There are several key advantages that may make it more attractive for owners to consider a sale of their business by the end of 2012 rather than holding the business until 2013 or beyond.
Below are a few key highlights:
- Today's top federal long term capital gains rate of 15% is scheduled to automatically increase to 20%.
- For taxpayers in the upper tax brackets, the health care reform legislation imposes a 3.8% additional tax on unearned income such as dividends, interest, capital gains and other investment income.
- Pease limitation returns in 2013, reducing the value of itemized deductions and may add as much as 1.2% to the effective capital gains tax rate.
For certain business owners, selling in 2012 versus 2013 could mean saving as much as an extra million dollars in taxes for every $10 million in taxable gain.
Gift Exemption Amounts
- In 2012, business owners can transfer up to $5.12 million free of federal transfer tax (for married couples, the amount is over $10 million), the highest level ever, but this lifetime gift exemption will revert to $1 million on January 1, 2013.
- Any gifts made above these limitations are currently taxed at 35% but are scheduled to increase to 55% next year (with an additional surtax of 5% on taxable estates between $10 million and $17.184 million).
- Also on January 1, 2013, the estate tax exemption is also scheduled to revert back to $1 million from $5 million and the generation-skipping transfer tax exemption is slated to move from $5 million to $1.39 million.
Owners should take advantage of this and implement a plan with their wealth advisors as soon as possible to further reduce their tax burden upon the sale of their business.
Key Questions to Ask:
With respect to selling your business, three critical questions must be considered:
- Will there be a significant value enhancing event in 2013? If so, the valuation appreciation could more than offset the possible tax savings of selling today. Alternatively, depending upon the issue, CMM can help structure this expected event into an earnout and still have a majority of the purchase price taxed at the lower rate.
- What is your tax basis? The wider the gap between purchase price and tax basis, the larger the savings. If the tax basis and purchase price are similar, the economic benefit of selling in 2012 versus waiting dissipates.
- Is your business ready to be sold? Value can only be maximized if owners and their businesses are properly prepared. CMM puts its clients through a practice due diligence process to determine if they are ready to withstand the detailed examination that is part of a sale process.
What could happen?
In February 2012, President Obama called for an end of the tax cuts for high-income households, and upped the ante by calling for capital gains and dividends to be taxed at the same rates as ordinary income. As a result, some taxpayers could pay as much as 43.4% in federal taxes on gains and dividends next year, nearly three times today's rate.
Growing political pressure to focus on the "1%" and increasing pressures on federal and state budgets make it is less likely that Congress will be able to once again extend the current favorable tax treatment of capital gains. Unlike the 2010 extension that followed a change of control in the House, current political realities make it likely that this historically low tax environment for business owners will end this year.
In summary, unless Congress acts with purpose and is able to pass sweeping tax reforms, immediately following the upcoming presidential election, owners can expect to pocket a lot less from their lifetime of work if they wait too long to act. The time for business owners to take advantage of the current historically low tax environment is quickly running out.
Contact us to see how we can help you maximize the proceeds from your business.
About Carter Morse & Mathias
Founded in 1987, Carter Morse & Mathias (www.cartermorse.com) is an independent investment bank that provides the highest quality financial advisory services for outstanding closely-held middle-market companies. We provide a full range of investment banking services to assist our clients with business sales and divestitures, equity and debt capital raises, strategic acquisitions and financial advisory. Carter Morse & Mathias is also a charter member of the Alliance of International Corporate Advisors (www.aoica.org), an international network of M&A professionals in over 22 countries across the Americas, Europe, Asia and the Middle East. Our senior professionals have helped hundreds of business owners conceive, plan, execute and close transactions that maximize shareholder value.