re-sell the land , likely taking it out of farming altogether , he says — though state law and local zoning can prevent or complicate farmland sales . If they do , “ that puts a big dent in your food security ,” he adds .
Plenty of investors are out there looking for small businesses to snap up , says Edward Cotney , founder and principal at Sacramento-based Olympus Tax , Business and Insurance Solutions . Private equity companies and investment banks — where high-dollar investors put their money to get better returns — were stymied during the pandemic because of the uncertainty , he says . Now they ’ re back . “ It ’ s the perfect storm ,” he says . It ’ s been his busiest year ever for sales of businesses and real estate . Nationally , sales involving purchases by private-equity firms were up more than 20 percent in the first five months of 2021 compared with the same period in 2020 , according to professional services giant PwC .
Without a good plan , most family businesses won ’ t be prepared for the next tax hike , even if this one gets killed in negotiations . “ Most business owners don ’ t even have the fundamentals in place — let alone an advanced tax structure — to exit their business on the terms that they want to ,” says Cotney . “ So the tax man wins . Overwhelmingly the tax man wins .”
Many strategies , not enough time
It ’ s likely too late to plan a sale to avoid the proposed increase if it becomes law . But the longer-term lesson is that with enough time , you can almost always do something to mitigate capital gains , says Cotney .
Specific strategies abound . Jackson says a family-owned corporate entity that ’ s selling to a third party could do an installment sale . The buyer could make payments over , say , a five-year period of less than $ 1 million each so the seller stays under the proposal ’ s cutoff .
Companies with many employees could sell the business to their staff through an employee stock ownership plan . Owners who sell to an ESOP can defer or avoid paying capital gains taxes on the sale if they reinvest in U . S . corporate stocks and bonds within 12 months and meet a few other conditions .
Another option is a “ Delaware Statutory Trust ,” says Nathan Torinus , CEO and financial adviser at Van Hulzen Financial Advisors in El Dorado Hills . These let a seller who ’ s realized a big gain roll over the increase into shares in institutional-quality commercial properties like office complexes and apartment buildings .
And Goralka mentions a relatively new option — taking the proceeds of a sale and investing in “ qualified opportunity zones .” The 2017 Tax Cuts and Jobs Act created these , which are designated low-income communities . To defer a gain , you have 180 days from the date of the sale of appreciated property to invest it into a QOZ fund — one either already established or that you set up . In most cases , any taxable gain is deferred until you sell your interest in the fund or Dec . 31 , 2026 , whichever comes first .
That ’ s far from the universe of options : Goralka rolls off an alphabet soup of other tax planning vehicles : CLATs , CRTs , PIFs , NING Trusts and more .
Each has its downsides . An ESOP sale , for example , usually brings a lower selling price than one on the open market , says Jackson . A Delaware Statutory Trust is less liquid than many other types of assets . Installment sales defer taxes but also sale proceeds .
There ’ s another option too : Wait it out . Since 1966 , the top capital gains rate has changed every few years , ranging from a high of 40 percent in 1976 to a low of 15 percent in 2012 . Some of Jackson ’ s clients have told her they may just hold tight until there ’ s a change in administration . Plus , in deciding whether to sell , capital gains taxes should be “ a factor but not the determining factor ,” she says .
And Torinus points out that a proposal is just that . Nearly every new administration has a tax plan , but the likelihood it will take effect exactly as spelled out is low , he says . “ I don ’ t want to send the message that ‘ Don ’ t worry about these Biden taxes ,’” he says . “ The message is ‘ Pay attention to what ’ s going on in the House and Senate and talk to your adviser and CPA as appropriate .’”
The history of the all-important step-up provision in the current plan makes the point . It was completely eliminated in the 1976 Tax Reform Act but created such a nightmare of paperwork that its implementation was delayed and ultimately repealed four years later .
Create a business tax plan
Even if the Biden plan doesn ’ t survive , family business proponents say one lesson should : Investing in tax planning isn ’ t optional . “ When you
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