Uncle Sam Will Be Looking at YOU to Help Refill the COVID-Coffers
Here we go again, just when you thought it was safe to actually plan for your financial future, we have a major election coming up in November that will likely (60-40) disrupt things. The odds makers favor Biden, who is staying at a consistent 9-10 point lead over Trump at this juncture. Why should this matter to you? If you decide to sell your business in mid-2021 and beyond, the after-tax proceeds could be 25-40% less because the tax rate will be doubled.
Biden has presented his first fiscal-tax plan, clearly targeting high income earners and businesses. No surprise there. Anyone thinking about the sale of their businesses in the next four years will be impacted. Biden has not yet announced a running mate but the smart money is on Kamala Harris, who may put more pressure on his administration to refill the coffers with even more revenue from those they perceive can best afford it. Individuals can expect a reversal of more than half of Trump’s signature tax initiatives - regardless of who Biden picks as his running mate. According to JP Morgan, a full Democratic sweep of the Senate with a Biden win would bring the markets' worst-case scenario, as the party would likely usher in new industry regulations alongside corporate and capital gain tax hikes.
Biden’s $3.8 trillion tax plan on a conventional basis in the next decade (Bloomberg):
Taxing capital gains as ordinary income for individuals making more than $1 million ($800 billion revenue increase over ten years)
Increasing the corporate income tax rate back up to 28% ($730 billion)
Ending the “stepped-up basis” of taxation, under which the cost basis of inherited property (e.g., stocks, real estate, etc.) for determining capital gains tax liability is the value of the property at the time of the inheritance, rather than the value of the property when the deceased individual purchased the asset ($440 billion)
Imposing a 15% minimum tax on all corporations with net income over $100 million, but who paid no federal income taxes ($400 billion)
Doubling the rate of tax on profits generated overseas to 21% ($340 billion)
Limiting the value of deductions for the wealthy to 28%, a proposal included in several Obama administration budgets ($310 billion)
Raising the top rate of tax back up to 39.6% ($90 billion)
Imposing sanctions on countries that “facilitate illegal corporate tax avoidance” ($200 billion)
Eliminating real estate tax loopholes ($70 billion)
Ending fossil fuel subsidies ($40 billion)
The proposed implementation of the Biden tax plan would cause a significant impact on all M&A transactions for the seller. Sellers of businesses should expect to see capital gains taxed as ordinary income under the Biden plan.
We as taxpayers used to try and think in terms of billions of dollars. The new normal is in trillions. When we think about Biden’s plan of close to $4 trillion over ten years, it doesn’t seem that bad. Don’t be fooled, it could be the tip of the iceberg of what is coming. After all, somebody is going to have to pay for all the “free” money being handed out. Again, a clean sweep of the House, Senate, and White House will give Mr. Biden and the democrats a great deal of power and they will be coming after the low hanging fruit - starting with capital gains. Think of early summer 2021 as the latest to have transitioned your business if you do not want to pay Uncle Sam double in capital gains. We all want to pay our “fair share,” just not someone else’s. One additional thought: get your Estate Plans in place before year-end 2020. The Biden plan will change all the rules and Estates will become a very big target for taxes, per Oxford Financial Group, Ltd.