Mass. small business sales mostly won’t trigger ‘millionaire’s tax,’ report finds

Small business sales in Massachusetts, in the vast majority of circumstances, would not trigger the so-called Fair Share Amendment or millionaires tax, should the contentious ballot question succeed at the polls next month, a new report released Monday finds.

Opponents of Ballot Question 1, which would impose a 4% surtax on incomes exceeding $1 million, warn that one-time earnings — including from the sale of businesses — could disproportionately harm small business owners and their nest eggs as they wrestle with the impact of the referendum. Funding from the tax is intended to augment transportation and education spending.

But only 123 small businesses sold from the first quarter of 2017 through the third quarter of 2022 notched prices between $1 million and roughly $3.5 million, according to the report from the left-leaning Massachusetts Budget and Policy Center, which based its analysis on data from Put differently, an average of only 21 businesses in question sold each year for prices topping $1 million.

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That’s culled from a data set that identified about 1,400 businesses that sold for below $3.5 million, which the Massachusetts Budget and Policy Center described as “a reasonable cutoff for what most of us would consider an upper bound value for a ‘small business.’” The median sale price, on average, was less than $290,000.

“But even for the owners who do manage to sell their business for more than $1 million, this does not mean they would inevitably owe any Fair Share tax. Many costs are deducted from the sales price when determining the resulting ‘net gain’ or taxable income — and it is only a filer’s taxable income above $1 million that is subject to the Fair Share tax…” senior policy analyst Kurt Wise wrote in the report.

Depreciated values ​​for property, equipment or inventory can be deducted, as well as realtor and legal fees tied to business sales, among other categories, according to the report.

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“Deductible costs greatly reduce the taxable income resulting from a business sale,” Wise continues. “This means that a typical business would have to sell for much more than $1 million in order for the sale to result in taxable income above $1 million.”

Organizational structural may insulate business owners from being subject to Ballot Question 1, as well. For example, if multiple owners split the sale price evenly and their shares are $1 million, Fair Share tax would not take effect, the report states.

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Business sales that span several years would also likely evade the surtax due to “significantly” reduced taxable gains.

“Very few small businesses ever would sell for amounts that would require the sellers to pay any Fair Share tax on the proceeds from the sale,” Wise concludes.