Tax Considerations When Selling a Business:
Contemplating selling your business in the next four years?
Tax considerations may advance your timing.
Regardless of who you supported in the 2020 election last Fall, business owners should now come to terms with the new reality – overall, taxes are most likely rising. The question of how much and when is the biggest unknown. If you anticipate holding your business for years to come, it is likely you can expect marginal personal income taxes to increase by 2 to 3% to 39.6% total (for those reporting income in excess of $400,000), with corporate rates possibly rising to 28% from the now current level of 21%. In addition, for those of you who are contemplating selling your business in the near term, possibly within the next four years, you should also carefully consider the potential revisions in capital gains taxes and how they might affect your exit timing.
As publicly outlined by the new administration regarding their prospective tax plans, capital gains and dividends could be taxed at ordinary income levels. As a result, business sellers could face rates up to 43.4% from the current level of 20% (for income streams in excess of $1 Million) . In simple terms, selling your business before the effective date of a tax revision would yield a 20% higher return purely as a result of timing. The numbers are staggering when you approach multi-millions in transaction value.
With that said, the probability, timing and rate of change are debatable. Numerous sources indicate the administration will primarily focus on stimulus actions in 2021 and defer major tax alterations to 2022; while other pundits believe power-sharing in the Senate might soften the prospect of these revisions. Still, on the far extreme, tax alterations could be addressed this year and retroactively activated to January 1, 2021.
As M&A intermediaries and advisors, our recommendation is that you incorporate the prospect of tax increases into the criteria of your exit strategy. For a closer look at your individual circumstances, please contact ibg/bluestem for a confidential discussion.