Tax Increases Will Change the Economics of Business Sales

The Bush era capital gains tax reduction expires December 31, 2010.  The top capital gains tax rates will rise from 15% to 20%.  Any relief from this tax increase seems highly unlikely anytime soon given the federal deficit and political trends.

In addition, the health care reform bill made some tax changes tat will also affect business sellers, beginning in 2013.  First, the act increased federal income tax rates for individuals earning over $200,000 and couple earning over $250,000 by .9%.    The act also provides for a new tax on investment income above those same levels of 3.8%.  The proceeds of a business sale would be considered investment income, so the effective capital gains tax rate will be 23.8% – for federal income tax purposes only.

When these two rounds of tax increases are in place, a business seller  with a capital gain of $2,000,000 from the sale of his or her business will pay $476,000 in federal income taxes, an increase of $176,000 from the tax levels in place in 2009.   Of course, state income taxes will be applicable for many business sellers as well.

Potential business sellers are well-advised to consult with their tax advisers to evaluate the potential impact of these pending tax changes on their personal tax situations.  For some, it may not be too late to consummate a sale by year-end.  Others may wish to plan a sale prior to the next round of tax increases.