ESTABLISHED: June 2015
FOUNDER: John Krohn, CEO
LOCATION: 12951 University Ave., Suite 201, Clive
WEBSITE: www.cfsgllc.com 

The Problem: 

Capital gains taxes have increased to 20 percent for individuals with incomes of more than $400,000 and for married couples filing joint tax returns with incomes of more than $450,000. In addition, there is a 3.8 percent surtax on net investment income, which includes capital gains. The issue is how to reduce tax obligations, especially on net gains on the sale of property or a business.

The Innovation: 

The solution on property has been to enter something called a 1031 exchange in which the income from a property sales is used to purchase a piece of land similar to what was sold. However, John Krohn, CEO of CashFlow Structure Group LLC and a senior financial services representative for Principal Financial Group Inc., has an alternative solution that, as with the 1031 exchange, falls within federal tax laws. The solution is a structured sale, in which a final selling price is agreed on for a transaction, but is not paid in one lump sum. 

How he did it: 

Krohn is the first to admit that the structured sale is not his idea alone. The concept was first devised by Allstate Corp. before it dropped its financial services business to focus on personal lines of insurance.

Krohn points out that Allstate simply tapped into existing IRS tax rulings. For the past five years, Krohn has been busy putting the pieces together, triggered in large part by the increase in capital gains tax rates to a maximum of 20 percent from 15 percent.

His CashFlow Structure Group helps the deal fall together and makes certain that the accompanying paper trail is transparent and within the IRS rules.

Here’s how it works:

An individual or business sells a qualifying asset, such as a farm or other real estate, for cash, plus a promise of future periodic payments or installments.

The buyer sends the balance of the funds to an assignment company, which makes the payments agreed to in an installment sales agreement.

The assignment company establishes a trust and purchases fixed annuities that match the payment terms of the installment agreement. Krohn’s company assigns the funds to Principal Trust Co., which is part of Principal Financial Group Inc.

The payments are distributed to the seller over the life of the agreement.

Krohn advises clients that if a 1031 exchange is part of the sales agreement, it should have a structured sales contingency that would kick in if the exchange should fail. In addition, the structured sale can be used to cover the “boot,” or the amount of cash that might be left over after the exchange is completed.

Although structured sales can be used to avoid or lower capital gains taxes on the sales of capital assets, they also can be used as a way to defer income on a diverse range of transactions, including the sales of crops and livestock, oil and gas lease bonuses and celebrity endorsements.

The Payoff: 

The main benefit of a structured sale is that payments can be parceled out year after year at a level that meets lower capital gains rates, or avoids capital gains taxes altogether. There is a key difference between this type of transaction and a loan that is paid off in installments. The total amount of the transaction is brought to the table when the deal closes and is transferred to the trustee, which invests the money in a fixed annuity. In a typical installment agreement, the seller is relying on the buyer’s promise to pay.