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How Tax Changes May Affect Your Exit Timing

by Joe Ciccarello, CPA, MST, Gray, Gray & Gray, LLP

Thinking of getting out soon? Stop thinking and do it.

If you have given any thought to selling your fuel oil or propane business and retiring, now might be a good time. And I mean right now.

The shift in power in Washington is likely to result in significant changes to federal tax laws, including capital gains taxes. Corporate tax rates are expected to return to the higher levels in place prior to the 2016 presidential election, and deductions put in place for pass-through entities (including S Corps, LLCs, partnerships and sole proprietors) will probably be eliminated. For businesses, that could feel very much like a tax increase of 20 percent or more.

Perhaps of greater significance, President Biden has said he wants to eliminate the favorable tax rates on long-term capital gains for anyone making over $1 million. This proposed change in the long-term capital gains tax rate is likely to impact business owners who sell their company. Current long-term capital gains are taxed at rates ranging from 0 to 20 percent, depending on your income. But the proposed changes would see long-term capital gains taxed as high as ordinary income, almost doubling the federal taxes due for most transactions.

At this time there is talk of making these proposed tax changes retroactive to the start of 2021. However, it is more likely that any changes will go into effect at the start of 2022. This gives you a window during which you can sell your business while the current, more favorable tax laws are still in place.

What difference will it make?

In a very simple example, if you sell your company for $750,000 today, the long-term capital gains tax rate would be 20 percent. That means you will owe the federal government $150,000. If you wait until the capital gains tax rates are changed to match the tax rates for ordinary income, the tax bill (assuming a 35 percent tax rate) could jump to $262,500. Are you prepared to hand over an extra $112,500 to Uncle Sam? (Please note that every transaction has different dynamics – your results may vary.)

Other emerging factors may influence your decision to exit the energy business, including changes coming to environmental laws and instability in global energy markets.

President Biden has already signed executive orders to cancel the Keystone XL pipeline, impose a moratorium on drilling, and rejoin the Paris Climate Accord. All of these, as well as other proposed “green” initiatives, will almost certainly result in higher prices for petroleum and gas. The industry has enjoyed stable pricing and steady production for several years, but that may all change. Are you ready to face customers who may balk at paying higher prices to heat their homes and fuel their businesses?

Hopefully, you have an exit strategy in place that will allow you the flexibility to act quickly on a decision to sell. But even if you have only been “kicking the idea around” about selling your business, aligning with an experienced advisor can help you prepare and market your company while the opportunity to maximize your net proceeds is ripe. Remember, the money you receive when selling your business will probably need to see you through your retirement years. You not only want to get the most money, but also need to plan how to make it last.

Joe Ciccarello is a Partner in the Energy Practice Group at Gray, Gray & Gray, LLP, a business consulting and accounting firm with deep ties to the fuel oil and propane industry. He can be reached at 781-407-0300 or jciccarello@gggllp.com.