Pharmacy Transactions and Capital Gains Tax in Utah

By Brad MacLiver
Authorship and profile at Google


Nearly everything you own and use for either personal or business purposes is a capital asset. When UT pharmacy owners sell a capital asset, the difference in the amount it sells for and the amount you paid for it (the basis) is called either a capital gain or a capital loss.

The term "Capital gains" may also be used refer to investment income that arises in relation to real assets such as financial assets, property, or intangible assets like goodwill.  All capital gains in the United States must be reported and its appropriate tax paid.

When selling pharmacies or a drug stores in Utah, there are certain tax strategies that can be utilized to help offset tax liabilities.  Pharmacy owners who don't consult a professional who handles a large number of pharmacy acquisitions will typically not know these federal regulations that allow for reducing the tax liability for themselves.

During this period of financial uncertainty where it is more difficult to finance a business, Utah 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 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 pharmacy owners to reconsider their retirement plans. The good news is there are financial tools and strategies that allow the Utah 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 (pharmacy owners in Utah) 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.

Some tax strategies including the use of CRTs are not widely known. It would be advisable for 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 Utah pharmacy and drug store acquisitions. Firms that have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a pharmacy owner large sums of money when a UT pharmacy is sold.

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Utah Buy-Sell Agreements for Pharmacy Owners

By Brad MacLiver
Authorship and profile at Google


When a UT 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 Utah pharmacy business.

         
Pharmacy buy-sell Agreements protect the interest of the parties who own the Utah 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 in Utah.

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 Utah 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.

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 Utah Buy-Sell Agreement:

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

2. Guidance for the certified Utah 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.

15. Enforceability of the agreement, the binding effects, and arbitration procedures for disputes.

16. Process for dissolution, or liquidation, of the corporation.

17. Maintaining the premises during a transition.

18. Preserving representations and warranties.

19. The terms of transfer.

20. Bill of Sale.

To ensure that the money required will be available, buy-sell agreements are typically funded with life insurance policies should the death of one of pharmacy owners occur.  In this case, the life insurance settlement provides funds for the remaining Utah pharmacy owner to buyout their partner's shares from the estate.

For each partner, life insurance coverage must be in place because with no way of purchasing the UT pharmacy shares, the buy-sell agreement is non-functional. As the business develops and grows, the amount of insurance needs to be adjusted in order to provide adequate coverage. Without insurance, the surviving stockholder could possibly not have enough cash to satisfy the required amount to buy out the estate, which will leave the survivor with an unwanted partner.

To have adequate insurance coverage and determine the specifics of the buy-out terms, it is necessary to consult a certified pharmacy business for a valuation. There are quite a few companies that provide business valuations and, because of the dynamics and current market conditions of the pharmacy industry, a valuation firm in Utah should have extensive Utah pharmacy experience. Simple accounting formulas and multipliers do not provide adequate or realistic valuations for a pharmacy business.

Pharmacy buy-sell agreements in Utah are extremely important documents that will need to be completed with both seriousness and care. Even if one has a long-standing partnership, it is already too late to create a buy-sell agreement when an event has already occurred that 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 pharmacy valuation is performed by an established Utah pharmacy industry expert.