How the Future Capital Gains Tax Is a Threat to Your Business Value

It has been a historically chaotic year. Global health and social issues are at the forefront of everyone’s mind, but there is one initiative that you may be overlooking.

While there are many areas of economic policy that may shift under a new President, perhaps the most impactful to business owners (especially in the middle market) are Joe Biden’s proposed changes to the treatment of capital gains taxes.

So exactly what are the effects of Biden’s proposed changes and why is it important to understand as a business owner?

For starters, Biden’s proposal looks to raise the top marginal tax rate to 39.6% from 37% that the 2017 Tax Cuts and Jobs Act put in place. Additionally, he also has proposed the elimination of the capital gains tax rate of 20% for those individuals who earn more than $1 million annually, and instead taxing those capital gains as ordinary income at 39.6%.

This means multiple, material impacts on business owners, especially those looking to transact in the near future. Most importantly, it means less money in business owners’ pockets after selling their company, by completing the most impactful financial transactions of their lives. The figures below illustrate the effect on the net proceeds for a middle-market business owner selling their company for $25 million:

Tax Rate Proposal

This change has a material impact on the net proceeds and the value business owners have created for themselves over a lifetime of work. It is equal to 13.8% of the gross proceeds from a sale and 21.2% of the net proceeds.

There is a silver lining….

As our nation continues to recover from the economic effects of COVID-19, potential buyers have begun to resurface and are on the prowl for attractive opportunities. If you are the owner of a successful company and looking to transact, 2020 may be the right time to consider your options and align yourself for a successful next chapter.