Small business sales in Massachusetts would, in the vast majority of cases, not trigger the so-called fair share amendment or millionaire tax if the controversial ballot wins in next month’s election, finds a new report released Monday.
Opponents of Question 1, which would impose a 4% surcharge on income over $1 million, warn that one-time gains – including from business sales – could disproportionately hurt small business owners and their nest egg if they struggle with the impact the referendum. Funding from the tax is intended to increase spending on transportation and education.
But just 123 small businesses sold from Q1 2017 to Q3 2022 fetched prices ranging from $1 million to about $3.5 million, according to the report from the left-leaning Massachusetts Budget and Policy Center, which based its analysis on data from the supported BizBuySell.com. Put another way, on average, only 21 companies in question are sold at prices in excess of $1 million each year.
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That comes from a data set that identified about 1,400 companies that sold for less than $3.5 million, which the Massachusetts Budget and Policy Center called “a reasonable limit for what most of us consider a ceiling for a… ‘small business”. The median selling price averaged under $290,000.
“But even for those owners who do manage to sell their business for more than $1 million, that doesn’t mean they would necessarily owe a fair share tax. Many expenses are deducted from the sale price when determining the resulting “net profit” or taxable income — and only a filer’s taxable income over $1 million is subject to fair share tax…” senior policy analyst Kurt Wise wrote in the Report.
According to the report, depreciated values for real estate, equipment or inventory, as well as brokerage and legal fees associated with business sales, among other things, can be deducted.
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“Deductible expenses significantly reduce taxable income from a business sale,” Wise continues. “That means a typical business would have to sell for well over $1 million for the sale to result in over $1 million in taxable income.”
Organizational structure can also prevent business owners from being subject to Polling #1. For example, if multiple owners split the sale price evenly and their shares are $1 million, the fair share tax would not take effect, the report said.
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Even company sales that extend over several years would probably avoid the tax surcharge due to “significantly” reduced taxable profits.
“Very few small businesses would ever sell for amounts that would require the sellers to pay a fair share tax on the proceeds of the sale,” concludes Wise.