For business owner clients, the right time to sell but the wrong time for taxes
The demographics of retired baby boomers and the declining economic ravages of Covid-19 likely mean that business owners will think more about selling their businesses in the coming months, even as the proposed increases in capital gains and other tax proposals could soon affect these sales. Wealthy business owner clients have a lot to think about.
“It is very likely that there will be changes in the rates of capital gains and that the highest rate will increase in 2022,” said attorney Robert C. Creighton, managing partner of the new law firm. Yorker Farrell Fritz. “This reality has prompted business owners who are considering selling their businesses to look to transact this year so that their earnings are taxed at current rates.”
âWe have seen that many business owners see buyers, both financial and strategic, in the marketplace with a lot of money to spend,â added Jose Reynoso, director of advanced tax and estate planning at Clarfeld Citizens. Private Wealth in Tarrytown, NY “They recognize that we may be at the end of an economic cycle after going through the stress of a pandemic.”
The proposed tax changes dampen the enthusiasm of sellers. Earlier this year, the highest proposed capital gains rates were to drop from 20% to 40% for people with incomes over $ 1 million. A recent bill proposes a 25% earning rate for people with income over $ 400,000 or $ 450,000, depending on the status of the tax return.
âBiden’s proposed capital gains tax increase is, in my opinion, a success tax,â said Craig J. Ferrantino, founder and director of Craig James Financial in Melville, NY. âThe way the US capital gains tax system is set up, you risk your capital and your hard work, and if you are successful and sell your business, you will be taxed on that success. Raising the rate of capital gains for some employees to the rate of ordinary income … could encourage owners not to expand their businesses and prevent future growth of the economy. “
âBusiness owners who were considering selling are probably relieved that the rate is 25%, down from 40%,â said Mallon FitzPatrick, managing director and principal of Robertson Stephens Wealth Management. There is also a proposal to raise the top tax rate, he added, potentially further motivating business sales this year, if possible.
Starting in 2022, corporate profits of S corporations will also be subject to a 3.8% net investment income surtax for high-income taxpayers. âOwners of S companies who sell before the end of the year would avoid this surcharge,â FitzPatrick said.
Other less obvious potential changes to inheritance tax laws could also fuel sales this year, Creighton added.
Reynoso said that a recent survey of his company showed that two-thirds of high net worth and very high net worth business owners have stepped up their plans to sell their businesses due to the pandemic. âEven those who haven’t sold their businesses have made significant changes,â he said, adding that 65% of rich and ultra-rich business owners have moved their businesses since March 2020, often in Low tax states.
Ferrantino customers are also concerned about the repeal of the base price plus rule. In his region, farms bought 60 years ago for five figures can now be worth tens of millions of dollars. The next generation that inherits such an asset, which does not produce enough to pay such a high tax bill, would have to sell on inheritance.
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