Merger & Acquisition Insights

Election Alert: How the New Administration’s Proposed Capital Gains Tax May Impact Transportation Business Value

Posted on January 19, 2021 by admin

Taxes aren’t red. They aren’t blue. They are, however, certain. The Biden Administration’s proposed tax plan presents new realities that all transportation and logistics business owners should thoughtfully consider as they look to 2021 and beyond.

The overall plan is complex. If you would like to read the complete Biden plan, visit Biden Tax Plan: Details & Analysis | Tax Foundation. I am not a tax expert, and it’s likely that you are not either. But you don’t need to be a tax expert to understand how the proposed changes might influence the timing of your business sale or, more importantly, how they could affect what actually goes in your pocket from that sale. One major component of this plan that should be getting serious attention from you and your advisory team (tax advisor, wealth advisor, M&A advisor) is the proposed capital gains increase.

Capital Gains Rate Hike

The new administration is proposing to treat any gain over $1M as ordinary incomeCurrently, the long-term capital gains tax rate for gains over $1M is 20% plus a 3.8% surcharge (total of 23.8%) plus any state tax. If Congress votes Biden’s plan into law, the federal tax rate on gains over $1M will be over 43% (39.6% plus 3.8%).  That increase equates to an additional $1,960,000 in taxes for every $10M of sale price above $1M.  That is a remarkable amount of personal wealth moving from the hands of business owners to the hands of our government. Again, that is not a political statement. It is a factual statement. For owners that have been considering an acquisition, merger or business sale over the next 1-3 years, you need to be watching Washington and the developments around this proposed plan closely. Unless you are resolved to absorbing this tax increase and its impact on the generational wealth within your family, you may need to consider being more flexible with the timing of your exit from this industry. It is also important to consider how this proposed plan could affect the way buyers, particularly private equity groups, value your business and approach acquisitions. If the available after-tax return on investment of purchasing your business is reduced (due to the proposed tax plan) then you should expect the valuation of your business to adjust accordingly. Investors are not going to pay the same money for a lower return on capital.

Concluding Thoughts:

It is not certain when or if the new administration’s proposed tax plan will become law. It is also not entirely clear how Biden will prioritize this plan alongside the rest of his political agenda once he is inaugurated. It appears he has a straightforward path to put his plan into law quickly if he chooses to make it a priority. For those of you expecting to own your business into the coming 5-10+ years, I hope this proposed tax plan inspires you to respond with bold and immediate action. In your effort to offset these tax implications, I hope you unleash the full creativity and innovation of your team and build a more valuable business. However, invest time and money with your eyes wide open. Seek counsel from your key advisors and create a plan for how to protect what you have built, how to preserve generational wealth, and how best to navigate these extraordinary times. Whether your next move is in or out of transportation, or if you need education around mergers or acquisitions, we are here for you.

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