In Part 1 of Do Potential Tax Changes Have You Thinking About Selling? we looked at proposed changes to the Capital Gains Tax, Payroll Tax, Individual Income Tax and some potential mitigation strategies. Let’s take a further look at some of the other specific proposed changes, their potential ramifications, and some financial planning strategies you may be able to use to help lessen your burden.
Transfers of Appreciated Property or “Deemed Sales”
Taxpayers transferring appreciated property after 1/1/22 during certain events would realize capital gains based on the difference between the fair market value and tax basis of the property at the time of transfer.
- Recognition events include: gifts (except to charity), death, transfers to trusts other than wholly revocable, transfers from trusts, transfers or distributions to partnerships, property held for more than 90 years beginning on or after 1/1/40
- Transfer to U.S. spouse does not trigger gain but they do not receive a step up in basis so the full gain is recognized and taxed upon the second spouse’s death
- Payment of tax on appreciation of certain family owned and operated businesses would not be due until the business is sold or ceases to be family owned and operated
- Discounts on valuation may be disallowed for business transfers
- All but family businesses who elect to defer gain are eligible for 15-year fixed rate payment plan
- Tax will be due even though property has not been sold thus these are “deemed sales”
- $1M per person ($2M per couple) exclusion from recognition of gain on properties transferred by gift or death
Note: A White House official told FOX Business recently that the American Families Plan will include protections for family-owned businesses and farms so they do not get hit by the president’s desire to eliminate stepped-up basis when they transfer to family members.
- Transfer appreciated property in 2021 before changes are effective in 2022
- Set up sale or gifting strategy that transfers business over time staying below threshold
Gifting and Estate Tax Changes
- For gifts made or individuals dying after 12/31/21
- Gifting during lifetime limited to $1M
- Estate exemption may drop to $5.5M or possibly as low as $3.5M
- Estate tax rates may increase to:
- 45% for estates valued at >$3.5M but <$10M
- 50% for estates valued at >$10M and <$50M
- Implement estate reduction strategies prior to the tax law change
- Transfer assets prior to lifetime gifting exemption being reduced
- Transfer a minority interest in your business while valuations are low due to COVID and discounts are still allowed
Other Possible Proposed Changes
- C Corporation tax rate increase from 21% to 28%
- Eliminating the state and local tax deduction limitation (which may actually be in our favor!)
- Repealing or modifying the Qualified Business Income Deduction (20% for pass-through entities)
- Eliminating 1031 exchanges – this could really hit home for owners who own the property in which their business operates
The Bottom Line
There’s a window of opportunity here in 2021 to do some significant planning to try to head off a number of these potential tax changes. Here are some things to consider:
- Carefully consider your timing and deal structure when selling or transferring your business to others.
- Determine your Wealth Gap (i.e., how much money you will need from your business transition to fund the rest of your life) if you have not sold your business yet.
- Ensure that your investment portfolio is positioned in the right types of accounts to minimize your taxes.
- Implement estate reduction strategies now prior to the tax law changes.
As a business owner, it’s important to understand how taxes can affect you and your business now and in the future. The proposed tax law changes will directly impact all business owners in multiple ways. Particularly, if you’re thinking about selling your business, it’s critical that you understand the tax implications of the sale whether you plan to sell to an outside buyer or employees or “gift” your business to family members.
If you have any questions about your specific situation or would like to discuss advanced tax strategies, 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.