory, which can also be transferred tax-free in a divorce. When the asset is later sold or converted to cash, the owner at that time must recognize the income and pay the tax liability.

5. Careful handling of the splitting up of qualified retirement plan accounts and IRAs is essential to avoid unexpected tax bills in a divorce.

6. If the individual owns a business, it is important to consider the significant tax implications of divorce and seek professional help to minimize adverse tax consequences. – New tax laws will impact small business owners
– Changes to capital gains tax rates
– Important tax deductions for freelancers and gig workers

Divorcing Business Owners Should Pay Attention to the Tax Consequences