When investments appreciate in value, their capital gains are subject to preferential tax rates, which were first established to incentivize taxpayers to invest their available savings for growth. However, President Joe Biden’s recently proposed American Families Plan, calling for substantial tax reform, includes a number of changes that would dramatically reshape the taxation of capital gains. In particular, the proposal would – at least for high-income individuals – eliminate the preferential rates for long-term capital gains, reverting their tax rate to the top ordinary income tax bracket (which itself would rise from the current 37% to a new 39.6% rate under the proposal).
Notably, the new 39.6% rate on long-term capital gains would only apply directly to taxpayers with income in excess of $1 million, allowing most to avoid the new capital gains bracket. However, because assets can appreciate substantially over very long periods of time, and potentially be taxed all at once in the year they are ultimately sold, the newly proposed capital gains tax rate could also potentially impact other taxpayers who don't annually earn anywhere near $1 million, but do have a once-in-a-lifetime (or few-in-a-lifetime) taxable event(s), such as the sale of a business, that can temporarily push their income over the $1 million mark (if only due to the capital gains event itself).
While the recent Biden budget proposal for Fiscal Year 2022 assumes the capital gains changes are made retroactively to April 2021, the reality of both the political climate and the practical challenges associated with such a retroactive change means that the most likely outcome would be a January 2022 effective date for any changes. Accordingly, business owners who are considering the potential sale and exit of a business – that may potentially have a ‘lifetime’ of growth all taxed in a single year of sale – will seriously want to consider liquidating the business before year-end, in an effort to ‘harvest’ capital gains at current 20% top capital gains tax rates, and avoid potentially substantial capital gains income from being subject to the proposed 39.6% top tax rate in the future (which at the margin, is a 19.6% tax rate savings on what could be one or several million dollars of appreciated business value!).
Additionally, business owners selling in 2021 whose sales may qualify for the installment method may wish to proactively opt out of such treatment, and instead report all gain from the sale in 2021, to avoid having capital gains spill into future years, where they may again be taxed at the newly proposed higher rate. Opting out of such treatment, however, could leave certain business owners with liquidity challenges that should be proactively addressed.
Ultimately, the price of liquidating capital gains (or having them treated as liquidated upon death) is likely about to be dramatically increased for high-income taxpayers (and others with highly appreciated assets that they will sell). And while most will be able to avoid the capital gains exposure – simply because they don’t earn $1M+ per year in the first place – those contemplating the sale-of-a-lifetime (e.g., a business whose value has been built over years or decades) in the coming years will want to seriously consider whether to accelerate (or not) the sale in 2021 given the sizable one-time tax savings that may be available! Which, notably, not only includes the clients of financial advisors, but even financial advisors themselves considering retirement and the potential sale of their own advisory firms!
In the run-up to the 2020 presidential election, President Joe Biden campaigned on a platform that included substantially reforming the Internal Revenue Code. More recently, he has looked to follow through on many of those campaign promises through the introduction of the American Families Plan.
While there are still plenty of questions about the details of the plan (as thus far, the White House has ‘only’ shared a Fact Sheet of its intended proposal, but not the actual legislative text it proposes to implement), one thing is crystal clear: the Biden administration aims to dramatically reshape the taxation of capital gains.
Accordingly, the American Families Plan Fact Sheet, recently released by the White House, described a major proposed change to the top capital gains rate as follows:
Households making over $1 million—the top 0.3 percent of all households—will pay the same 39.6 percent rate on all their income, equalizing the rate paid on investment returns and wages.
Along with the (substantial) increase of the top capital gains rate, the Biden tax plan also calls for two significant changes to capital gains upon a taxpayer’s death. The first would include the elimination of the step-up in basis (or at least its substantial curtailment), and second, death itself would become a capital gains realization event.
Taken together, these three changes – the increased top capital gains tax rate, the elimination/reduction of the step-up in basis allowance, and the inclusion of death as a realization event – have the potential to nearly double the tax rate that certain taxpayers pay on their capital gains (from the current 20% top capital gains tax rate to the new proposed 39.6% rate), making planning to manage and minimize such capital gains taxation all the more important!
Biden Proposal Raises Top Capital Gains Rate To 39.6% Ordinary Income Tax Rate
One of the centerpieces of the Biden tax plan is to increase the top marginal rate for capital gains so that it is equivalent to the top rate imposed on ordinary income, in order to equalize the top tax rate on income generated from both investments and employment earnings.
And since the Biden tax plan calls for an increase in the top ordinary income tax bracket from 37% to 39.6%, the sum of these changes would increase the top marginal income tax rate imposed on capital gain income from today’s top rate of 20%, to 39.6%.
Of course, both of those rates fail to take into consideration the 3.8% Net Investment Income Tax (NIIT) that also applies to some (or all) of the investment income of single filers with Modified Adjusted Gross Income (MAGI) in excess of $200,000, and joint filers with MAGI in excess of $250,000. Thus, the Biden tax plan would increase the ‘real’ top rate paid on capital gains from 20% + 3.8% = 23.8% to 39.6% + 3.8% = 43.4%, a total increase of 19.6%.
Although draft legislation has yet to be released, “capital gains”, in this context, are almost assuredly intended to mean “net capital gains” as defined under IRC Section 1(h)(11), which includes not only long-term capital gains but also qualified dividends. Accordingly, the top rate on qualified dividends would also increase from the current maximum of 23.8% to 43.4%.
While such a significant increase in the top income tax rate imposed on capital gains (and qualified dividends) will, no doubt, have a substantial impact on the after-tax income of taxpayers subject to the new rate, the good news for most Americans – and even many high earners – is that the new rate will not apply to them.
Because as noted earlier, the Biden tax plan calls for the imposition of a 39.6% ordinary income tax rate for capital gain income only to the extent that total income exceeds $1 million. That said, under the Biden tax plan, ordinary income in excess of $1 million would already be taxed at 39.6%. So, simply stated:
Income in excess of $1 million (whether ordinary income or capital gains or qualified dividends) will be taxed at 39.6% under the Biden proposal.
Notably, under the standard ordering rules for capital gains – which always sit on top of ordinary income – the Biden tax plan does not require $1M of capital gains to be subject to the new capital gains tax rate. Instead, if ordinary income fills up the first $1M, the capital gains that automatically “stack on top” will already be in the new 39.6% capital gains tax bracket.
Example #1: Sandra is a high-earning C-level executive at a Fortune 500 company. Her taxable income for the year is $1.6 million, which consists of $1.2 million of ordinary income and $400,000 of capital gain income.
Since Sandra’s taxable income, without her $400,000 of capital gains, is already over $1 million, all $400,000 of her capital gain income would be subject to the 39.6% proposed rate.
By contrast, if a taxpayer has less than $1 million of ordinary taxable income, but total taxable income (including capital gains) exceeds $1 million, then the difference between $1 million and their ordinary taxable income will be taxed at existing capital gains rates, with all additional capital gains (the capital gains that overflow beyond the $1 million threshold) taxed at the new 39.6% rate.
Example #2: David and Betty are married, high-income taxpayers who have substantial investments in taxable accounts. The couple’s taxable income for the year is $1.1 million, which consists of $850,000 of ordinary taxable income and $250,000 of qualified dividends (capital gains).
Here, David and Betty have less than $1 million of ordinary taxable income (before their capital gain income is added in), but more than $1 million of total taxable income after including their capital gains.
Accordingly, the $1 million (ordinary income threshold) – $850,000 (ordinary taxable income received) = $150,000 difference reflects the portion of capital gain income subject to taxation at the existing 20% capital gains rate, while the $1.1 million (total income received) – $1 million (ordinary income threshold) = $100,000 difference reflects the portion of capital gain income subject to be taxed at the new proposed rate of 39.6%.
The above explanation of how the new proposed 39.6% rate would apply to capital gain income when taxpayers have income in excess of $1 million is not yet known for certain but is (overwhelmingly) the most likely way in which the new rate could/would be applied. As in practice, it is simply a reflection of how long-term capital gains rates are already applied and coordinated with ordinary income… and simply includes the application of a new $1M capital gains bracket.
A select few commentators, however, have theorized that the tax could be applied to all capital gain income to the extent that a taxpayer has AGI (as opposed to taxable income) of $1 million or more. Essentially, a cliff-like scenario where $999,999 of total AGI would keep a taxpayer at the current capital gains rates, but just one additional dollar of AGI would cause all capital gains to be subject to the proposed 39.6% rate.
Given the dramatic departure from the underlying system of taxation (e.g., way more than ‘just’ a rate change), as well as the incredibly punitive nature of such proposed application, the author believes it to be (beyond) highly unlikely and, thus, proceeds under the assumption that the previously described structure would be used to implement the proposed new 39.6% rate for the remainder of this article.
‘Once-In-A-Lifetime’ Business Sales Could Trigger 39.6% Capital Gains Tax
The proposed new 39.6% capital gains bracket for earned income in excess of $1 million would have little to no impact on most taxpayers, simply because most people don’t earn anywhere near $1M of income in any year, ever. That said, the proposal could impact far more taxpayers than may appear to be subject to the tax at first glance by simply looking at how many people do ‘earn’ $1M or more per year.
As notably, it’s not just taxpayers who make $1 million of ordinary income or more, per year, every year (like Sandra from Example #1, who earns $1.2 million ordinary income and $400,000 capital gain income), or those who regularly have income in excess of $1 million after accounting for typical amounts of capital gains or qualified dividend income from their portfolios (like David and Betty from Example #2, who earn $850,000 ordinary income and receive $250,000 in qualified dividend income).
Rather, taxpayers who could be dramatically impacted by the change in capital gains tax rate would also include those with once-in-a-lifetime (or few-in-a-lifetime) taxable events that push their income temporarily over the $1 million mark!
Consider, for instance, a business owner, who generally earns nowhere near $1 million, but who, upon the sale of their business that has appreciated in value over 10, 20, or 30+ years, experiences a liquidity event by selling the business at retirement. This pushes income received in that one year of sale well north of the $1M threshold amount. Or what about the sale of a significant real estate asset that has similarly been appreciating for decades? Either of these events could easily result in a taxpayer having a one-year ‘blip’ in income of more than $1 million (if only because it represents the accumulation of years or decades of growth… all of which happens to be taxed in a single year when the asset is finally sold).
Example #3: Raylan is the owner of Justified Advisory Services. Typically, Raylan has an annual income of roughly $500,000. Accordingly, he is not overly concerned about the Biden tax plan’s proposed 39.6% rate on capital gains in excess of $1 million.
Suppose, however, that in 2022, Raylan decides to retire and sell his advisory practice. He receives a cash offer of $3 million, which he decides to accept, with the closing date of July 1, 2022.
As a result of the July 1 sale, Raylan will have income in 2022 of $250,000 (estimated earnings from the first half of the year) + $3 million (business sale proceeds) = $3,250,000, which is well north of the $1 million threshold at which the 39.6% marginal rate would kick in for capital gains.
Accordingly, $3,250,000 (total annual income) – $1 million (income threshold before the 39.6% long-term capital gains bracket ‘kicks in’) = $2,250,000 of his capital gains (from the sale of his business) will be taxed at 39.6% under the new law (plus the 3.8% Medicare surtax), instead of 'just' 20%!
Biden Budget Changes To Capital Gains Rules Likely Not Effective Before 2022
On Friday, May 28, 2021, President Biden unveiled his 2022 budget request, entitled “Blue Collar Blueprint For America”. And in somewhat of a surprise, the budget request assumes that the proposed capital-gains-related changes would be enacted retroactive to April 2021, which would effectively render a lot of the planning that could otherwise be done from now through the end of 2021 (when presumably the changes would otherwise begin to be effective) useless.
Is that even possible? Could Congress really change the rules of the game after the game has started?
In a word, “yes.” When it comes to tax policy, Congress has broad latitude to enact policy as it sees fit, within constitutional limitations, of course. And to that point, the constitutionality of retroactive income tax changes is well-settled. They are allowed.
Notably, while Article I, Section 9 of the United States Constitution does state, in part, that “No Bill of attainder or ex post facto Law shall be passed”, in the 1798(!) U.S. Supreme Court case Calder v. Bull, the justices determined that the limitation on ex post facto laws (laws that retroactively change the consequences for actions already taken) relates only to criminal matters (which does not include taxes).
More recently, in cases such as United States v. Hemme, Welch v. Henry, and United States v. Carlton, the U.S. Supreme Court has reaffirmed that both income and transfer tax (e.g., estate and gift taxes) changes may be implemented retroactively, “Provided that the retroactive application of a statute is supported by a legitimate legislative purpose furthered by rational means…”
Accordingly, there is nothing stopping Congress from passing the Biden tax plan and making the proposed 39.6% top capital gains rate retroactive to April 2021.
But what Congress can do and what Congress will do are not necessarily the same thing. In fact, despite President Biden’s budget (which is essentially just a glorified ‘Presidential wish list’), it’s highly unlikely that the proposed capital gains changes will be enacted retroactively. Perhaps, had Congress looked to enact such changes earlier in 2021, the chance to make the capital gains tax changes retroactive (to, perhaps, the start of the year) would have been greater. At this point, though, it’s looking like the earliest the Biden tax plan will be passed is Q3 2021.
By then, what is legally permissible (retroactively changing the capital gains rules) becomes far less politically feasible (as retroactive tax hikes tend to be viewed in an especially harsh light). Dramatically changing tax policy (to increase taxes) more than halfway through the year when many individuals have already acted would likely be unpopular. Accordingly, the likelihood of at least one Senate Democrat not being comfortable supporting such a change is extremely high. And given the near guarantee that Republican Senators will unanimously oppose such a change, the loss of even a single Democratic vote (in the Senate) would be enough to derail the legislation.
Plus, a change to the capital gains rules with a midyear effective date (e.g., a 20% top capital gains rate for pre-April 2021 sales, and a 39.6% top capital gains rate for sales made in April 2021 or later) would be a logistical nightmare for taxpayers, planners, tax preparers, and even the IRS. Such a change, for instance, would require substantial revisions to various tax forms.
All of this is to say that the most likely outcome, by far, is that if any changes to the top capital gains rate are made, they will be effective no earlier than January 1, 2022. Which means business owners may have the remainder of this year - but only this year - to plan for business sales under the current capital gains tax rates before they transition to a new higher rate!
Minimizing Business Owner Taxation For Near-Term Targeted Liquidity Events
If 2022 brings with it a new top capital gains rate, financial advisors will have a brief window of opportunity – from now through the end of the year – to help their clients prepare for the upcoming change and implement strategies that would potentially mitigate the impact of higher taxes. One particular group of taxpayers who would likely benefit greatly from taking action prior to the end of the year is business owners looking to sell their (long-term, highly-appreciated) businesses in the near future.
To the extent that the near-term sale of a business would push a business owner’s income over the $1 million mark for one or more years, such a business owner should give substantial consideration to accelerating the sale of the business into the second half of 2021. Critically, selling prior to the end of 2021, as opposed to early 2022 (or beyond), could result in dramatic tax savings.
Example #4: Recall Raylan from Example #3, the owner of Justified Advisory Services. In the example, Raylan sold his advisory practice halfway through 2022 for $3 million. Thus, his total income in 2022 was $3 million (business sale proceeds) + $250,000 (annual business income) =$3,250,000, which resulted in $3.25 million (total income) – $1 million (capital gains exemption) = $2,250,000 of capital gains being taxed at 39.6%.
What if, however, Raylan had acted a little bit sooner, and instead of selling his business in the middle of 2022, sold it prior to the end of 2021? Simply put, the $2.25 million of gain on which Raylan would have owed the proposed 39.6% capital gains tax would be taxed at just 20% instead!
All told, accelerating the sale into 2021 would equate to a reduction in the capital gains tax owed on the sale of the business of (39.6% – 20%) × $2.25 million (capital gain income originally subject to 39.6% tax rate) = $441,000.
That’s a pretty strong incentive for Raylan to shift his sale forward by six months!
Business Owners Must Act Soon To Have A Realistic Chance Of Closing Before Year-End
While assets such as stocks, bonds, ETFs, mutual funds, and similar investments can be sold at virtually a moment’s notice with the click of a button, other assets, like a business, have a much longer sales cycle. So, while the fate of the Biden tax plan is still unknown, waiting until final details emerge to try to initiate a potentially desirable sale of certain assets before the end of the year may not leave enough time if changes to the top capital gains rate are enacted and become effective beginning January 1, 2022. Accordingly, advisors can encourage business owner clients who may benefit from selling businesses with longer sales cycles by the end of the year to begin taking the initial steps to do so now.
Notably, the goal doesn’t have to be to sell now, especially since the outcome of the proposal itself is uncertain (e.g., the American Families Plan might not be passed, or could be substantively changed, with the capital gains provisions altered, before it is passed). Rather, the goal is to start the process now, so that a future sale this year will be possible, if desired, when the time comes, given that nearly 20% of the entire growth of the business value could be at stake!
Maximizing After-Tax Proceeds From A Business Sale
“Keep your eyes on the prize” is a common expression meant to remind people to focus on their end goal, or what really matters. When it comes to the sale of a business, the “prize” is the net after-tax proceeds, and not the gross sale price.
To that end, advisors can help ensure that business owners contemplating a sale are focused on the after-tax amount they will walk away with after the sale of an investment. As notably, when considering the sale of any long-held, highly appreciated asset, individuals can become susceptible to anchoring to a certain price. And when it comes to the sale of a business – an asset into which a business owner may have literally poured their blood, sweat, and tears for decades – the tendency to anchor to a particular sales price (e.g., the highest valuation they can get from any bidder!) is naturally even greater.
Unfortunately, though, holding out to receive that price may come at a particularly high (tax) cost under the Biden proposal! Indeed, if taking less on the sale price allows a business owner to save even more on taxes (by getting the transaction done in 2021 at current low capital gains tax rates), it’s the obvious right choice!
In fact, in many situations, it might pay for certain business owners to proactively ‘discount’ the sales price of their business in order to entice a buyer to move faster than they otherwise might and accelerate a sale into 2021, given that as much as 20% of the appreciation is at risk with a tax rate increase!
Example #5: Recall Raylan, from Examples #3 and #4 above, who sold his business for $3 million in 2022.
Now suppose that Rylan truly believed his business was worth $3 million, but that he had only secured a top offer of $2.7 million by the time he would have needed to act in order to execute a sale in 2021.
This $300,000 ‘haircut’ on what Rylan thinks his business is actually worth could easily give him pause to sell the business. Indeed, it would be easy to imagine how, after spending his life building his advisory business, he might anchor to that $3 million figure. It might really be worth $3 million in a normal full-length sales process, and it’s not hard to imagine why he would want to hold out for a top dollar offer.
But as noted above, in Example #4, assuming a $3 million sale price, Raylan would save $441,000 in taxes by selling in 2021 as opposed to selling in 2022. ‘Trading’ $300,000 in sales price (by selling for $2.7 million instead of $3 million) to get $441,000 in tax savings would be a ‘win’ in and of itself!
However, the outcome of taking a "fairer offer" at $2.7 million would be even better than that for Raylan! As the lower sales price of "just" $2.7 million would lead to an even lower tax bill, because he'd have $300,000 less in capital gains to pay taxes on! More specifically, at a $2.7 million sales price, Raylan’s tax bill would drop by an additional $300,000 (reduction in sales price) x 39.6% = $118,800!
So, all told, Rylan’s tax bill would be reduced by $441,000 (tax difference at a $3 million sale) + $118,800 (additional tax savings due to ‘discounted’ sales price of $2.7 million) = $559,800, in exchange for taking an accelerated offer in 2021 at "just" $2.7 million! Which means taking a $300,000 haircut on the value of the business nets Raylan $259,800 more in final after-tax proceeds!
As the example above illustrates, even if Raylan and his advisor were confident that Raylan would ultimately receive a $3 million offer when he found the right buyer (albeit one that might not come close until 2022), taking a 10% haircut of $300,000 to ensure a 2021 sale and keeping his "eyes on the prize" would still be the most appropriate strategy because it would result in substantially more ($259,800) after-tax dollars!
Navigating 2021 Installment Sales Under Biden's American Families Plan
Installment sales are a popular and relatively simple way of allowing taxpayers to minimize spikes in their capital gains upon the sale of certain assets. Notably, installment sales allow a seller to report the gain on the sale of an eligible asset over time, as the principal amount of the sale price itself is paid to the seller.
In other words, if the proceeds of a sale are paid out over 5 years, the capital gains are stretched out over 5 years as well (as the payments are received). In turn, the longer the installment period, the greater the number of years over which the gain can be spread and, accordingly, the lower the amount of gain that must be included in income annually.
Notably, when available (because payments are made over time), the installment method is actually the default method of reporting gain. Accordingly, in situations where a taxpayer receives principal payments attributable to the sale of an eligible asset over multiple years, the gain from that sale will be spread out proportionally unless the taxpayer elects out of the installment sale method.
Installment sales cannot be used to report gain from the sale of a stock or other security publicly traded on an established exchange.
It all sounds great… that is, until you realize that using the installment method for a 2021 sale pushes some of the capital gains into future years. If those gains are large enough and/or if other income is substantial, a 2021 installment sale could be pushing income out to a future year, but at a much higher rate under the American Families Plan's proposed capital gains rate!
Example #6: Paul is set to close on the sale of his business on December 1, 2021, at a price of $12 million. The $12 million is to be paid in four equal $3 million payments of principal annually, from 2021 through 2024, plus interest.
Normally, Paul would most likely make use of the installment method, reporting $3 million of capital gains pursuant to the sale on each of his 2021 – 2024 income tax returns. If, however, the 39.6% top capital gains bracket is made effective for 2022 and future years, doing so could substantially increase Paul’s tax bill on the proceeds of the sale of his business, and result in a substantially higher tax bill than would be the case if Paul opted out of the installment method by reporting all $12 million of gain on his 2021 return.
Suppose, for instance, that Paul has $300,000 of other income annually from 2021 – 2024. Using the installment method would leave him with $2.3 million of gain in each of those years that falls over the $1 million threshold. Accordingly, $2.3 million x 3 years = $6.9 million would ultimately be taxed at 39.6% instead of the 20% rate it would be taxed at in 2021 if Paul opts out of the installment method.
Consequently, while the installment method gives Paul some tax deferral, it comes at a cost of increasing his net tax bill on the sale by $6.9 million × (39.6% – 20% = 19.6%) = $1,352,400! The price tag is hardly worth it.
Accordingly, Paul should almost certainly elect out of the installment method, and report all $12 million of gain from the sale of his business in 2021.
Liquidity Issues When Opting Out Of The Installment Method
While electing out of the installment method is a veritable "no-brainer" in situations like the one described above, doing so can potentially lead to its own set of challenges for taxpayers. Specifically, business owners opting out of the installment method of reporting gain from the sale of their business may find themselves with some cash liquidity challenges!
As ultimately, the whole point of opting out of the installment method of reporting gain means a taxpayer is reporting the full gain from the sale in the year of sale. That means that the entire tax bill is due by the following April 15th. Even though all the cash from the sale (and actually, often only a small percentage) has yet to be received... because the payments themselves are still being paid out in installments over time!
Imagine, for instance, a business owner selling a $30 million business in 2021 with principal payments of $3 million to be made annually each year for 10 years. Electing out of the installment method would leave that business owner with a $30 million x 20% = $6 million tax bill for 2021, despite only receiving $3 million (the first year's payment) in cash!
Where is the business owner going to come up with the additional $3 million needed to pay the tax bill? And what about the cash needed for ‘regular’ living expenses?
These are questions advisors should help business owners address proactively. For some fortunate individuals, there will be enough other assets to pay the bill and meet living expenses (though liquidating those assets could create an even bigger tax bill). Other business owners may need to arrange short-term financing to bridge the gap. And in some cases, the best course of action may simply be to structure the terms of their installment sales in such a way as to provide more cash upfront (e.g., a sizable downpayment from the buyer at closing) to enable them to meet their tax and other ongoing obligations.
President Biden's American Families Tax plan is poised to implement some of the largest changes to the Internal Revenue Code in recent decades. In one of the most significant departures from previous administrations’ tax policies, the Biden plan would change the top capital gains rate to mirror that of the top ordinary income tax rate, at least for taxpayers with income in excess of $1 million.
While, clearly, those taxpayers with annual income in excess of $1 million would be ensnared by the new potential capital gains rate, so too would many other taxpayers. For instance, the sale of a highly appreciated business could result in a taxpayer’s income exceeding the $1 million mark during just a single year of their life. And that could be enough to significantly reduce the after-tax proceeds of the sale.
If such changes are made effective beginning in 2022 (which, despite the Biden budget proposal, continues to be the most likely possibility), business owners have only a limited window of time, through the end of the year, to close on sales and capture gains at the current top tax rate of 20%. Which may include not only the clients of advisors, but even advisors themselves who may be nearing retirement and considering the sale of their own advisory firm in the coming years!
Advisors working with such business owners (or who are such business owners!) should help those business owners focus on what matters most; the after-tax amount they are able to receive for the sale of their business, and not the gross sale valuation. To that end, advisors may even encourage certain business owners to consider accepting a lower-than-expected sales price to find a willing buyer quicker and expedite a sale into 2021.
At the same time, advisors should also pay close attention to 2021 installment-method-eligible sales of businesses. Should the 39.6% top rate become effective for 2022 and future years, in many circumstances business owners may be best served by electing out of the installment method and reporting all gain on their 2021 return. Doing so, however, could create liquidity issues, which should be proactively addressed.
Ultimately, for high-income (or soon-to-be-high-income) taxpayers with highly appreciated businesses, the price of selling that business is likely about to be dramatically increased, placing a heightened emphasis on capital gains management and planning for the rest of 2021 and the foreseeable future.