6 ms·

Ask HN: How do I minimize the taxes from selling my startup?

84 points by exitingfounder 15y ago

I'm about to sell my company. Because the company has existed for less than 1 year, I'm subject to short-term capital gains tax - about 35%. The tax code stipulates that, if I invest the proceeds in a "qualifying small business" and leave it there for just a few more months, the proceeds of the original and the new investment are treated as long term capital gains - 20%. Even better: if the proceeds stay in a QSB for more than 5 years, the whole thing is tax free, due to this: http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2010/CorpTax/TaxExclusion_Expanded.jsp I'm fairly certain that there's a win/win/win here: a way I can use my proceeds to invest in a small business, create jobs (the goal of the tax break), make the economy better, but not take on the kind of risk that comes with a traditional tech startup angel investment. I've thought about buying a diversified portfolio of franchised businesses, for example, or creating a holding company that makes many small investments. But I'm not a financial genius, there's always gotchas, and I don't want to re-invent the wheel. I've talked to two startup lawyers, a financial planner, and two CPAs, and while they can explain the mechanics, none of them have good suggestions about implementation. Does anyone know of solid strategies for sheltering investment proceeds in a QSB without taking too much capital risk? This information would be really helpful to anyone here who successfully sells their company!

iag 15y ago
Great question. Would love to hear some of the HN veterans chime in here.
pvsnp 15y ago
I think you want to ask this to a lawyer/accountant.
- exitingfounder 15y ago
  As I mentioned, I've asked two attorneys (one tax lawyer, one general counsel), a couple of CPAs, and a financial advisor or two for good measure. They all could explain the mechanics but none of them had much to suggest beyond traditional startup angel investments (which I'm going to do with some of the proceeds - but I need something lower risk for the rest).
  - latch 15y ago
    I realize this won't be too helpful, but I just feel you are asking the wrong people. If you can't get an accountant to suggest a proper course of actions.
  - SriniK 15y ago
    Where are you located? If you are in sv, there are quite a few folks who deal with this kinda stuff on a daily basis. I would definitely take help from them. Even if the acq is small amount, most of them do help you verbally on a good faith basis for repeated business from you. Have you received the LOI yet? http://en.wikipedia.org/wiki/Letter_of_intent http://en.wikipedia.org/wiki/Letter_of_intent Good luck.
    - exitingfounder 15y ago
      If you have specific names of advisors who have dealt with this particular problem, please share them! The usual suspects (highly regarded startup attorneys, startup CPAs) have been helpful in analyzing the situation but I haven't found any who has experience with the problem at hand, and I'd rather not be a pioneer here. Yes, we've signed an LOI; the transaction is imminent.
JonnieCache 15y ago
>use my proceeds to invest in a small business, create jobs (the goal of the tax break), make the economy better I was all ready to run up in here hatin' on tax evaders, reel off some polemic about how schools and roads need to be paid for by everyone, but then I read this. Descending cloud of morning depression: averted. Best of luck to you.
- exitingfounder 15y ago
  :) Yeah. I don't want to move the proceeds to an offshore tax haven or something. If I can follow the letter and spirit of the law to create jobs instead of paying taxes, I think everyone wins. And the more HN readers who know about this and can do the same, the better!
- javert 15y ago
  The vast majority of taxes go to far, far less legitimate things than roads and schools. The tax system is a very, very crooked one (speaking for the US but probably everywhere), and nobody should be forced to sacrifice 35% (!!!) of their earnings to it. My point here is that you shouldn't go around telling people that they have a moral duty to pay taxes. People who believe that have to choose between guilt, and self-sacrifice.
  - JonnieCache 15y ago
    There is a moral duty to pay taxes when you live in and benefit from a civilisation founded upon taxation, public services, and shared wealth. And self-sacrifice was a pretty good choice last time I checked.
    - pufuwozu 15y ago
      I don't think anybody here is denying that. There's a big difference between tax evasion and tax avoidance. I particularly like this quote on tax avoidance from Kerry Packer, 1991: I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn't minimize their tax they want their heads read because as a government I can tell you you're not spending it that well that we should be donating extra.
Julianhearn 15y ago
If you live in the uk you wouldonlypay 10% tax the first time you sell a company, up to £10m per person.
- benhalllondon 15y ago
  I think it's £1 million. http://www.hmrc.gov.uk/cgt/disposal.htm http://www.hmrc.gov.uk/cgt/disposal.htm
  - petercooper 15y ago
    Nope, Julian was right the first time. Entrepreneur's relief was increased to £10m (from £5m) at the last budget: http://citywire.co.uk/new-model-adviser/budget-2011-entrepreneurs-relief-lifetime-limit-doubled-to-10m/a481231 http://citywire.co.uk/new-model-adviser/budget-2011-entrepre... A lot of what's on HMRC's own site is, sadly, stale or poorly dated.
    - srgseg 15y ago
      Yes. And it used to be 10% with no limit until 2008. Those were the days. Also it's not just the "first time you sell a company". It applies on as many company sales as you want, up to a lifetime total of £10m.
      - petercooper 15y ago
        And not even company sales, as far as I understand it, but any group of complete business assets (that is, any set of business assets that defines a single "business" - an important point for sole traders like me ;-))
  - petercooper 15y ago
    Nope, Julian was right the first time. Entrepreneur's relief was increased to £10m (from £5m) at the last budget: http://citywire.co.uk/new-model-adviser/budget-2011-entrepreneurs-relief-lifetime-limit-doubled-to-10m/a481231 http://citywire.co.uk/new-model-adviser/budget-2011-entrepre... A lot of what's on HMRC's own site is, sadly, stale or poorly dated.
davidw 15y ago
It'd sure be fun in cases like these to hear more about the company - after the deal is done, of course.
dfasdsa 15y ago
Why not just wait until 1 year passes to officially sell your company?
- code 15y ago
  The window of opportunity to sell a company is narrow and if he waits, the buyer may move on and another one may not come for awhile or offer the same term. Of course it depends on how far off he is from closing the deal but I assume OP is asking because its not anywhere near the one year mark.
patio11 15y ago
For legal advice, you apparently have money, so talk to the people who trade money for legal advice. Are you positive that selling your company is the only mutually beneficial transaction you and the acquiring party can arrange? There are many possible options, with VASTLY different tax consequences but only minorly different changes on the ground. Stock sale != asset sale != IP licensing agreement != sudden decision of all key employees to change jobs. Consider BobSoft, a hypothetical company with three engineers and some IP which is 100% owned by Bob. If BobSoft gets acquired by Google via Google buying all the shares from Bob, Bob has capital gains up the wazoo. If on the other hand Google buys all the assets of BobSoft, BobSoft continues to be a going concern. It continues paying Bob a salary for a few more months, puts around doing whatever BobSoft would do in the absence of their main line of business, hits the magic day on the calendar, and then buys all stock in itself back from Bob, who now has long-term capital gains. BobSoft then spins down in an orderly fashion. Ask your competent legal advisers for how to work this such that you don't trigger the ire-RS. This is what they do. More broadly: every tax cutout, no matter how well-intentioned, distorts the economy by paying smart people to spend more time figuring out how to hit the algorithm versus doing whatever they would otherwise do to earn money.
- palish 15y ago
  Does this strike anyone else as... well, greedy? I don't quite mean "greedy" --- I mean dangerous. The OP is about to "win at life". Why tempt fate? What I'm saying is, if PG hadn't sold Viaweb at all, then YCombinator would never have existed. But if he had sold Viaweb for, say, 15% less than he did... then there's a good chance YC would have been created anyway, because he would still be wealthy. So again, why tempt fate? It seems like the best advice is "just get the deal done".
  - nazgulnarsil 15y ago
    you're assuming a 7 figure exit. this might not even be a six figure exit.
    - derwiki 15y ago
dotBen 15y ago
I'm firmly in the camp of "pay for legal/CPA advice" rather than asking here. But I've sort of been through this and the short answer is that the time to consider how you would minimize tax was when you formed the company. Assigning the stock in the startup to a holding company you control vs personal ownership, getting into S-Corp vs LLC for the holding company, etc are all areas you could explore. It's probably too late now, however.
- benmccann 15y ago
  How would a holding company help? Wouldn't the company just be subject to the tax then (at the corporate tax rate which would be even higher)?
  - dotBen 15y ago
    I believe there are various things you can do (note IANAL, or accountant) such as take procedes taxed as a dividend (lesser tax rate) or even not take the money out of the company and reinvest or buy an asset and net out zero taxable profit. And S-Corp would also come under your personal tax rate, I believe rather than corporate tax rate.
destraynor 15y ago
This doesn't necesarily help the poster in this case, but it's worth a read. Derek Sivers (@sivers) sold CD Baby for $22,000,000. Before he did it he transferred the entire business to a trust. The trust received the $22 mill in cash, without paying tax. Derek receives 5% of that amount every year (1 mil) Read about it here: http://sivers.org/trust http://sivers.org/trust
- huhtenberg 15y ago
  This is just a tax deferral scheme. It has some benefits, but it is not dramatically different from paying all taxes upfront.
maukdaddy 15y ago
This won't be a popular option, but why not just pay the tax? Why try to invest or involve yourself in some complicated scheme just to save the 15%. If the sale is enough money to be somewhat comfortable, pay the tax and be appreciative of the folks who paid tax before you did - enabling you the opportunities to easily create and sell businesses.
- exitingfounder 15y ago
  I think I explained the answer to your question in the original post. The government has decided that in this case the money would be better spent creating jobs than going in to general funds. I agree. I'm looking for a mechanism for doing that which accomplishes the stated goal with less risk than a traditional startup. Win (for me), win (for the government), win (for society).
lubujackson 15y ago
Don't forget state taxes - if you are an internet-based company and have no central office, there is really nothing keeping you bound to whatever state you live in. Look into moving the HQ to a state like Nevada - you can pay people to be a "registered agent" which means your business mail MUST go to that person and they'll forward it on to wherever you are. Consider this "gray hat" tax advice. The tax code isn't built to handle companies without a true physical presence. They look to see where your main office is - if you don't have any, you can pretty much claim whatever state you choose. There may be rules about how long the HQ has to be in a state to qualify for the tax year, but I think that's it. Certainly ask your accountant/lawyer for more details and about the letter of the law here.
- rprasad 15y ago
  Two different issues. The sale of a company is a taxable event to the owner(s), not the company. It does not matter where the company is located, it matters where the owner is located. That's why Arrington moved to another state while he was in talks to sell TechCrunch, but left TC in Cali. Also, the danger with multi-state companies (i.e,. incorporated in one state but with operations in other states) is that they can subject themselves to the taxes of each state in which they have a presence. It is settled law that presence can include facilities or employees even if the business is HQ'd in another state.
deleted 15y ago
[deleted]
deleted 15y ago
[deleted]
rprasad 15y ago
I've got bad news for you: that tax program expired in January. It was only a temporary extension to a small business incentive program that ran from 2009-2010. The law still exists, but the tax benefits are significantly reduced, and it only applies to C Corporations. (http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001202----000-.html http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_0...) Here are some thoughts (for free, so not in enough detail to act upon without further legal advice): - Hire a tax lawyer. The amount you save in taxes will pay for itself. - If feasible, delay the execution of the sale until you have held your company for more than 1 year. - Consider selling your company for stock of the acquiring company instead of for cash. The transaction would be fully tax free if solely for stock, and taxable only to the extent of cash/non-stock received. (See IRC 368, and related sections.) - If you made the S election, you must unelect for Small Business Sale Exclusion to apply. This has fun tax consequences. And finally, DO NOT HIRE A CPA to do this for you. CPAs know how to add things up, but they frequently get the law wrong. Tax lawyers exist largely to clean up the mess created by CPAs.
- exitingfounder 15y ago
  To quickly run through these in order: 1) The program was extended. And regardless, the original company investment was made during the holiday, so as long as I roll over within 60 days, I'm OK. 2) I did hire a tax lawyer, which is why I understand the circumstances pretty thoroughly. What they weren't able to do was recommend a specific course of action based upon firsthand experience, which is why I'm asking here - either for someone who has that experience, or a pointer to a lawyer who's specifically experienced with this particular cranny of law - It's not feasible to delay without wrecking the deal - A stock transaction is not an option for the acquirer - We're a C corp - I asked a CPA as well since what I'm looking for is experiences and strategies. I concur with the gist of this advice and will have a tax attorney look over it if I come up with anything. Thanks for taking the time to weight in.
  - rprasad 15y ago
    Whoops. You're right about the second extension. The law itself (Sec 1202) was not extended, but other code sections that interplay with 1202 extended (and expanded) the scope of 1202. That's what I get for commenting after midnight...
triviatise 15y ago
I have a good tax attorney, contact me if you want contact info. Here is one possible method. There is a company that will let you buy income insurance which you can then expense wholly (for the whole amount of the sale of your company). At some later date when you have additional expenses or take a loss or with other specific triggers, the insurance company will pay out your losses. You would typically do this in a year when you take a loss and the income from the insurance company balances the expenses for that year. They charge around 5-7% This is basically a way to smooth out and balance taxes over multiple years.

iag 15y ago

Great question. Would love to hear some of the HN veterans chime in here.

pvsnp 15y ago

I think you want to ask this to a lawyer/accountant.

exitingfounder 15y ago
As I mentioned, I've asked two attorneys (one tax lawyer, one general counsel), a couple of CPAs, and a financial advisor or two for good measure. They all could explain the mechanics but none of them had much to suggest beyond traditional startup angel investments (which I'm going to do with some of the proceeds - but I need something lower risk for the rest).
- latch 15y ago
  I realize this won't be too helpful, but I just feel you are asking the wrong people. If you can't get an accountant to suggest a proper course of actions.
- SriniK 15y ago
  Where are you located? If you are in sv, there are quite a few folks who deal with this kinda stuff on a daily basis. I would definitely take help from them. Even if the acq is small amount, most of them do help you verbally on a good faith basis for repeated business from you. Have you received the LOI yet? http://en.wikipedia.org/wiki/Letter_of_intent http://en.wikipedia.org/wiki/Letter_of_intent Good luck.
  - exitingfounder 15y ago
    If you have specific names of advisors who have dealt with this particular problem, please share them! The usual suspects (highly regarded startup attorneys, startup CPAs) have been helpful in analyzing the situation but I haven't found any who has experience with the problem at hand, and I'd rather not be a pioneer here. Yes, we've signed an LOI; the transaction is imminent.

JonnieCache 15y ago

>use my proceeds to invest in a small business, create jobs (the goal of the tax break), make the economy better I was all ready to run up in here hatin' on tax evaders, reel off some polemic about how schools and roads need to be paid for by everyone, but then I read this. Descending cloud of morning depression: averted. Best of luck to you.

exitingfounder 15y ago
:) Yeah. I don't want to move the proceeds to an offshore tax haven or something. If I can follow the letter and spirit of the law to create jobs instead of paying taxes, I think everyone wins. And the more HN readers who know about this and can do the same, the better!
javert 15y ago
The vast majority of taxes go to far, far less legitimate things than roads and schools. The tax system is a very, very crooked one (speaking for the US but probably everywhere), and nobody should be forced to sacrifice 35% (!!!) of their earnings to it. My point here is that you shouldn't go around telling people that they have a moral duty to pay taxes. People who believe that have to choose between guilt, and self-sacrifice.
- JonnieCache 15y ago
  There is a moral duty to pay taxes when you live in and benefit from a civilisation founded upon taxation, public services, and shared wealth. And self-sacrifice was a pretty good choice last time I checked.
  - pufuwozu 15y ago
    I don't think anybody here is denying that. There's a big difference between tax evasion and tax avoidance. I particularly like this quote on tax avoidance from Kerry Packer, 1991: I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn't minimize their tax they want their heads read because as a government I can tell you you're not spending it that well that we should be donating extra.

Julianhearn 15y ago

If you live in the uk you wouldonlypay 10% tax the first time you sell a company, up to £10m per person.

benhalllondon 15y ago
I think it's £1 million. http://www.hmrc.gov.uk/cgt/disposal.htm http://www.hmrc.gov.uk/cgt/disposal.htm
- petercooper 15y ago
  Nope, Julian was right the first time. Entrepreneur's relief was increased to £10m (from £5m) at the last budget: http://citywire.co.uk/new-model-adviser/budget-2011-entrepreneurs-relief-lifetime-limit-doubled-to-10m/a481231 http://citywire.co.uk/new-model-adviser/budget-2011-entrepre... A lot of what's on HMRC's own site is, sadly, stale or poorly dated.
  - srgseg 15y ago
    Yes. And it used to be 10% with no limit until 2008. Those were the days. Also it's not just the "first time you sell a company". It applies on as many company sales as you want, up to a lifetime total of £10m.
    - petercooper 15y ago
      And not even company sales, as far as I understand it, but any group of complete business assets (that is, any set of business assets that defines a single "business" - an important point for sole traders like me ;-))
- petercooper 15y ago
  Nope, Julian was right the first time. Entrepreneur's relief was increased to £10m (from £5m) at the last budget: http://citywire.co.uk/new-model-adviser/budget-2011-entrepreneurs-relief-lifetime-limit-doubled-to-10m/a481231 http://citywire.co.uk/new-model-adviser/budget-2011-entrepre... A lot of what's on HMRC's own site is, sadly, stale or poorly dated.

davidw 15y ago

It'd sure be fun in cases like these to hear more about the company - after the deal is done, of course.

dfasdsa 15y ago

Why not just wait until 1 year passes to officially sell your company?

code 15y ago
The window of opportunity to sell a company is narrow and if he waits, the buyer may move on and another one may not come for awhile or offer the same term. Of course it depends on how far off he is from closing the deal but I assume OP is asking because its not anywhere near the one year mark.

patio11 15y ago

For legal advice, you apparently have money, so talk to the people who trade money for legal advice. Are you positive that selling your company is the only mutually beneficial transaction you and the acquiring party can arrange? There are many possible options, with VASTLY different tax consequences but only minorly different changes on the ground. Stock sale != asset sale != IP licensing agreement != sudden decision of all key employees to change jobs. Consider BobSoft, a hypothetical company with three engineers and some IP which is 100% owned by Bob. If BobSoft gets acquired by Google via Google buying all the shares from Bob, Bob has capital gains up the wazoo. If on the other hand Google buys all the assets of BobSoft, BobSoft continues to be a going concern. It continues paying Bob a salary for a few more months, puts around doing whatever BobSoft would do in the absence of their main line of business, hits the magic day on the calendar, and then buys all stock in itself back from Bob, who now has long-term capital gains. BobSoft then spins down in an orderly fashion. Ask your competent legal advisers for how to work this such that you don't trigger the ire-RS. This is what they do. More broadly: every tax cutout, no matter how well-intentioned, distorts the economy by paying smart people to spend more time figuring out how to hit the algorithm versus doing whatever they would otherwise do to earn money.

palish 15y ago
Does this strike anyone else as... well, greedy? I don't quite mean "greedy" --- I mean dangerous. The OP is about to "win at life". Why tempt fate? What I'm saying is, if PG hadn't sold Viaweb at all, then YCombinator would never have existed. But if he had sold Viaweb for, say, 15% less than he did... then there's a good chance YC would have been created anyway, because he would still be wealthy. So again, why tempt fate? It seems like the best advice is "just get the deal done".
- nazgulnarsil 15y ago
  you're assuming a 7 figure exit. this might not even be a six figure exit.
  - derwiki 15y ago

dotBen 15y ago

I'm firmly in the camp of "pay for legal/CPA advice" rather than asking here. But I've sort of been through this and the short answer is that the time to consider how you would minimize tax was when you formed the company. Assigning the stock in the startup to a holding company you control vs personal ownership, getting into S-Corp vs LLC for the holding company, etc are all areas you could explore. It's probably too late now, however.

benmccann 15y ago
How would a holding company help? Wouldn't the company just be subject to the tax then (at the corporate tax rate which would be even higher)?
- dotBen 15y ago
  I believe there are various things you can do (note IANAL, or accountant) such as take procedes taxed as a dividend (lesser tax rate) or even not take the money out of the company and reinvest or buy an asset and net out zero taxable profit. And S-Corp would also come under your personal tax rate, I believe rather than corporate tax rate.

destraynor 15y ago

This doesn't necesarily help the poster in this case, but it's worth a read. Derek Sivers (@sivers) sold CD Baby for $22,000,000. Before he did it he transferred the entire business to a trust. The trust received the $22 mill in cash, without paying tax. Derek receives 5% of that amount every year (1 mil) Read about it here: http://sivers.org/trust http://sivers.org/trust

huhtenberg 15y ago
This is just a tax deferral scheme. It has some benefits, but it is not dramatically different from paying all taxes upfront.

maukdaddy 15y ago

This won't be a popular option, but why not just pay the tax? Why try to invest or involve yourself in some complicated scheme just to save the 15%. If the sale is enough money to be somewhat comfortable, pay the tax and be appreciative of the folks who paid tax before you did - enabling you the opportunities to easily create and sell businesses.

exitingfounder 15y ago
I think I explained the answer to your question in the original post. The government has decided that in this case the money would be better spent creating jobs than going in to general funds. I agree. I'm looking for a mechanism for doing that which accomplishes the stated goal with less risk than a traditional startup. Win (for me), win (for the government), win (for society).

lubujackson 15y ago

Don't forget state taxes - if you are an internet-based company and have no central office, there is really nothing keeping you bound to whatever state you live in. Look into moving the HQ to a state like Nevada - you can pay people to be a "registered agent" which means your business mail MUST go to that person and they'll forward it on to wherever you are. Consider this "gray hat" tax advice. The tax code isn't built to handle companies without a true physical presence. They look to see where your main office is - if you don't have any, you can pretty much claim whatever state you choose. There may be rules about how long the HQ has to be in a state to qualify for the tax year, but I think that's it. Certainly ask your accountant/lawyer for more details and about the letter of the law here.

rprasad 15y ago
Two different issues. The sale of a company is a taxable event to the owner(s), not the company. It does not matter where the company is located, it matters where the owner is located. That's why Arrington moved to another state while he was in talks to sell TechCrunch, but left TC in Cali. Also, the danger with multi-state companies (i.e,. incorporated in one state but with operations in other states) is that they can subject themselves to the taxes of each state in which they have a presence. It is settled law that presence can include facilities or employees even if the business is HQ'd in another state.

deleted 15y ago

[deleted]

deleted 15y ago

[deleted]

rprasad 15y ago

I've got bad news for you: that tax program expired in January. It was only a temporary extension to a small business incentive program that ran from 2009-2010. The law still exists, but the tax benefits are significantly reduced, and it only applies to C Corporations. (http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001202----000-.html http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_0...) Here are some thoughts (for free, so not in enough detail to act upon without further legal advice): - Hire a tax lawyer. The amount you save in taxes will pay for itself. - If feasible, delay the execution of the sale until you have held your company for more than 1 year. - Consider selling your company for stock of the acquiring company instead of for cash. The transaction would be fully tax free if solely for stock, and taxable only to the extent of cash/non-stock received. (See IRC 368, and related sections.) - If you made the S election, you must unelect for Small Business Sale Exclusion to apply. This has fun tax consequences. And finally, DO NOT HIRE A CPA to do this for you. CPAs know how to add things up, but they frequently get the law wrong. Tax lawyers exist largely to clean up the mess created by CPAs.

exitingfounder 15y ago
To quickly run through these in order: 1) The program was extended. And regardless, the original company investment was made during the holiday, so as long as I roll over within 60 days, I'm OK. 2) I did hire a tax lawyer, which is why I understand the circumstances pretty thoroughly. What they weren't able to do was recommend a specific course of action based upon firsthand experience, which is why I'm asking here - either for someone who has that experience, or a pointer to a lawyer who's specifically experienced with this particular cranny of law - It's not feasible to delay without wrecking the deal - A stock transaction is not an option for the acquirer - We're a C corp - I asked a CPA as well since what I'm looking for is experiences and strategies. I concur with the gist of this advice and will have a tax attorney look over it if I come up with anything. Thanks for taking the time to weight in.
- rprasad 15y ago
  Whoops. You're right about the second extension. The law itself (Sec 1202) was not extended, but other code sections that interplay with 1202 extended (and expanded) the scope of 1202. That's what I get for commenting after midnight...

triviatise 15y ago

I have a good tax attorney, contact me if you want contact info. Here is one possible method. There is a company that will let you buy income insurance which you can then expense wholly (for the whole amount of the sale of your company). At some later date when you have additional expenses or take a loss or with other specific triggers, the insurance company will pay out your losses. You would typically do this in a year when you take a loss and the income from the insurance company balances the expenses for that year. They charge around 5-7% This is basically a way to smooth out and balance taxes over multiple years.