Tuesday, November 3, 2020
By Steven Abbate… There is a lot of discussion of how a Biden presidency would affect business taxes and after-tax payouts on the sale of business assets. While we can’t project the future, especially where politics is involved, we can make some educated guesses. 
There was a recent article in the Wall Street Journal, titled “Read Joe Biden’s Lips: New Taxes.” The article went on to highlight Biden’s proposal for increasing taxes on high-wage earners and businesses. The No. 1 item that caught my eye was his proposal to eliminate the favorable capital gains tax on the sale of a business and to instead have the income be taxed as ordinary business income. This tax modification, coupled with an increase in the top corporate tax rate, would equate to a rate of 39.6% as compared to the current rate of 23.8%. Throw in the proposal of no cap on payroll tax, which is currently capped at $137,700, and a seller of a business may be paying around 22% more in taxes on the income from the sale.
COST BASIS
Every company has a slightly different cost basis on the assets being sold and every state has a different rate for capital gains and income taxes, all the way up to 13.3% in California. For discussion purposes, if we use 6.5% state tax and the current 23.8% capital gains tax, a seller can expect to pay around 30.3% in taxes. A seller who receives $5 million for the sale of his or her assets should net somewhere around $3.5 million before paying down debt. Under the Biden proposal, the tax appears to be in the 45.6% range, so the same seller would see around $2.7 million or around 23% less. Another way to think about it is if an owner was looking to have $350,000 annual income for 10 years, it will only last a little over 7.7 years.
We have had a small rush of activity, especially from owners in their mid-60s, who want to protect some of their after-tax earnings. We have also had many conversations with owners nearing the time to consider a sale. We understand that some owners want to protect themselves and take advantage of the current strong market for a seller and the current tax structure, which will likely increase. With that said, we always caution owners to consider other factors. If your plan today is to own and operate your business long into the future, and that is what makes you happy, then stick with your plan. You may even want to expand your business, and acquisitions are a great way of doing that.
With the existing Section 179 accelerated depreciation schedules, it is a great time to buy assets in an acquisition or just to upgrade your fleet and other depreciable equipment. Investing in technology such as new computers or tank monitoring systems can have strong payoffs in operating efficiencies. It’s also a good time to invest in additional storage capacity. If you are in it for the long haul, you should consider capital improvements.
Extremely low interest rates is the other reason capital improvements are currently a great investment right now. If you have a good relationship with your bank, we suggest you meet with them to discuss capital improvement projects and cost-effective term loans. Another consideration would be to meet with equipment leasing companies. Capital leasing is a strong option to avoid the red tape of a bank while still achieving
your growth and financial goals.
The bottom line is that if you already had plans to sell in the next three or four years, you may want to consider moving up your timeline. It would be unlikely a new tax law would go into effect before the end of 2021. We recently surveyed a group of CPAs who all confirmed that a retroactive tax on capital gains is highly unlikely. If you’re in it for the long haul, you may want to take advantage of some of the tax programs currently in place.
Steven Abbate is managing director, principal, at Cetane Associates, LLC. Cetane provides financial advisory services to owners of propane and heating oil distribution businesses.
There was a recent article in the Wall Street Journal, titled “Read Joe Biden’s Lips: New Taxes.” The article went on to highlight Biden’s proposal for increasing taxes on high-wage earners and businesses. The No. 1 item that caught my eye was his proposal to eliminate the favorable capital gains tax on the sale of a business and to instead have the income be taxed as ordinary business income. This tax modification, coupled with an increase in the top corporate tax rate, would equate to a rate of 39.6% as compared to the current rate of 23.8%. Throw in the proposal of no cap on payroll tax, which is currently capped at $137,700, and a seller of a business may be paying around 22% more in taxes on the income from the sale.
COST BASIS
Every company has a slightly different cost basis on the assets being sold and every state has a different rate for capital gains and income taxes, all the way up to 13.3% in California. For discussion purposes, if we use 6.5% state tax and the current 23.8% capital gains tax, a seller can expect to pay around 30.3% in taxes. A seller who receives $5 million for the sale of his or her assets should net somewhere around $3.5 million before paying down debt. Under the Biden proposal, the tax appears to be in the 45.6% range, so the same seller would see around $2.7 million or around 23% less. Another way to think about it is if an owner was looking to have $350,000 annual income for 10 years, it will only last a little over 7.7 years.
We have had a small rush of activity, especially from owners in their mid-60s, who want to protect some of their after-tax earnings. We have also had many conversations with owners nearing the time to consider a sale. We understand that some owners want to protect themselves and take advantage of the current strong market for a seller and the current tax structure, which will likely increase. With that said, we always caution owners to consider other factors. If your plan today is to own and operate your business long into the future, and that is what makes you happy, then stick with your plan. You may even want to expand your business, and acquisitions are a great way of doing that.
With the existing Section 179 accelerated depreciation schedules, it is a great time to buy assets in an acquisition or just to upgrade your fleet and other depreciable equipment. Investing in technology such as new computers or tank monitoring systems can have strong payoffs in operating efficiencies. It’s also a good time to invest in additional storage capacity. If you are in it for the long haul, you should consider capital improvements.
Extremely low interest rates is the other reason capital improvements are currently a great investment right now. If you have a good relationship with your bank, we suggest you meet with them to discuss capital improvement projects and cost-effective term loans. Another consideration would be to meet with equipment leasing companies. Capital leasing is a strong option to avoid the red tape of a bank while still achieving
your growth and financial goals.
The bottom line is that if you already had plans to sell in the next three or four years, you may want to consider moving up your timeline. It would be unlikely a new tax law would go into effect before the end of 2021. We recently surveyed a group of CPAs who all confirmed that a retroactive tax on capital gains is highly unlikely. If you’re in it for the long haul, you may want to take advantage of some of the tax programs currently in place.
Steven Abbate is managing director, principal, at Cetane Associates, LLC. Cetane provides financial advisory services to owners of propane and heating oil distribution businesses.
