“The combined income and estate tax burden could be as high as 60% under these proposals, and that could be devastating for a family business passing down to the next generation.” Avoiding the Threshold “These are highly personal decisions and dependent on a lot of factors that have nothing to do with tax,” Nichols said. Taxpayers with closely held businesses will likely explore options like donations to charity or transfers to children during life to avoid triggering some of the gains if the capital gains tax rate increases as proposed. “The loss of that person who held everything together never fails to have a substantial impact in terms of continuity for the business,” he said.Īllowing the increased tax to be paid over multiple years might blunt the immediate impact but could still present a major challenge, because a closely held business may not return to the same level of profitability after the death of the principal owner, Nichols added. ![]() The death of the owner of a closely held business is typically a difficult time of transition for the business, and adding to the tax burden at that juncture could compound the problems it already faces, Nichols said. “If that’s your nest egg, it’s really huge,” Nichols said. But the difference between a 20% rate for a taxpayer who materially participates in their business and a potential 43.4% rate is significant. “The decision whether or not to sell a business has so many implications, you can’t let tax completely drive the bus,” Nichols said. The point of a sale for owners is often to cash out completely and not have to worry about keeping the business going. Spreading out the gain from the sale of a business over multiple years under the installment sale rules to avoid exceeding the threshold in any one year might be an option for some closely held business owners, but it might not be ideal. For example, for some of those businesses, the only point at which the owner-operator would reach the proposed $1 million threshold would be when they sell the business they’ve spent years building. Nichols of Meissner Tierney Fisher & Nichols SC said gain realization could be draconian for closely held businesses. Closely Held Businessesīusiness owners who may not typically end up above the income threshold each year could face an unpalatably large tax bill when they decide to sell their business, or upon death. Hadjilogiou noted that this is consistent with other deferral regimes such as the installment sale rules and even the rules for 401(k) plans, which apply the rate in effect in the year of the gain recognition. Section 1400Z-2 doesn’t specify what rate applies, but Treasury clarified in regulations that the rate is the one in effect in the year the gain is recognized. “I think investors in the short term are going to look at that potential rate hike and say no to investing in a QOF because of that,” he added.Ĭongress and the Biden administration could modify the Opportunity Zone rules to allow the applicable tax rate to be the one that applied in the year the capital gain was realized, rather than the one that applies when the gain is recognized on December 31, 2026. ![]() Hadjilogiou said qualified opportunity fund investments will still be valuable even if the rate increase becomes law, but that the deferral piece will become a cost. ![]() (Photo by Anna Moneymaker/Getty Images) Getty Images will send 20 million doses of Pfizer, Moderna and Johnson & Johnson COVID-19 vaccines abroad on top of the 60 million AstraZeneca doses already planned for export. response and vaccination program in the East Room of the White House on in Washington, DC. President Joe Biden gives an update on his administration’s COVID-19.
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