How Will the Increase in the Capital Gains Tax Impact You?

-Please see update below-

There has probably never been a better time to sell a business – for many reasons; The biggest may be an upcoming increase in the capital gains tax.

Raising the capital gains tax from 20% to approximately 39.6% would have huge potential impact on what you, as a business owner, could expect to net from the sale of your business. And the new administration has indicated a big increase in the capital gains tax might be coming. Healthy businesses are selling quickly, so there is still a window of opportunity to sell before any increase takes place.

In addition, it’s a great time to find out what your business might be worth because:

Right now, buyer activity is high, including high net worth individuals, strategic buyers, and private equity groups. It’s a seller’s market!

Businesses are REALLY SELLING – there is an extraordinary amount of pent-up capital waiting for the right business opportunity in which to invest.

Many businesses are SELLING at a PREMIUM – COVID 19 has created a backlog of capital and buyers that is driving demand in most industries.

Right now, you should take the time to see what your company might be worth today. Call us today and we can quickly set up a Opinion of Value with no cost or obligation – again, 100% confidential!

You should get all the facts. We’ll do all the homework. You make all the decisions. I know sometimes the more successful you are, the more difficult it is to imagine ever selling your business – even though you could move on to even better things. It’s important to have the facts either way.

Aaron Thom, California Business Advisors, Inc.

Update as of 6/2/21 by Monty Walker, www.walkeradvisory.com, with permission

The President’s Year 2022 $6 Trillion Budget was published today and it does not specifically reference any retroactive application of a capital gain tax increase. This retroactive issue came out yesterday as the six biggest US banks testified before the House Financial Services Committee. The committee hearing revealed that President Biden’s budget assumes that his proposed capital-gains tax rate increase took effect in late April, meaning that it would already be too late for high-income investors to realize gains at the lower tax rates if Congress agrees. Notice the key item is ---- If Congress Agrees. The President’s Budget is a proposal. It is not law. Congress can follow it fully, partially, modify it or just ignore it. Congress must approve any rate changes and retroactive effective dates, and there is already wariness about the full capital-gains tax plan building among some congressional Democrats. Additionally, some Democrats are already balking at Biden’s full menu of tax increases, imperiling his ability to pay for his ambitious spending.

The outcome of yesterday’s House Financial Services Committee hearing is the six biggest US banks warned against a retroactive change to the capital-gains tax. This warning is going to be consistently trumpeted throughout the tax and financial sector. The prospect of a retroactive tax increase has been looming but the possibility that it may actually occur just became a little more real.

With the vast gap between the Democrats and the Republicans and the fact that many Democrats are not currently onboard with the level of proposed tax increases, a lot of ground is yet to be covered. It’s important to also keep in mind that many Democrats up for reelection in Year 2022 have constituents that will be hurt by a tax increase and certainly by a retroactive tax increase. This means that nothing we are hearing at this point is a for sure thing. The information that came out yesterday just may be posturing which is a part of the negotiating process.

It is necessary for taxes to increase in some fashion to even begin to pay for the spending that has already occurred. During the past 40 years the highest capital gain rate was at 28%. This appears to be a top end point that both parties have accepted as reasonable. Based on this history, it really appears that the capital gain rate will more likely increase to the 28% to 30% mark.

Retroactive tax changes have occurred in the past. During the past 25 years there have been around 6 significant retroactive tax changes all involving rate decreases. Certainly tax decreases are much easier to implement from a political standpoint. Based on history, the negative fallout that will absolutely occur from a retroactive tax increase and the fact that it will most likely be in the later part of the year before a tax bill is passed, it really appears that any capital gain rate increase will most likely occur prospectively from the date a tax bill is enacted.

All these unknows just make decisions extremely difficult and planning to be a shot in the dark.

Monty

Walker Business Advisory Services

Monty W. Walker, CPA, CGMA, CBI