Imagine a possible increase of 66% or more in the capital gains tax rate when you sell your business ("exit income"). That could be the scenario if the Biden administration follows through on its campaign promise. What can be done to mitigate the impact on your transaction?
1. Think of government as part of your future exit transaction
Every transaction is said to have three parts: the buyer, the seller, and the government. Your role as a seller is to look at how to reduce the government's role in the transaction to leave it with more exit revenue. Without proper planning, the government's opinion of your business transaction may be significantly higher than you might expect.
2. Consider Four Primary Taxes
For most homeowners, there are four additional taxes you should focus on for your overall business exit and wealth protection strategies.
a. Capital gains taxes
b. Ordinary Income Taxes
c. Corporate Taxes
d. Estate taxes (both federal and state)
Different taxes and tax rates apply when cash flows in and out of your business (and eventually your estate). The capital gains tax rate is generally the most favorable, but may not be available for your transaction.
3. Plan accordingly, as outings take time
An exit planning process can take years to develop and execute; Add to that up to twelve months to finalize a commercial sale transaction. If you're like most business owners and most of your wealth is locked inside your private business, the threat of the government taking a bigger chunk of your profits should make you reconsider your schedule.
Consult with your exit consultant on these issues to help ensure you don't miss a planning opportunity due to delays and the passage of time.