Why Should the AMT be on Every Business Owner’s Radar?
Hopefully, as a business owner, this isn’t the first time you’ve heard the term Alternative Minimum Tax (AMT). If it is, you will want to pay attention, as it could significantly affect you in 2024 and beyond. If you’re looking to sell your business or divest any corporate capital assets (like commercial real estate), this may act as a catalyst to get your deal done in 2023.
Some of the language surrounding the AMT can be confusing, so I simplified this version for my purposes and understanding.
The Alternative Minimum Tax (AMT) is undergoing changes that may affect business owners selling their businesses or other capital assets in 2024 and beyond. The AMT operates parallel to the regular tax system, applying when the regular tax is lower. However, recent changes have increased the capital gains inclusion rate to 100%, which can lead to higher taxes for business owners.
To illustrate, let's consider Ted, a business owner planning to sell his business in 2023 or 2024 with an expected profit of $50 million. Under current rules, only 50% of the profit is subject to taxes. However, the new rules would tax the entire $50 million.
The Lifetime Capital Gains Exemption (LCGE) also comes into play, allowing tax-free portions of capital gains for eligible property or shares. However, these exemptions may be affected by the new rules.
The impact on Ted's taxes can be complex. The AMT system may result in higher taxes than the regular one, particularly if there is a substantial capital gain. If Ted sells his business in 2023, he may not have to pay the AMT, as the regular tax would be lower. But if he sells in 2024, the AMT could be higher, requiring higher income in subsequent years to offset it.
Furthermore, charitable donations made during the business sale can affect taxes. The AMT calculation may limit the donation tax credit, potentially resulting in higher tax payments and negatively impacting the charitable sector.
In summary, the changes to the alternative minimum tax can impact business owners selling their businesses and other capital assets from 2024 onwards. It's essential to consult a tax advisor to understand the specific implications of your situation and develop a strategic plan accordingly.
