Historically,
business transactions escalate when taxes are expected to change, as sellers
and buyers try to capitalize on favorable rates. It is safe to assume that the
U.S. will soon have to raise taxes on businesses and individuals, so
retirement-age business owners looking to maximize value should look closely at
selling in 2012.
Since
it typically takes a year to prepare, find a buyer, negotiate, work through due
diligence and close a deal, now is the time to get started. This article
outlines a handful of the expected tax changes.
Capital
Gains Tax Rate Increase
Given our massive federal
budget deficit, most experts believe that the Bush tax cuts will not be
extended again at the end of 2012. The current maximum Federal long-term
capital gains income tax rate is 15%. The top long-term capital gains tax rate
is expected to revert to the pre Bush tax cuts rate of 20% on January 1,
2013. The 20% rate was effective from 1997 to 2003, and some expect it to
could go even higher. Note that from 1987 to 1997 the maximum capital
gains tax rate was 28%.
Ordinary
Income Tax Rate Increase
The current top individual
ordinary income tax rate is 35%. This rate applies through 2012 due to
the Bush tax cut extension. Again, expectations are that the Bush tax cuts will
not be extended beyond 2012. What will the new maximum tax rate be?
Consider our tax rate history:
|
Period
|
Top
Tax Rates
|
|
1944
to 1963
|
82%
to 94%
|
|
1964
to 1982
|
69%
to 77%
|
|
1982
to 1986
|
50%
|
|
1986
to 1992
|
31%
to 38.5%
|
|
1993
to 2002
|
38.6%
to 39.6%
|
|
2003
to 2012
|
35%
|
Special
15% Qualified Dividend Tax Rate may be Eliminated
The
qualified dividend maximum tax rate remains at 15% through the end of 2012.
Before the Bush tax cuts, dividends were taxed at ordinary income tax rates. C
corporation business owners could be faced with a 100% or more increase in this
tax if they don’t distribute dividends before the end of
2012.
Patient
Protection Act
Starting
in 2013, there is an additional 3.8% Medicare tax for individuals with adjusted
gross income (AGI) above $200,000, joint filers with AGI above $250,000 and
married taxpayers filing separate with AGI above $125,000. This tax is
generally levied on interest, dividends, annuities, royalties, rents and
capital gains.
Also
beginning in 2013, the Patient Protection Act imposes a 0.9% additional
Medicare tax on earned income in excess of $200,000 for individuals, $250,000
for joint returns and $125,000 for married taxpayers filing separate.
Section
179 Deductions
Decreases
in Section 179 deduction limits from $500,000 in 2011 to $25,000 in 2013 and
the elimination of bonus depreciation in 2013 will result in higher taxes as
well as lower business valuations from buyers. Businesses with recurring capital
equipment needs will be especially hard hit.
Cumulative
Effect
Business
owners who are approaching retirement are encouraged to consult with their tax
adviser immediately to understand what the cumulative tax effect will be if
they exit in 2012, set against waiting another year or two. The savings could
be substantial. Because tax practitioners are so inundated at tax time, these
exit planning conversations often don’t happen. Be proactive here to maximize
proceeds and avoid surprises.
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