Take Advantage of the Capital Gains Tax Reprieve Now
Unless you were on another planet, if you are a business owner, you are aware that last month President Obama signed a major tax deal into law. The 2010 Tax Relief Act ended months – actually, years – of speculation about what would happen to the Bush-era cuts in the capital gains tax rate that were slated to expire on January 1 of this year.
Of course, nearly everyone has a stake in whether taxes rise or fall. But my clients, most of whom are business owners that are considering selling their business within the next several years, have more at stake here than the average American. This is why I have spent a lot of time following the ongoing saga of what would happen to the 2003 capital gains tax cuts (see my earlier article, ""). As I have said before, if you own a business and are considering selling it, timing is everything. By that I mean that a mis-timed sale could cost you many thousands of dollars, whereas timing the sale of your business to take advantage of things such as the most favorable tax rates could ensure that the retirement lifestyle you want is well within your means.
Right now business owners have a very short window of opportunity to save potentially hundreds of thousands of dollars in capital gains taxes. Both the tax law passed in December and the health care bill passed last March will mean higher taxes starting a scant two years from right now. Consider this:
1. The capital gains tax rates are frozen at historically low levels for another two years. The tax on capital gains will continue to be 15% for the highest income brackets (those over 15%), instead of reverting to 20%, as was scheduled. Remember that it’s fairly common for 75% of the gains from a business sale to be capital gains.
2. A raft of new taxes levied on higher income earners was passed in the March 2010 health care bill. These include a new 3.8% tax on investment income on those with adjusted gross incomes above $250K for couples and $200K for singles. This tax includes capital gains on transactions such as the sale of a business. These taxes will apply as of January, 2013.
What does this mean for you as a business owner? In just under two years from now, the new capital gains rate of 20% plus a new 3.8% tax on investment income will go into effect. This means an effective capital gains tax of almost 24%, or almost a 9% rise from the current rate of 15%. So, for example, if you sold your business before 2013, and the sale yielded $10M in capital gains, you would save $900,000 in taxes compared to after the tax rate increases. I’m guessing you would rather keep that in your pocket than give it to Uncle Sam!
The bipartisan fight to get this new tax law passed was touch and go. The concerns over the rising budget deficit will only intensify by the time the current tax cuts are up for renewal again. 2012 is an election year, and it is anyone’s guess what could happen. It is by no means too early to take advantage of the surprise tax reprieve from Congress. Why not make it your New Year’s resolution to start planning the sale of your business now?
