Tax increases with the sale of a business
Many significant provisions of the Bush tax cuts are scheduled to expire at the end of 2012, which will result in significant changes to the tax laws. If Congress should fail to extend the cuts, income taxes, dividend taxes and capital gains taxes will all rise. The Long Term Capital Gains tax is the primary area that will affect most business owners thinking of selling their businesses. These affect the sale of stock.
There will no longer be a 15% tax bracket. It will rise to 20% as a result of the healthcare reform legislation. And it will rise an additional 3.8% via a Medicare tax beginning in 2013. This tax also will be added to dividend income taxes and even ordinary income taxes. In short, selling next year versus this year means the price received will need to be about 16% higher next year to net the seller the same amount as they would receive selling this year. How many owners will be able to increase the value of their business by that amount?
Some examples of possible scenarios:
Assumption: You net $1 million in the sale of your business and make less than $250,000 (AGI).
Option 1: If you sell the business before the end of 2012, the federal income taxes owed from the sale will be $150,000, you net $850,000.
Option 2: You hold out, but still sell for $1 million in 2013. Taxes will be 20% plus 3.8% or $238,000; $88,000 more in federal taxes ($238,000 vs. $150,000).
Option 3: You wait and capital gain taxes go up even more! Based on the government’s need for revenue this is a real possibility.