Capital Gains & Selling Your Private Practice
On April 24, 2021 the Washington State Legislature passed a controversial capital gains tax. Under debate for years, the new law has been described as step toward improving the state’s regressive tax code and opponents calling it an unconstitutional income tax.
Opponents of the measure attack the proposed tax as a job-killer that could hurt small and multi-generational businesses, regular arguments against raising taxes on businesses or investments. [Reid Wilson, The Hill, April 23, 2021]
The new capital gains tax bill was narrowly approved by the Washington State Senate in early March. The measure imposes a 7% tax on sale of stocks, bonds, and other high-end assets in excess of $250,000 for both individuals and couples. It now awaits the signature of Governor Jay Inslee to become law.
What does it mean for you if you are putting your business on the market?
These taxes, coupled with pressures of the current economic climate, could make it an opportune time for small businesses to sell.
Most small business owners – including owners of private practices and professional services – will be exempt from the WA state capital gains tax. The tax will not apply If a business owner has
- been regularly involved in running their business for five of the last 10 years,
- owned it for at least five years, and
- gross $10 million or less the year before the sale.
For owners who have had a business for five years of less or are feeling pressure to sell, the new tax could force them to keep their business longer.
Capital Gains Tax and Selling Your Business
Taxes on capital gains are a critical piece to understanding the sale of a business as most business owners, especially in the professional services field, have built a tremendous amount of value in their business over time. This potential lump sum of cash represents one of the largest taxable events they will receive and navigate tax treatment in their lifetime for many business owners. As such, it is crucial to understand the right time to sell and how it impacts your net proceeds post-close. It is crucial to consult your CPA or Financial Advisory Professional to appropriately minimize your tax burden.
Even though your business and its assets are sold as a “package,” there must be a determination of capital gain or loss on each asset. According to the IRS, “The sale of a trade or business for a lump sum is considered a sale of each individual asset rather than of a single asset.”
These assets are broken down into the following categories: Tangible or Intangible Assets. Tangible assets include, among other things, furniture, fixtures, equipment, and inventory. Intangible assets include patents, trade names, and goodwill. Traditionally, gain on the sale of assets owned for more than one year will be treated as long-term capital gains, as will all intangible assets, such as goodwill.
Two Steps to Take Now
If you are considering selling your private practice, here are two steps to take now to get started.
Get a business valuation. This will help get a clear picture of your business’ value by determining a realistic selling price in addition to a good understanding of what the market will bear.
Discuss your specific situation with an expert. Consult with a qualified CPA or Financial Advisory Professional to help you better understand your specific situation.
When you sell your business, you may face a unique tax bill. However, with skillful planning it’s possible to minimize or defer at least some of these taxes.
Understanding is Key
“It is important to understand the current economic and regulatory environment. If you are on the fence about selling your business, perhaps it is time to be nudged over it and start the conversation. It’s far better to proceed now with a solid understanding of the current tax and regulatory situation than wait for what could, and likely will, change. If there was ever a time to jump in while uncertainty lies ahead, now is that time.”Chandler Hueckel, CBI, Director of Client Services / Financing Specialist, Private Practice Transitions
The tax treatment of capital gains is complicated, and the information in this article is intended to be general and should not be considered as tax or legal advice. Each business is unique, and taxes and regulations change frequently.
If you have questions about selling your practice, including the best time to sell your business, pitfalls to avoid, determining what a business is worth, or learning why a business broker might be your best decision, please contact us.