Before I was owner/CEO of IBEX business exchange, I spent decades as a financial consultant, CPA and executive helping Fortune 500, small /medium sized businesses and startups interpret trends impacting heir businesses.
Now that I help business owners sell their companies, I wanted to share the highlights of the significant proposed tax changes and how they will affect the sale of your business. I am not here to discuss the merits of these changes or to speculate on the likelihood that the proposals will become law, just to point out how they may impact your plans.
Change in Top Income Tax Bracket
The plan would increase the top income tax bracket for those earning more than $400k from 37% to the 39.6%. Meaning less take home for you and whoever wants to buy your company.
Change in Tax Rate on Long Term Capital Gains
Under current law, long term capital gains are taxed at a maximum rate of 20%. The proposed tax plan would increase that to 39.6%, meaning if passed, you would pay double the taxes on your business sale.
Elimination of Asset Value At Death
Currently, when a decedent passes away, estate assets typically receive a step-up to fair market value when inherited. If the beneficiary sells the asset, they can do so with little to no capital gains tax. Under the proposed plan, your heirs would pay taxes on the market value of your company upon your death or pay significant taxes when they sell the business down the road. This could force a fire sale of your business by your spouse or children.
Reduction in Lifetime Estate & Gift Tax Exemption
Currently, the value of assets that can be passed free of estate and gift taxes is $11.58 million for individuals and $23.16 million for couples. The proposed tax plan calls for a reduction to $3.5 million. This would significantly limit your ability to pass your company to your children without financial penalties.
Increase in Top Estate & Gift Tax Rate
The proposed tax plan calls for an increase in the maximum estate and gift tax rate from 40% to the 45% rate in effect in 2009. It would cost you more to pass your business to your family through your estate.