There’s been lots of talk (and associated panic) about the Biden administration’s proposed tax hikes as part of the American Families Plan and its projected $1.5 trillion price tag over the next 10 years. First and foremost, the key word here is proposed. None of this is set in stone. Any tax code changes will need to be approved by Congress and may look quite different once all is said and done.
That being said, as a business owner, especially one who might be thinking of transitioning out of your business, it’s critical that you understand the proposed changes and the tax implications of the sale whether you plan to sell to an outside buyer or employees or “gift” your business to family members.
You don’t need to be a tax expert. You just need to have a basic understanding of how business transfers are taxed so you can evaluate your various exit options and understand how much you will “net” from each and get a plan in place for whatever may come to pass in the final legislation. You’ll also want to make sure that you have a team of trusted experts and advisors who can help determine the best course of action for you and your business, and execute when the time is right. Let’s take a look at some of the proposed changes, what you need to know, and some steps you can take now to get yourself and your business prepared.
Some of the details about the proposed changes under Biden’s American Families Plan:
- The top individual income tax rate would be increased from 37% to 39.6%.
- This rate would affect single individuals with taxable income of more than $452,700 and married couples filing jointly with income over $509,300, according to a budget proposal issued in May.
- The proposed plan would make several changes to taxation of capital gains and dividends, including taxing capital gains as ordinary income above $1 million and unrealized gains above $1 million at death, eliminating the “carried interest” loophole, and closing other real estate-related loopholes.
- The existing 3.8% Medicare tax would be applied to all income above $400,000.
- The plan would permanently extend the current limitation on deducting large business losses.
- The corporate tax rate would increase from 21% to 28% for those owners who do not own pass-through entities such as S Corporations or Limited Liability Companies taxed as partnerships.
Understanding Your Tax Liability when Selling Your Business
While increasing taxes is a current hot issue, we’ve found over the years that many owners who are selling their businesses often don’t realize just how much of the proceeds of the sale will go toward paying taxes – whether it’s a sale to an insider or to an external buyer. Your tax liability could be at least 30% and can be as high as 50% or 60% of the sale proceeds.
What really matters is the net amount, which is calculated as gross sale price minus all selling expenses (i.e. legal, accounting, and broker fees) and taxes.
What You Can Do to Minimize Taxes on Your Sale
Transfer tax is a very complex area and could become even more so – you don’t want to go it alone. As you work with your advisory team, tax planning should be incorporated into your overall exit plan.
Taking the time to get properly educated on this topic may help you to realize significant tax savings and preserve your hard-earned wealth!
Talk of taxes always grabs headlines and people’s imaginations – if it’s grabbed your attention, it’s no time to panic. As we mentioned, nothing is on the books yet and things are bound to change. Now is the time to get your ducks in a row and plan for the future of your business, regardless of what tax code changes may come. Business owners can save hundreds of thousands or millions of dollars on their business transfers by planning in advance and taking action to legally minimize their taxes. (Just to be clear: tax avoidance is legal while tax evasion is not).
Let us know your questions!
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.