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How the presidential election could impact your succession plans

John Mickelson, managing partner Midwest Growth Partners, is IowaBiz's blogger on succession planning. Read more about him here. Article also contributed to by MGP intern, Nolan Hellickson, a SE Polk alumni who is currently a wrestler and economics student at Harvard University.

The 2016 presidential election has been one for the ages, from boisterous personalities to outlandish scandals. Overlooked amid the hysteria surrounding the candidates is some of their policy plans, which could significantly affect succession plans for business owners.

For the purposes of this article, we will examine proposals from the two presumptive nominees, Secretary Hillary Clinton and Donald Trump.

Clinton and Trump both propose changes to the capital gains tax rate. The capital gains tax applies to gains from the sale of capital assets, which include proceeds from selling a business.

To simplify the explanation below, we are making an assumption that the business owner is in the top income tax bracket, but this analysis can be scaled to other brackets as well.

The current policy in place is a two-tier system. Short-term capital gains (assets held for less than a year) are taxed at regular income rates, or 39.6 percent plus an additional 3.8 percent surtax from the Affordable Care Act, bringing the total to 43.4 percent. Long-term capital gains (assets held for over a year) are taxed at 23.8 percent, with the surtax included.

Clinton’s proposal lengthens the time period between the short and long-term rates, adds a 4 percent surtax for incomes over $5 million, and keeps the Affordable Care Act surtax of 3.8 percent. Her policy reclassifies short-term capital gains as gains on assets held for less than two years instead of one and taxes those at a total rate of 43.4 percent, with the surtax.

The tax decreases to 39.8 percent for assets held between two and three years, and follows with a decrease of 4 percent annually until after year six, when the rate matches today’s rates (23.8 percent) for incomes less than $5 million, or an additional 4 percent for incomes above.

Trump takes a different approach. His policy eliminates the Affordable Care Act surtax of 3.8 percent and reclassifies the highest income tax bracket to 25 percent. As a result, the short-term capital gains tax rate would be 25 percent and the long-term rate 20 percent. Trump keeps the existing one year designation to determine long-term vs. short-term.

Each candidate has social and economic rationale for why they believe their plan is best. The proposals are, of course, subject to Congressional approval.

Given the differing rates which could amount to significant differences in take-home cash from the sale of a business, it may make sense for business owners to work with their tax professional now and determine if the pending election should hasten their succession planning.

Candidate Capital Gains Tax Graph 

 

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