If you are a business owner whose exit strategy contemplates a potential sale transaction, the current Administration’s recent revenue proposals, as explained in the “Green Book,” should prompt you to take current action. Specifically, some proposals have the potential to impact the ultimate net cash value you might realize from a sale transaction.

Whether the proposals as currently described in the Green Book will ultimately be enacted into law remains uncertain. However, what is more certain is that business owners who proactively evaluate and revise their strategies for these uncertainties now will be better positioned to manage the outcome.

Increased Tax Rates

The current proposals include the following increases in tax rates which may impact the after-tax cash value realized.

• Long-term capital gains and qualified dividends taxed as ordinary income rates to the extent a taxpayer’s income exceeds $1 million ($500,000 for married filing separately). It is important to note the Green Book describes this proposal as being effective for gains required to be recognized after the date of announcement.
• Increase in highest marginal rate for individuals to 39.6 percent and lowering of the taxable income threshold at which the highest marginal rate would apply for tax years beginning after Dec. 31, 2021.
• Increase the corporate tax rate from 21 percent to 28 percent.

Taxpayers selling their ownership interest in a business operated as a C-corporation or S-corporation will generally recognize only capital gains upon the sale of their stock. In instances where the sale transaction is structured as an asset sale, is a sale of an ownership interest in a partnership or is a sale of a sole proprietorship, a portion of the gain may be taxed at ordinary or corporate income tax rates and a portion at capital gains rates. Additionally, for the sale of qualified small business (QSB) stock, the gain on the sale of the stock may be excluded.

Read more for examples illustrating how changes in the capital gains, ordinary and corporate income tax rates will affect the amount of after-tax proceeds to the seller at a static sales price.

A Clear Call to Action

Business owners may decide to employ varying strategies in response to the current proposals and corresponding uncertainties they create. Some business owners whose exit plan contemplates a sale in the next few years may choose to alter their timeline and accelerate a sale into the 2021 year. Owners with a longer-term exit plan might explore other planning options, such as meeting requirements for qualified small business stock gain exclusions. Transaction terms and structuring may also be utilized as planning tools.

Which planning tools are best suited for each business owner’s unique strategy will vary depending upon their overall objectives, facts and circumstances. While each business and business owner are unique, all business owners stand to benefit by taking action now to understand how current tax policy proposals may impact them and assessing their options.

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