Business Sellers - Beware Of Potential Changes In The Capital Gains Tax
Topics: business broker, merger and acquisition, sell a business, capital gain tax, investment banker, M&A
Thinking of selling your business? If you have planned it correctly, most of your transaction proceeds should be long term capital gains. Given the current political climate and the upcoming change in the White House, capital gains taxes will come under attack. If you are a business owner and are thinking of selling your business within the next 5 years, you may want to move up your exit timeframe says Dave Kauppi, President of MidMarket Capital, a Merger and Acquisition Advisor.
The reduced 15% tax rate on capital gains, previously scheduled to expire in 2008, has been extended through 2010 as a result of the Tax Reconciliation Act signed into law by President Bush on May 17, 2006. In 2011 these reduced tax rates will revert to the rates in effect before 2003, which were generally 20%.
Kauppi believes that with the AMT currently targeted for elimination, the $23 billion will be made up by raising taxes elsewhere, and I believe this “owner of capital” tax is the most vunerable for increase. I expect that the long term capital gain tax rate will be moved to an upper limit of 25% by mid 2009 for the high end income bracket.
Translation, the business seller is going to take a big hit on his after tax proceeds if his business sale is concluded after July 1, 2009. Let’s look at a quick example. A 63 year old man started his business 25 years ago and he sells it for $5 million. All his equipment has depreciated so his basis is approximately $0. Under current tax laws he would have a $5 million capital gain from the sale of his business. His after tax proceeds would total $4,250,000.
If he sells after July 1, 2009, and the tax laws change as I am predicting. The same sale would net him $3,750,000. He lost $500,000 because of this change. If you wait until the actual change is voted into law, there will be a rush to the exits causing an unusually high number of business to be for sale. That would further reduce proceeds for the seller because of supply and demand pressures.
The most important tax issue, however, for the business seller continues to be the corporate structure (C Corp, S Corp, or LLC) and whether the business sale is an asset sale or a stock sale. First, unless you are planning on going public or have hundreds of stockholders do not form a C Corp to begin with. Use an S Corp or an LLC. If you currently are a C Corp ask your attorney or tax advisor about converting to an S Corp. If you sell your company within a 10-year period of converting to an S Corp the sale can be taxed as if you were still a C Corp.
Here is what happens when there is an asset sale of a C Corp. The assets that are sold are compared to their depreciated basis and the difference is treated as ordinary income to the C Corp. Any good will is a 100% gain and again is treated as ordinary income. This new found income drives up your corporate tax rate, often to the maximum rate of around 34%. You are not done yet. The corporation pays this tax bill and then there is a distribution of the remaining funds to the shareholders. They are taxed a second time at their long term capital gains rate.
Compare this to a C Corp stock sale. The stock is sold and there is no tax to the corporation. The distribution is made to the shareholders and they pay only their long term capital gain on the change in value over their basis. The difference can be hundreds of thousands of dollars.
This anticipated change to the capital gains tax rates will certainly add to the complexity of selling a business. I can not stress how important a factor taxes will be in your successful business exit. Here is my summary checklist:
Tax Consideration Checklist
Get Good Advice on Original Corporate Structure
If C Corp - Retain Ownership of all Appreciating Assets Outside Corporation - ie Real Estate, Patents, Franchise Rights: avoid double taxation
Look at Deal Economics First, Taxes Second
Make Sure Your Transaction Support Team has Deal Experience
Before You Go To Market, Work With Your Team to Understand Deal Structure vs After Tax Proceeds
You Have the Right to Pursue the Minimum Payment of Taxes - Exercise Your Rights
It Is Never as Effective as an Afterthought
The Pros Can Match Your Desired Outcomes With the Right Tools
Be agressive in your tax positioning of your sale, both with the buyer in your negotiations and with your filing with the IRS. The give and take on deal structure with the buyer is just one of the many factors that you will negotiate along with total purchase price and cash at close.
Dave Kauppi is president of Mid Market Capital, Inc. MMC is an M&A advisory firm focused on middle market strategic business sellers. Dave a licensed business broker and a member of IBBA and the MBBI. Contact (630)325-0123 davekauppi@midmarkcap.com or www.midmarkcap.com
Previous Articles Highlighter:
Tips For A Better Auto Loan (1)
While the loan may sometimes be a good deal - it is not necessarily the best. For you to save money, though, and get a better deal, simply follow the steps below.
Do Your Research To Find Low Cost Car Insurance (2)
However, just because you need car insurance doesn't mean that you must pay a lot of money for it. That's why you should research as much as possible to ensure you get the best deal.
Losing Money On The Bourse? Try Forex Instead (3)
Constant trading is done in the forex markets as time zones will vary and the markets will open in one country while another is near closing. What happens in one market will have an effect on the other countries forex markets, but it is not always bad or good, sometimes the margins of trading are near each other.
All About Fixed Mortgage (4)
The interest rates on fixed rate mortgages are constant and do not change for the number of years that it requires for the customer to pay off the loan. Home loans that do have constant rates typically have a marketed interest rate attached to them before the company actually lends out money to people.
Stocks Are Like Baseball Cards (5)
Eventually it became so popular that they had to move into a building and create a stock exchange. Of course it is much more complicated today, but the roots of stock trading are very similar to modern baseball card trading.
Ways To Become A Successful Real Estate Agent (6)
A great amount of skill is required to be successful in real-estate-business. There are some books that are related to real-estate business and it is possible to learn from these books about being a successful real-estate-business.
How To Use A Home Equity Loan Intelligently (7)
You also want to leave at least 20% of the value of your home untouched - or you will need to pay private mortgage insurance. Joe Kenny writes for the UK personal finance sites offering loans, credit cards, mortgages and insurance products - www.ukpersonalloanstore.co.uk and www.nationsfinance.co.uk.
Types Of Investing In Real Estate And Land (8)
These individual investors gather their funds and other resources and direct their investments only for the real-estate investments. The investment is a kind of joint ownership in this investment group.
Losing Your House Over Credit Card Debt (9)
You have been given an amount of time to pay for your house, and you have done a considerably good job making your mortgage payments during that period of time so far.
Should You Fear A Law Suit From Collections? (10)
Here are a few examples of harassment. If a collection agency calls you in behalf of the same creditor more than three times a week, they are violating your rights.
Hot Texas County-Ft. Bend County New Homes (11)
Bend County new homes are being constructed at record rates because the County itself is growing rapidly. Fort Bend County contains major population centers of Sugar Land (the largest city), Richmond (the county seat), Arcola, Needville, Fulshear, Meadows Place, and Rosenberg.
You Have Rights When It Comes To Collection Agencies (12)
Here are some things that collection agencies do that may be considered harassment, and that you should counteract with a formal complaint if it occurs. The only time of the day that you can be called by a collection agency is between 7:00 in the morning and 9:00 at night Monday through Saturday.
New Homes In Houston-Houston Custom Home Builders (13)
Generally, the average price of new homes in the Houston area is somewhat less than the national average price for new homes, which makes it an attractive place to live and work.
Getting Insurance Can Be Tricky (14)
The obtaining of car insurance can be a complex process because of all the necessary steps that need to be taken. There are also many insurance advisor's available to help customers get through these important steps of buying insurance without much difficulty.
Best Schools In Houston For Quality Education (15)
These ratios help parents see at a glance how much individual help their child is likely to receive in the classroom. However, this ratio is not the only factor that goes to determining the best schools in Houston for your family.
Spouses Debt Is Your Debt (16)
Bankruptcy laws cannot protect both spouses if only one declares individually. The reason you would want to file individually is because of your credit reports. If one person will not be obligated to pay off the debt if the other files for bankruptcy, then the only one that should file is the one responsible for the debt.
Residing In The Top Golf Course Communities In America (17)
It is also important to look at whether there are public or semi-private courses associated with the private course and whether the housing location that you choose will be acceptable in the future.
The Cuban Economy: An Overview (18)
At this point of time, Cuba provided for the highly profitable business of sugar cultivation and its exports. Sugar industry was the crux of Cuba's economy and Cuba rose to become one of the largest producers of sugar in the world.
Top Golf Course Communities In America (19)
Whether you are a retiree or a working person, choosing one of the communities located on or near the first tee means you are minutes from being able to play a round of golf.
Insulation Can Reduce Heating Bills 'For Years' (20)
A study carried out by uSwitch earlier this year indicated that over 64 million pounds is to be wasted this year through "unnecessary" repair bills as a result of not having sufficient service checks and insurance put in place.
Newer Articles Highlighter:
Homeowners Can Consolidate (1)
Including those people who have a house, consolidation of loans is surely available for everyone. Combining your home mortgage with other debts such as car loans, property loans, and other types loans can greatly reduce the amount of money you spend on interest rates.
Planning Ahead For Your Family Financial Security (2)
You can prepare your own wills by purchasing a kit online or at an office supply store. Although this is a good short-term solution, you should consult a lawyer as soon as possible, particularly if you have a lot of assets or there is disagreement in your extended family about who should serve as guardians for your children.
Car Insurance And Your Credit Score (3)
Is it fair for car insurance companies to increase their premiums? This is the crux of the debate, whether or not it is fair for an entire group of people to be penalized for the actions of a few.
Countrywide Mortgage Foreclosures Are Up - What This Means To You (4)
Countrywide began in 1969 as the brainchild of two New Yorkers who decided to start their own mortgage company. At first, it was called Countrywide Funding Corporation. When the founders decided to make the move to California due to the booming real estate market there, they funded VA and FHA loans.
Consolidate Bad Credit As A Renter (5)
When an amount of borrowed money is finally officialized, businesses then begin to watch how well the customer pays off the debt. If you consistently make your payments on time without having any financial struggles, then you will be able to build a strong working relationship with the loan company.
Four Keys To Selling An Apartment Building Yourself (6)
This analysis will also keep the asking price from being lowered as you have given concrete evidence about the value of the building that will be heeded by those interested in apartment investing.
Credit Union Vs. Banks (7)
Topics: debt consolidation loans, loans, bad credit loans When people have great desires to save and protect their finances by using a specific kind of monetary business, there exist several various companies that can help you to do so.
Apartment Buildings Will Make You Wealthy (8)
You will cut your risk by half with duplexes and cut it by even more with quadplexes. This is because the more units you have under one roof the easier it is to absorb tenant turnover.
The Real Estate Investor's Guide To Finding The Perfect Tenant (9)
When interviewing a potential renter, bring your expectations to the table and explain them thoroughly. If you are upfront from the beginning, you have a better foundation to build the tenant-landlord relationship on.
The Pros And Cons Of Landlording (10)
As supply and demand goes, it is reasonable to venture that a landlord could make a lot of money off individuals who, for whatever reason, don't have a place of their own to call home.
Ways To Control Tenants In Your Apartment Buildings (11)
The tenant that moves in and has obvious problems with drugs, there should be steps taken toward property management terminating the lease. These tenants usually have more traffic than the other tenants, and may have other character flaws that will become apparent to property management and tenants.
The Real Estate Investor's Guide To Understanding The Homeowners Association Community (12)
5)HOAs can foster a sense of community which you can use to your advantage when finding that perfect tenant to fill your investment property. Of course, HOAs are like a double-edged sword.
Learning To Win With Stocks Even If You're Losing (13)
Among those that ultimately succeed they face heavy losses in the beginning at least until they work out some sort of system that brings success their way more often than not.
Mortgage Tips For The Frantic (14)
A mortgage is the biggest financial committment most of us will ever make; worth spending a little time on, to get it right! T. O' Donnell is a credit broker running a web site ( www.tigertom.co.uk ) about mortgages, in London, UK.
Ballon Mortgage And ARM Vs. FRM (15)
People should realize what kind of income they have and the various options that will allow them to quickly pay off the loan. There are basically three different kinds of mortgages that people can apply for, which all have their positive points and negative points.
Here's Why The Rich Get Richer And The Poor Get Poorer (16)
His best hope is to work his way up the career ladder or raise enough money to be able to start his own business and hope it becomes successful, but this is not easy and definitely not something everyone can achieve.
The Importance Of Financial Equity In Lender Loans (17)
It can be used for anything you want, a vacation, education, or home repairs, or even the bills that caused your credit rating to plummet to begin with. Having bad credit does not mean that you will never be able to take out a loan again, because you can.
10 Tips On Buying Real Estate (18)
Take as long as you need. This is your financial investment and not anyone else's. T. O' Donnell runs entrepreneur ( www.getintothe.biz ), real estate ( www.ttrealestate.com ) and webmaster ( www.ttwebmaster.com ) sites in London, UK.
Simple Tips For Getting Your Loan (19)
If you find yourself in a dispute with a lender, don't send correspondence to the same address you send your payment. You need to deal with the decision-makers, not the account clerks.
The Environment Of The EU Banking System (20)
These two fields of technology have had the greatest potential for growth and profitability. Currently, as the banks anticipate the rapid IT growth potentials, they continue to give a lot of emphasis on the technology of e-banking-the transactions with banks through Internet-and e-commerce of products and services.
Permalink to Business Sellers - Beware Of Potential Changes In The Capital Gains Tax