How Capital Gains Tax Increases Can Affect Business Owners Looking to Retire

As if this past year hasn’t been enough of a rollercoaster, capital gains tax have the potential to almost double from 20% to 39.6% for profits made on the sale of stock or property for people who make more than $1 million in income. With 2022 seemingly around the corner, it leaves a narrow window for business owners to decide if now is the right time to consider retirement before the increase kicks in. No matter your industry, a qualified advisor can help you decide if it’s time to hang up your proverbial hat. But Professional Transition Strategies (PTS) Founder and President Kyle Francis thinks, yes, retirement is possible, even with an increase in capital gains taxes looming, but only with careful (and quick!) planning, as discussed in a recent article for The Street


The capital gains tax rate has been low for the last 20 years and was on a course to eventually increase regardless of the pandemic. However, the pandemic has accelerated the need to up capital gains taxes to cover some of the massive revenue shortfalls. While the Paycheck Protection Program (PPP) was a lifesaver for businesses, this and the many other COVID-19-related programs come at a cost. Putting $5 trillion into the economy only quickened the government’s trajectory for spending more than it’s earning. Regardless of who is in the Oval Office, it is more bearable for politicians to tax businesses and higher income earners rather than taxing individuals to cover the deficit we are facing.

Crunching numbers

The impact of selling your business can be minimized by closing the sale before January 1, 2022, to pull from stock losses and other investments that have declined in value, and using an installment of the sale to keep your taxable income below $1 million. As an example, the projected increase would reduce the net profit from the sale of a business valued at $3 million by $600,000 on the first day. While the value of your business won’t be affected, your net takeaway will.

Option 1: Stick your head in the sand

Sure, it can be easy to pretend it’s all going to fade away, but after so much speculation, we now know that an increase is coming. If you weren’t planning to retire during this time, be sure to understand that the amount taken out of your business as net income distributions is going to go down. These distributions are generally taxed at the capital gains rate, as well.

Option 2: Act fast

Now is the time to grease the wheels and make something happen since the increase won’t likely be retroactive while getting the best possible outcome for both the buyer and seller. Just first ask yourself: What is it going to cost you financially and emotionally? Is saving $100,000 on the sale of your business worth it to get a quicker transaction, and what would that mean for the way that you are living your life? For example, let’s say you own a car wash that is worth $1,000,000 and no debt. It may make sense for that owner to consider a transaction this year as they would be able to net an additional $150,000 on the sale of the business because the capital gains rate is lower. On the other hand, maybe the owner loves operating the business and is not wanting to sell their business until some point in the future. They make this decision knowing that they will net less in the new tax environment.

What’s next?

Contact the experts at PTS for more guidance on how to keep your dental practice on top of its game.