July 9, 2021
In a recent article for Bloomberg Tax, Nelson Mullins partner C. Wells Hall, III and associate Drew Hermiller explain how possible tax changes proposed under the Biden administration could become a top consideration for those starting, operating, owning, or selling a business.
“Typically, tax cost is merely one item on a long list of regulatory considerations business owners and investors must analyze,” Hall and Hermiller write. “However, the magnitude of the proposed rate increases is likely to push tax issues to the top of that list in 2021.”
Business owners will need to carefully weigh decisions like when to sell, their choice of entity, and tax deferral and tax elimination structures. For example, Hall and Hermiller explain, “The near doubling of the capital gains tax rate would have a large impact on net profit from any M&A transaction.” And for those not ready to sell, they will need to also consider the increased tax burden of operating a business. “Regardless of entity type, available operating cash flow will likely be materially diminished under the proposed rates, and business owners may need to consider additional avenues for operating liquidity such as increased debt financing or cost cutting,” write Hall and Hermiller.
They add that the availability of certain tax-favored investment structures is likely to take on additional importance if the proposed rates become law. Yet, while the enactment of these proposed tax rate increases are far from certain, Hall and Hermiller encourage business owners and investors to be proactive and consider the effects now.
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