The possibility of tax increases have some business owners thinking seriously about selling their businesses as soon as possible. We wrote about some of the potential changes in a recent article, which you can read here: How Proposed Tax Code Changes Could Impact the Sale of Your Business. Let’s take a closer look at some of the specific proposed changes, their potential ramifications, and some financial planning strategies you may be able to use to help mitigate them.
Capital Gains Tax Increase
Proposed Changes
Increase Long Term Capital Gains Rate to 39.6%
- When combined with Net Investment Income Tax of 3.8% = 43.4%
- Applies to taxpayers with Adjusted Gross Income of >$1M
- Proposed retroactive to April 28, 2021 although some experts think this is unlikely
Note: Business owners looking to sell must be very careful, especially if you have good profits every year, it’s not hard to hit that $1 million dollar mark. So, you’re definitely going to need to do some planning to try to stay under that threshold.
Possible Strategies
- Spread out recognition over number of years
- Sell in 2021, prior to tax changes (may not matter if the changes are retroactive)
- Offset gains with losses
- Donate highly appreciated assets
- Allocate your portfolio in tax efficient manner
Payroll Tax Increase
Proposed Changes
Social security tax to be paid on annual wages above $400,000
- Social Security of 12.4% will be split between employers and employees
- No Social Security tax between current limit of $142,800 & $400,000
Possible Strategies
In lieu of compensation, provide:
- Employee expense reimbursement (i.e., travel, entertainment, supplies)
- Provide fringe benefits that are payroll tax exempt such as:
- Dependent Care Fund
- Group Term Life Insurance
- Education Assistance
- Moving Expenses
- Health Benefits
- Health Savings Accounts
Individual Income Tax Rate Hike
Proposed Changes
Raises top marginal rate from 37% to 39.6%
- Begins in 2022
- Applies to taxable income >$509,300 for married filing jointly and $452,700 for single filers
Possible Strategies
- Utilize retirement plans
- Consider tax-free investments
- Pay tax now by converting tax deferred accounts to Roth
- Invest in Life Insurance Retirement Plan for tax-free growth and retirement income
- Optimize portfolio for tax efficiency
- Pull income into 2021
The Bottom Line
As you know, taxes are a very complicated area, and the sale or transfer of a business adds a whole other level of complexity. Our possible strategies to mitigate your liability are only suggestions and are not tax advice. You should always work with your trusted advisors and tax experts who are familiar with your circumstances before making any major business or financial decisions. It pays to understand all of the potential changes and how they may impact you and the sale of your business.
In the next installment of this series, we will discuss Transfers of Appreciated Property or “Deemed Sales,” Gifting and Estate Tax Changes, and other proposed tax changes. In the meantime, if you have any questions, we invite you to schedule a complimentary call with us. We’re here to help.
Material discussed in this communication is meant to provide general information and should not be acted on without obtaining professional advice tailored to you or your company’s individual and specific needs. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used by any person or entity, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This information is for general guidance only and is not a substitute for professional advice. Information presented is believed to be factual and up-to-date; however, BTA makes no guarantee as to accuracy, completeness, suitability, or validity of any information within this communication and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages from its display or use. Any forward-looking statements are believed to be reasonable; however, BTA gives no assurance that such expectations will prove to be correct.
