Thinking of selling your business? Uncle Sam is offering a big incentive to act fast. As in, by the end of this year. The capital gains tax rate is set to jump from 15 to 20 percent on January 1, 2011. Surprisingly, many owners are unaware of these potential tax increases, and just as many don’t know how it could affect them.
Upon the transfer of a business, the owner is faced with a tax bill based on the consideration received. The tax rates applied to the proceeds depend on how the purchase price is allocated amongst a variety of asset classes. The two most common tax rates are ordinary income and long-term capital gains. And with the top ordinary income rates at least double long-term capital gains, sellers are particularly interested in having a majority of the proceeds treated as the latter. In the sale of a business, the portion of the purchase price allocated between these tax rates is driven by what the parties can negotiate, as well as the tax code.
Currently, the largest source of Treasury revenues comes from individual income and employment taxes. Our mounting federal deficit all but assures that increases to the long-term capital gains tax will happen. In fact, most accountants and wealth mangers have been advising their clients to consider accelerating any tax liabilities, as we may never see today’s tax rates again.
“[Another] compelling reason to consider selling a business this year, assuming one is otherwise motivated, is the likelihood that not only are capital gains rising, but ordinary income tax rates will likely be rising in the future,” states Jeff Arnol, CPA and managing partner of Illinois accounting firm Kessler Orleans and Silver…
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