As election day draws near, many business owner voters are weighing the merits of the candidates, and one factor is the impact of the 2017 Tax Cuts and Jobs Act policies that are set to expire at the end of 2025. For business owners considering an exit in the coming years, this is of particular interest given the proposed tax programs Trump and Harris have outlined in their campaigns.
Here are some of the highlights between the two plans and what it would mean for you if either of these programs were passed:
Trump Proposal:
1. Corporate Tax: Make 2017 tax cuts permanent. Lower rate from 21% to 20% with a reduced rate (15%) for companies that manufacture products in the U.S.
2. Capital Gains: Make the current 20% long-term capital gains tax permanent, plus the current 3.8% net investment tax
Harris Proposal:
1. Corporate Tax: Increase corporate income tax rate from 21% to 28%
2. Capital Gains: Implement a higher 28% long-term capital gains tax, plus 5% (increased from 3.8%) net investment income tax for a total of 33%
In addition to these tax changes, many other tax policies will revert at the end of 2025 with no action by Congress. These include top tax rates going from 37% to 39.6%, state/local tax deductions being eliminated, and significant reductions to lifetime estate tax exemptions. All of these will have a meaningful impact on business owners who expect to receive a windfall in the exit of their business and require a solid tax strategy to ensure their retirement and estate planning goals are achieved.
As a business owner with considerable wealth tied to your business, it’s important to understand how these changes may impact your transaction net proceeds. If you’re planning an exit in the next several years, it may be more advantageous to complete a transaction before the 2025 TCJA expiration to ensure you get more favorable tax treatment. Sometimes business owners want to continue growing their business, however, it can take years and years of significant investment and performance to realize a major increase in valuation. Many drivers and dingers impact valuation combined with any future unknowns (losing a big customer, turnover of key managers, supplier pricing increases), so it may not be worth the risk of waiting.
Business Acquisition & Merger Associates would love to provide a no-cost consultation and valuation to understand how your business would be valued in today’s market. Also, good tax counsel from your CPA/tax advisor allows you to realize the bottom-line impact these tax changes can have on your transaction. We’ve worked with many good tax teams and are glad to refer knowledgeable advisors who can help you look closely at your business metrics.