Entrepreneur and reality star Kylie Jenner has agreed to sell a majority stake in her beauty company Kylie Cosmetics, which means she is likely on the hook for hundreds of millions of dollars in taxes.
Jenner announced Monday that she will enter a long-term strategic partnership with Coty Inc., which will acquire a 51 percent ownership stake in Kylie Cosmetics for $600 million.
As a result, she is likely to be on the hook for tax liabilities in the ballpark of $200 million, Friedman LLP’s Mike Greenwald and Bob Charron told FOX Business.
“It likely wouldn’t go higher than $300 million … [so] she’s still very wealthy,” Greenwald said.
Here’s a look at what tax liabilities Jenner faces if it is assumed the sale was a cash deal:
As an LLC, Kylie Cosmetics is likely to be treated as a partnership for income tax purposes. And by selling some of her interest in the partnership, it would be taxed as capital gains, Greenwald noted.
Jenner would be subject to the top capital gains rate of 20 percent.
Her basis in the LLC interest was likely pretty low because of the value built within the company so quickly, Bill Smith, managing director for CBIZ MHM's National Tax Office, told FOX Business, which means the capital gains tax could be pretty substantial.
She will also be subject to the net investment income tax of 3.8 percent, which applies to specific net investment income, including capital gains, of individuals, estates and trusts with income above certain threshold amounts. The tax was implemented as a type of add-on tax in 2013, alongside the Affordable Care Act.
That brings her liability to 23.8 percent. And that’s just the taxes on the federal side, she will also be subject to state income taxes.
In California, Greenwald and Charron noted, all capital gains are taxed as regular income. The top rate in the Golden State is 13.3 percent, which means California residents pay once more on capital gains than most other people.
She’s not going to get much of a tax break in California, either, since state and local tax deductions are capped at $10,000 and she likely owns an expensive home in the state.
Under some LLC sales, there are also what are known as “hot assets,” which may be converted from capital gains into ordinary income. Hot assets include unrealized receivables and substantially appreciated inventory items. Jenner, however, may have neither, Greenwald said.
Coty said that Kylie Cosmetics realized an estimated $177 million in net revenues over the past year.
The deal is not expected to close until the third quarter of Coty's fiscal year 2020, which Smith noted is an unusually long time for this type of transaction. Likely, he said, it is an issue on the buyer’s side. Coty, for example, may need to generate cash.
Jenner, who is worth an estimated $1 billion, launched her cosmetics company in 2016.