Selling Your Business in 2021: How Capital Gains Tax Changes Might Affect You

Selling Your Business in 2021: How Capital Gains Tax Changes Might Affect You

Andy Kocemba

Every four years, as we speak with business owners looking to sell their companies, our conversations take a bit of a pause.  There’s always a question of how a new administration might treat capital gains taxes differently than a prior administration.  The uncertainty can put a pause on potential business sales, for better or for worse. 

As a quick refresher, capital gains taxes are the taxes levied on the gains earned from the sale of a certain asset above the original purchase price.  In our world this is when a business owner sells their business as an asset sale.  Their proceeds from the sale are subject to capital gains tax.

There is one important factor to remember here, outside of the tax rate, that can impact your proceeds from a sale.  Be sure to talk to your accountant about how you are allocating the price to certain assets.  As I mention above, this is a gains tax, so you need to establish how much you have gained on certain asset classes.  Your accountant will be able to help you properly minimize your tax burden.

Capital Gains Tax in 2020

Here’s a breakdown of where long-term capital gains tax rates sit in 2020.  As you can see, the rate is based on your taxable income and how you file your income taxes.  The more income you make, the higher capital gains tax rate you pay as well. 

Credit: IRS

Possible Capital Gains Tax Changes in 2021

Depending on how the presidential election plays out, we could see changes in how capital gains taxes are calculated going forward.  Near as we can tell, here are two possibilities as to how that could play out:

• It’s proposed that the 20% capital gains tax bracket would be capped, and those earning over $1,000,000 would have their gains taxed at the regular income tax rate, up to 39.6%.
• Another proposal is to lower capital gains rate for the highest earners to 15%, essentially eliminating the right-hand column above and lumping those in with the existing 15% rate.

Under either proposal, those who had previously been in either the 0% or 15% category would not likely see any changes. 

Selling Your Business in 2020 vs. 2021

There’s the dilemma.  With potential changes in capital gains tax, what is a business seller to do?  First, with your income in mind, see where you fall on the 2020 chart.  If you are in either the low or mid earning bracket, any proposed changes will not affect you, so proceed with the sale of your business.

If you are in the high-earner category, there could be changes coming your way, but it is yet to be seen if they are positive or negative.  We won’t know that until November (or beyond).

So, selling quickly in 2020 could help if rates go up, and waiting until 2021 could help if rates go down.  But while most of this is out of a business owners’ hands, it is important for a business owner to refocus on that which they can control.  What is motivating the sale?  Are you burned out and ready to move on?  Have you done all you can to increase the value of your business?  Have you identified a buyer, or do you need to go to market?  Answering questions like these might lead you to realize that there are many factors that influence the timing and success of a business sale, and it just might be that the capital gains tax rate might be lower on the list than you initially thought. 

The content in this article is for informational purposes and should not be taken as legal or accounting advice.  If you need further information regarding capital gains tax law and how it applies to you, please seek guidance from an attorney or accounting professional.

Takeaways:

1. In 2020, the more income you make, the higher capital gains tax rate you pay as well.
2. While the way capital gains taxes are treated may change in 2021, those who had previously been in either the 0% or 15% categories will likely see no change.
3. As a business seller, if you are in either the low or mid earning bracket, any proposed changes will not affect you, so proceed with the sale of your business.