By the Numbers: Selling a Business Before or After the 2020 Election

The outcome of the 2020 presidential race could have significant tax implications for business owners who sell their firms.

There’s a lot that goes into the sale of a business. That’s especially true for business owners in 2020, who are dealing with the fallout of a global pandemic on top of the uncertainty surrounding the upcoming presidential election.

As Election Day approaches, it’s critical that business owners who are positioning themselves for a sale carefully assess the timing and tax implications. A change in the White House could result in significant tax hikes for business owners and investors. The changes proposed by Democratic presidential nominee Joe Biden include increasing the corporate tax rate from 21% to 28% and the favorable long-term capital gains rate from 20% to 39.6% for high-income taxpayers.

This could have substantial tax implications for owners of C Corporations. As a separate taxable entity, a C Corp that generates a profit incurs a tax on that profit. If the C Corp then pays a dividend to the shareholder, as in the sale of the business, the dividend is also subject to income tax at the shareholder level.

The changes would also be felt by owners of sole proprietorships, S Corps, partnerships, LLCs and trusts. Unlike C Corps, these businesses are taxes as "pass-through entities,” where the income is taxed at the owner's individual tax rate for ordinary income. While Biden has pledged no income tax increases for individuals earning less than $400,000, those who earn above that amount could see their marginal tax rate increase to 39.6%.

For a closer look at how the timing of a sale might play out on a more technical level, check out our two case studies here:

C-Corporation Case Study

Pass-Through Entities Case Study

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