Capital Gains Tax and Pharmacy Transactions in North Dakota

By Brad MacLiver

Authorship and profile at Google

Almost everything you own and use for personal, or business, purposes is a capital asset. When ND 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 North Dakota pharmacy or a drug store, 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 in North Dakota, they usually do not know these federal regulations that allow for reducing the tax liability for the 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 North Dakota pharmacy seller who wants as much money out of the deal as possible. For most pharmacy owners in North Dakota, 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 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 other strategy that can be used to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). These trusts are legally described as Split Interest Trusts because of their blend of both philanthropic motivations and personal financial aspects. CRT’s are capable of reducing tax liabilities, increase the financial wealth of a business owner, and provide a platform for charitable giving at the same time.

CRT’s are established when someone donates assets to this special type of Trust.  These assets can be real estate, stocks, cash, and the like.  The CRT will be established for a set period of time or until the death of the donor (the pharmacy owners).  The pharmacy owner or a family member can receive income from the Trust’s assets, but upon the donor’s death, those assets will go to a designated charity. Part of the income received from the Trust can be used to purchase life insurance on the donor. The proceeds from the life insurance will go to designated heir(s) who receives it without incurring any estate tax liability.

Some tax strategies including the use of CRTs are not widely known. It would be advisable for North Dakota pharmacy business owners to be aware of the different tools that are available in structuring a business transaction. They should also be aware that only a professional with vast experience in CRTs should be used to setup a Charitable Remainder Trust. Not following the strict IRS guidelines could be cause for increased taxes, penalties, and in some cases criminal charges.

Over the years there have been unscrupulous individuals who have tried using CRTs and similar financial tools in illegal scams. With the increase in capital gains taxes there are expectations more scams will be floating around out there. Be knowledgeable about the possibilities, but be confident you are working with experts in your industry.

You should consult a firm with extensive experience in pharmacy and drug store acquisitions in ND. Firms that have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a North Dakota pharmacy owner large sums of money when a pharmacy is sold.

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Buy-Sell Agreements for Pharmacy Owners in North Dakota

By Brad MacLiver 
Authorship and profile at Google

When a ND pharmacy is owned by at least two people, the partners/stockholders should have a Buy-Sell Agreement. This agreement is a written document that will outline and govern the procedures for the future sale of the pharmacy business.

            
Pharmacy buy-sell Agreements are documents that protect the interest of the parties who own the pharmacy and direct the actions triggered by a stockholder leaving due to death, divorce, dissolution, retirement, or disability. The document will govern how and when the North Dakota pharmacy business' shares can be transferred or sold. The document will also provide guidance as to how the pharmacy will be valued as well as outline the obligations of the remaining shareholders of the ND pharmacy.

Buy-sell agreements are important documents because the differing elements of a future sell are predetermined and will not need to be negotiated during a heated dispute or grieving period.  They provide both the stockholder and the family some reassurance that when the inevitable time comes for an exit strategy, the process will have been thoroughly thought out in advance.

One of the disadvantages to not having a buy-sell agreement between North Dakota pharmacy owners is that a disability leaves one partner working more than another who is not adding to the productivity. Should a partner die before an agreement is established, the remaining partner may be left with a non-productive heir or a new partner who has personality conflicts with the surviving partner may be inserted. An incompatible partner could be devastating for the pharmacy business.

Buy-Sell agreements come in many other forms: 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 North Dakota Buy-Sell Agreement:

1. Stockholders names and the number of shares and voting rights of each. 

2. Guidance for the certified North Dakota 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 ensure that the money required is available, buy-sell agreements are often funded with a life insurance policy. Should the death of one of North Dakota pharmacy owners occur, the life insurance settlement will provide the funds for the remaining pharmacy owner in ND to buyout the partners shares from the estate.

Life insurance coverage for each partner needs to be in place, because without a way to accomplish the purchase of the pharmacy shares the buy-sell agreement will not be functional. As the business grows and develops the amount of insurance need to be adjusted to provide an adequate coverage. Without the insurance the surviving stockholder may not have enough cash to satisfy the amount required to buy out the estate - leaving the survivor with an unwanted partner.

To have the adequate insurance coverage and to determine the specifics of the buy-out terms, a certified North Dakota pharmacy business valuation is needed. There are a large number of companies that provide business valuations. Due to the dynamics and current market conditions of the pharmacy industry a valuation firm should have extensive pharmacy experience in ND. Simple accounting formulas and multipliers will not provide an adequate, or realistic, valuation for a pharmacy business.

Pharmacy buy-sell agreements are extremely important documents that need to be completed with seriousness and care. Even with a long standing partnership, it is only too late to create a buy-sell agreement when an event has already occurred....that would require 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 North Dakota pharmacy valuation is performed by an established ND pharmacy industry expert.