The recent changes to capital gains tax rates have left many online business owners scrambling to figure out their next move.
It’s a situation that feels like a game of high-stakes poker and the clock is ticking.
As someone who’s been in the online business space for years I’ve seen my fair share of ups and downs and this is definitely one for the books.
Is It Too Late to Sell Your Online Business?
The new capital gains tax rates have been a hot topic of conversation with many business owners feeling the pressure to sell before the year ends.
The truth is it’s not a simple “yes” or “no” answer.
It depends on several factors.
Understanding the Tax Changes
First things first let’s clarify what’s changed.
The Biden administration’s tax proposal has increased the top capital gains tax rate for high-income earners from 20% to 25%. This means if you sell your business for a significant profit you’ll be paying a larger chunk of that profit to Uncle Sam.
The changes go beyond just the capital gains rate too.
There are also new surtaxes and increased net investment income taxes (NIIT) that can impact high-net-worth individuals.
Combine all of these changes and the effective tax rate for those selling large online businesses can easily climb above 30%. It’s a significant bite out of your hard-earned profits.
The “Grandfathering” Rule
Now here’s where things get interesting.
The tax proposal includes a “grandfathering” rule.
This rule essentially lets you sell your business under the old tax rates if you signed a binding sales contract before September 13 2021 and close the deal by the end of the year.
This is a lifeline for those who were already in the process of selling but for everyone else it’s a ticking clock.
Time Is of the Essence
With just a few months left in the year the pressure to sell before the new tax rates kick in is immense.
This is where the “Season of the Seller” comes into play.
The pandemic’s impact on online businesses has created a unique environment where buyers are actively seeking new opportunities.
The influx of capital into the online business space has driven up valuations creating a favorable market for sellers.
It’s a seller’s dream and the increased tax rates are only fueling the fire.
Navigating the Tax Landscape
Selling your business before the year ends can help you capitalize on this market and potentially avoid the higher tax rates.
However it’s crucial to approach this situation with a clear head and a solid plan.
Earning Structures
One strategy to consider is structuring your sale with an earnout.
This means you won’t receive all of the sale proceeds upfront.
Instead you’ll receive a portion up front and the remaining amount over time.
By spreading out the sale proceeds you can potentially keep your taxable income below the threshold where the increased capital gains rate applies.
For example if you sell a $2 million business you might receive $800000 upfront and the remaining $1.2 million over the next two years.
This can be a win-win scenario for both the buyer and seller.
The seller avoids the higher tax rates and the buyer gains more flexibility in financing the acquisition.
Buyer Trust is Key
The downside of an earnout is that it puts your business’s future in the hands of the buyer.
You need to carefully vet potential buyers to ensure they have the expertise and resources to successfully manage your business and generate the cash flow to make the earnout payments.
Trust is essential here.
Think Long-Term
While avoiding higher taxes is a valid motivation don’t let it overshadow your long-term goals.
Selling your business is a significant decision and you should consider all of the factors involved.
Don’t rush into a sale simply because you’re worried about the tax implications.
Take the time to carefully evaluate your options and make the best decision for your business and your future.
The Bottom Line
The new capital gains tax rates are a significant factor to consider when selling your online business.
However it’s not the only factor.
The current market conditions your personal financial goals and your long-term vision for your business all play a role in your decision.
The best approach is to seek professional advice from a tax advisor and an online business broker.
They can help you navigate the complexities of the tax landscape and understand the implications of various sale structures.
Ultimately the decision of whether or not to sell and when to sell is yours.
But armed with the right information you can make an informed choice that aligns with your goals and sets you up for success.