317: The Tax Trap Most Business Owners Don’t See Coming

[00:00:00] Hilary Hendershott:  You can build a $10 million business and still find yourself wondering, where did it all go? And not because you did anything wrong, but because there are forces shaping your outcome that most owners don’t fully see until it’s too late.

[00:00:16] Hi, I’m Hilary Hendershott, founder of Hendershott Wealth Management. We publish content to help you strengthen your financial life, grow your net worth, and feel supported through the moments that matter. If that sounds like the kind of advice you might be looking for, please take a moment to like this video and subscribe to my channel. So here’s what’s actually happening.

[00:00:38] If you’re building a business in a high-tax state, such as California or New York, you don’t just have one tax problem.

[00:00:45] You have three, and they don’t show up all at once. They show up at different points, at different moments across your financial life. That’s the part most owners miss.

[00:00:56] The first is what I call the success tax. As your business grows, more income flows through to you personally, and at higher levels, you’re often paying over 50% when you combine federal and state taxes. So every additional dollar of profit is effectively split, half to you, half to the government. The second is the exit tax.

[00:01:21] For many owners, selling the business is actually the largest financial event of their lives. But that moment also triggers a large capital gains bill. On a $10 million sale, it’s not unusual to see $3 or $4 million go to taxes immediately. And then there’s the third one. That’s the enjoy it tax. You’ve sold the business, you’ve invested the proceeds, you paid the tax, and you’re enjoying the fruits of your success, and now you’re paying taxes again on the growth of your own capital.

[00:01:56] So if you zoom out, this isn’t just one tax event; it’s a sequence, and if it’s not managed intentionally, it will erode what you actually keep from everything you built. Now, most business owners try to solve this reactively. They look for deductions. They increase their expenses. They look for ways to reduce this year’s tax bill.

[00:02:19] But the real opportunity is to think about this in the system because when you do that, you can start to change the outcome across all three phases.

[00:02:30] Let me give you a concrete example. Imagine your business generates a million dollars in profit every year. At a 50% combined tax rate, that’s roughly half a million dollars going to taxes.

[00:02:41] Now, imagine you have an investment strategy that can generate $300,000 in ordinary losses while still being profitable. Only the profits are realized as $400,000 of capital gains. Now, you’re only taxed on $700,000 of income. That’s a $150,000 reduction in your tax bill in a single year, and that’s just the first layer.

[00:03:06] At the same time, there are strategies designed to generate capital losses without sacrificing returns or adding risk. Those losses can offset your capital gains this year and be carried forward and used later,

[00:03:19] Which means when you eventually sell your business, you can already have a reserve of losses ready to offset that capital gain. So instead of reacting to a large tax bill, you’ve prepared for it, and the same structure can continue working for you in retirement, offsetting gains, supporting distributions, and keeping more of your capital compounding.

[00:03:44] This isn’t about finding a trick. It’s about coordinating strategies that were never meant to be used in isolation. And when they’re combined and implemented correctly, they can and will change the trajectory of your financial future. At Hendershott Wealth Management, this is exactly the problem we solve.

[00:04:06] We call it Ultra Tax-Efficient Wealth Management. Not a product. It is a process that integrates tax strategy directly into how your portfolio is designed and managed.

[00:04:17] If you’re a business owner and your financial life is becoming more complex, this is usually the point where thinking differently starts to matter. And if you’re looking at your situation and wondering whether you’re structuring things as well as you could be, well, that’s a good signal that it’s time to take a closer look. If you’d like help thinking through your specific situation, you can go to HendershottWealth.com, click on Schedule a Call, and fill out the contact form there.

[00:04:48] That’s the best way to start a conversation with our team. It’s a thoughtful, low-pressure meeting focused on understanding your situation and helping you decide what to do next. Thanks for being here.