I just finished reading an article in the Wall Street Journal about the stampede by many business owners to sell their businesses before January 1, 2013 — the date capital gains taxes are due to increase in the United States. According to the article, the tax rate on capital gains will increase from the current 15 percent to at least 23.8 percent. So, for every one million dollars of gain, that’s the difference between paying $150,000 in taxes today, or $238,000 in taxes starting January 1. That’s an additional $88,000 going to Uncle Sam instead of into an owner’s pocket. Says compressed-gas business owner Bert Wolf (pictured above), who recently sold his company to Praxair, "It just made more sense for me to take my chips off the table and go do something else." Wolf went on to say that if he waited until after the tax increase to sell, he would have to expand the business at the current rate "for at least 3 or 4 more years to achieve the same after-tax sales dollar."
As it turns out, no one really knows what is going to happen with the capital gains tax rate after the U.S. Presidential election on Tuesday. Politics being the way they are, there are all sorts of possibilities, and it’s nearly impossible to be certain today what will happen on January 1, 2013. Thus the desire on the part of many business owners to sell their businesses now, while that 15 percent capital gains rate is a sure thing.
Assuming the government does nothing (something the government has gotten pretty good at doing), the capital gains rate will automatically rise to 20 percent on January 1st. A provision in Obamacare will push this rate up an additional 3.8 percent, and possibly more, on higher-income households depending on negotiations between the Obama administration — which will be in power at least through Inauguration Day, January 20, 2013 — and Congress. The final outcome of these negotiations is impossible to predict today, creating additional uncertainty among business owners. But that’s not all. Other tax breaks for high earners are also scheduled to expire at the end of 2012. This will push the capital gains rate up to at least 25 percent. Unless of course whoever is President on January 1st works with Congress to maintain the current 15 percent rate — or increase it to something even higher.
Confused yet? If so, you’re not alone.
If you’re the owner of a business and you’re thinking of selling it anytime within the next five years, you could potentially save yourself many tens or even hundreds of thousands of dollars or more in taxes by selling your business in 2012. And that’s nothing to sneeze at.