Biden’s proposed tax raise has huge implications for those who own their own companies. Succession planning may need to happen sooner rather than later. 

If it becomes the law of the land, President Biden’s plan to increase tax rates on top earners could have devastating consequences for a population the law probably did not mean to target: Small business owners. 

Biden has called for raising the capital gains tax to 43.4% from 23.8% for Americans who make more than $1 million. This could severely impact business owners who plan to fund their retirement with the proceeds from selling their lives’ work. If capital gains for the highest earners shoot up to 43%, entrepreneurs in that range won’t have nearly as much to retire on as they had planned. For some who sell after the possible change, the taxes they’d pay on the transaction could nearly double. 

Anyone who’d planned to implement their succession plan within five years may want to consider shortening their timeline. Also, there are other ways to structure a sale so it wouldn't trigger the highest rate under Biden's proposal.

Selling in phases

Some business owners might consider selling their endeavor in phases – 10% this year, another 10% next year, and so on. If a portion of the sale occurs before the possible tax hike, the owner will end up with more cash in their pockets. This structure probably going to make the most sense for an inside sale – selling the business to someone already involved with the company like a relative or a trusted employee.

An additional added benefit to the incremental sale described above: When the owner stays on longer, they can spend more time working with and grooming their successor. That can provide an added sense of security about the sale of the business they spent a lifetime building, plus assure its longevity with a thoughtful handover. 

That's trickier to pull off with an external sale, when the buyer will typically want to take control of the business immediately. It is not unheard of for a seller to conduct a phased sale to an outside party, but that typically means the seller will carry the paper on the deal until the transaction is completed. In other words, they'll operate as a lender that the buyer repays over a period of time.

Every business owner's situation is different, to be sure. But given the numbers that are floating around in Washington, if you're planning to sell your business in the near term, it's at least worth asking the question if you should start thinking about activating your succession plan before current capital gains rates may rise.

For more information about how I can help you gain the most from selling your business, please reach out to me here or at https://www.americantbp.com/contact-american-tax-and-business-planning