Selling a Business May Be Getting A Lot More Expensive
UPDATE 2 (January 12, 2021): With Democratic control of the Senate, the incoming Biden Administration will have an easier path to implementing its tax plan. The sense is that tax reforms — including an increase in capital gains tax for high income earners — stand a reasonable chance of being passed but a far lower chance of having an impact on taxes in 2021. More here, here, and here (with a paywall on the last link).
UPDATE (November 11, 2020): With the presidential election now behind us, focus shifts to control of the Senate. The outcome of the run-off elections in Georgia will determine whether the Biden administration will be able to enact its tax plan.
The political betting markets suggest that former vice president Biden will be elected in November. Though this is far from certain, it is useful to reflect on the implications of the tax policy changes of a potential Biden administration on the sale of a small business.
According to an overview of the proposed changes by the American Enterprise Institute, a Washington think tank, his plan would tax capital gains and dividends as ordinary income for taxpayers who report $1 million or more. This means that capital gains for high income earners will bump up to 39.6%, the highest tax bracket under the proposal. Currently, capital gains are taxed at up to 20%, so this increase would roughly double the current rate.
Whether these changes are enacted also depends on which party controls the Senate, which is currently up for grabs. Should the changes be adopted, they could be effective for the 2021 tax year.
So let's say you're selling your business for $10 million and are expecting $9 million at close with the remainder going into a seller note. Assuming $8 million in capital gains from the sale and no state capital gains tax, you'd take home $6.4 million under the current tax code and around $4.8 million under the proposed plan.
Worth thinking about if you are considering the sale of your business.