How capital gains tax affect the sale of your business.
Elections have consequences.
Trouble is, for busy business owners, many of those consequences don’t become evident until after the fact; when it’s too late. Take tax policy and how it might affect a small business.
Capital gains, income earned from appreciating assets—rather than wages—constitutes a large portion of income for taxpayers in the highest income brackets; many, successful small business owners who are in the process of selling their successful businesses.
The Tax Foundation www.taxfoundation.org has completed analysis on the following:
This year, Democratic presidential candidates have suggested that long-term capital gains and dividends income earned by the wealthiest Americans should be taxed at ordinary income tax rates rather than the preferential rates.
Raising capital gains rates for the highest income taxpayers makes the tax code more progressive but reduces economic output and national income. The potential revenue of each plan varies by how the plans address deferral treatment of capital gains.
One recommendation is to tax capital gains at ordinary income tax rates on those with incomes over $1 million.
If you are a business owner and considering the sale of your business, any recommendation that will impact capital gains should be researched – get familiar with what is being recommended.
Some capital gains tax increase recommendations take the rate from just over 20% to over 40%. A business owner would need to increase the price of the sale of a business by a significant percentage (upwards of 30%) to make up for the increase in capital gains.
Is this realistic?
All the more reason to work with an experienced business broker when you are considering the sale of your business; and, if you are ready to sell, the time to do might be now, before any changes in capital gains tax take place.
Despite the impact of COVID-19, business sales are starting to pick up across many vertical industry sectors, and there is a lot of pent-up capital in the hunt for the best opportunities.
Sometimes we get so busy in the day-to-day aspects of running a business, we can’t stop and take a look at what might be ahead. However, election season is a great time to do so.
This blog post is not intended as political commentary.