In a recent article published by the Wall Street Journal titled “Kamala Harris’s Tax Increases and Cuts Take Shape,” author Richard Rubin described how taxes could go up for high-income households in a Harris administration, especially for business owners who sell their companies. Key provisions in the Harris tax policy include:
- The top marginal tax rates would reach their highest point since 1986, with significant capital-gains tax bills for the wealthiest investors and company founders. The top marginal income-tax rate for individuals would climb to 44.6% across almost all income types, compared with today’s lower top rates (23.8% on capital gains, 29.6% on some business income, and over 39% on wages).
- Harris’s plan also includes a novel system to tax the unrealized capital gains of people with a net worth exceeding $100 million. Capital gains currently aren’t taxed until assets are sold.
While this article is apolitical, private business owners must consider the tax implications of selling their businesses if Democrats win the presidency, House, and Senate. Taxes play a critical role in determining the net proceeds from a business sale, and understanding the potential effects of the proposed tax reforms is essential for strategic planning.
Understanding Goodwill, Capital Gains, and Their Tax Implications
Goodwill represents a business’s intangible value beyond its physical assets and liabilities. It encompasses elements such as brand reputation, customer relationships, and intellectual property. When a business is sold as an asset sale, goodwill is typically a significant component of the sale price and is subject to capital gains tax rate.
In a stock sale, the capital gain is the difference between the shareholder’s basis and the sale price. The shareholder’s basis is generally the amount initially paid for the stock, adjusted for additional investments or dividends received over time.
Under current tax regulations, long-term capital gains are taxed at 23.8%. However, Harris plans to increase the rate to 44.6%. Traditionally, capital gains were taxed at a lower rate to promote investment. However, the proposed tax changes could alter this landscape, potentially increasing the tax burden for sellers on business transactions.
Illustrative Scenarios
To better understand the impact of the proposed tax changes, let’s examine three potential transactions in which the sellers realize goodwill or capital gains of $10 million, $25 million, and $50 million. These scenarios will compare the current tax rates with the proposed rates, highlighting the differences in tax liabilities.
The chart below shows different capital gains or goodwill values, the amount of tax at different rates, and the differences between existing and proposed tax rates:
| Capital Gains/Goodwill | Tax at 23.6% | Tax at 44.6% | Difference |
| $10 million | $2.36 million | $4.46 million | $2.10 million |
| $25 million | $5.90 million | $11.15 million | $5.25 million |
| $50 million | $11.80 million | $22.30 million | $10.50 million |
If Democrats successfully increase capital gains tax rates, owners can expect to pay nearly twice the taxes under the new system.
Assume an owner owns a business with $10 million in goodwill value. How much more would the owner need from the sale to achieve the same after-tax value if the Harris proposals took effect? The answer is $13.79 million, a 37.9% increase in the sale price. The reality is that owners cannot automatically increase the sale prices of their companies to account for tax changes. Consequently, tax increases will automatically destroy wealth.
Key Takeaways for Business Owners
The proposed tax changes could significantly impact the net proceeds from the sale of a business, particularly regarding the treatment of goodwill and capital gains. Therefore, business owners should:
- Understand the potential tax implications. Tax planning is crucial for effective decision-making, and no decision is more important to owners than selling their businesses. Consult with a tax advisor to evaluate how the proposed changes might affect your situation.
- Consider accelerating a transaction to take advantage of today’s lower tax rates, but hurry! Selling a business takes time, and if the proposed changes become law, they might be retroactively applied in January 2025. The timing of a sale could influence the overall tax burden.
In conclusion, the proposed tax changes could substantially impact the financial outcomes of selling a business, especially regarding capital gains and goodwill taxation. Take control of your financial future. Contact Blue River now to develop a proactive plan that addresses the potential tax implications and ensures you maximize the value of your business sale.
William “Bill” Loftis is Managing Partner and co-founder of Blue River. Mr. Loftis developed a passion for M&A as a transaction principal, and has assisted buy and sell-side clients through the M&A process in multiple industries. He earned a B.A. in Business Administration from Alma College and a Master of Science in Finance from Colorado State University. Bill’s full bio is available here.
About Blue River
Blue River Financial Group is a middle market merger and acquisition advisory firm headquartered in Bloomfield Hills, Michigan. It assists corporations, private equity groups and individuals in the sale and acquisition of businesses, and has completed assignments in multiple business segments. With over 20 years of experience spanning across 50 global industries, Blue River provides a suite of services to middle market clients including corporate development, private equity support, valuations and transaction consulting, placing a premium on relationship-centered transaction counsel and client focus.
