Winter Is Coming
Sunny business prospects may soon turn cloudy. Just when things were looking bright for funeral home and cemetery sales, the tax people have started closing in. Darker days are on the way in the form of increased capital gains and ordinary income taxes. Now is the time to consider selling.
Tax Fact #1 – The Proposal
A proposed federal tax increase could soon affect your business by raising taxes on long-term capital gains and qualified dividends, as well as ordinary income. If put into effect, the U.S. would have the highest marginal tax rate in the OECD (Organisation for Economic Co-operation and Development) at 39.6% (currently 20%). When combined with the 3.8% NIIT (Net Investment Income Tax) and average top state capital gains tax rates, the proposal would lead to a top combined state and federal tax rate of 48.4%, up from the current top rate of 29%. At this number, the U.S. would have the highest overall tax rate in the OECD.
Tax Fact #2 – The Timing
Things are already starting to look gray and the cold chill of the new tax proposal could be approved and take effect on January 1, 2022, if not sooner. This means time is of the essence to get a succession plan in order and possibly even push up your selling timeframe in order to avoid lofty new taxation on your business and personal income.
Tax Fact #3 – The Details
The new tax proposal:
- Would apply to taxpayers with taxable income over $1 million
- Is not expected to be retroactive
- Would put the U.S. in a small, elite group of only five countries facing capital gains and dividend tax rates above 40% along. The other countries are Denmark, Chile, Ireland, and Korea.
- Is part of a broader plan to raise taxes on those making over $400,000
Tax Fact #4 – The Consequences
Because funeral home and cemetery businesses tend to stay around much longer than others, sometimes even 100 years or more, capital gains can be significant. This potentially puts funeral home and cemetery professionals at greater tax risk than others. Unlike other businesses, funeral homes and cemeteries almost always include real estate, which most often results in building depreciation. This building depreciation many times creates a net income tax benefit over the years, but the benefit is then eroded at the time of sale due to a depreciation recapture tax. The depreciation recapture is taxed at the ordinary income tax rate up to a certain threshold percentage, which could mean well over $500K-$1M in additional taxes under the proposed tax structure changes. Ordinary income taxes may have an even greater impact than capital gains taxes, so all angles need to be considered.
Tax Fact #5 – The Exit Strategy
The first leaves are already falling, so the time to act is now. Get your share of the current selling boom before it’s silenced by new tax laws. If you do not yet have a succession plan, need to update your succession plan, or need to push up your selling timeline, we are here to talk. Johnson Consulting Group has the knowledge to help you understand what’s coming next and the experience to lead you forward. We are in business to assist you in getting the most out of your business.