The Effect of Capital Gains Taxes on Business Owners


By Mac Holley - Jacksonville, Florida. If you are considering selling a business, you should measure the impact of pending tax changes The special tax rate on long-term capital gains is set to expire on December 31, 2012. If Congress does not take action, the 2013 tax on long-term gains from selling a business will increase from 15 to 20 percent. Additionally, the distinction between ordinary and qualified dividends will disappear, and all dividends will be subject to the ordinary tax rates. Also beginning in 2013, capital gain income will be subject to an additional 3.8 percent Medicare tax. For business owners intending to sell in the next 18 – 24 months, this may represent a significant amount of money – and for many these changes will compel a decision to accelerate a sale before year-end 2012. Others may explore a partial sale in 2012 to lock in capital gains tax on the portion of the business sold to fully grasp the impact of tax increases, consider the following scenario: a business owner sells his/her company, which results in a $50 million capital gain:

At the current 15 percent capital gains tax rate, the owner will net $42.5 million before state and local taxes. However, at a potential effective tax rate of 23.8 percent, the same deal completed on or after January, 1, 2013, will net the owner $38.1 or $4.4 million less.

The impact of the capital gains tax is an important factor to consider when deciding to sell your business in the near-term. With the pending tax changes, owners should seek information and counsel from an advisory firm about the potential consequences of a sale or developing another strategy for a business transition that will have benefits in today’s market and beyond.

If you have any questions about the effect pending tax changes on the value of your business, contact Heritage Capital Group.

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