Tax Hikes are Coming. Time to Sell?

Reprinted with permission from Inc.com.

First, the tax facts. We know only one thing: Taxes will increase next year.

We don’t know what bipartisan compromise may be worked out in the coming months. But in the absence of a compromise, the Bush tax cuts will expire on New Year’s Eve, and here’s what will happen to them (based on top marginal rates):

  • Federal Income Tax will go from 35% to 39.6%
  • Federal Capital Gains Tax will go from 15% to 23.8%*
  • Estate Tax Exemption will change from $5.1 million to $1 million

(* including the 3.8% surcharge for Affordable Health Care)

So, if you sold a business with a $1 million capital gain, you would keep $850,000 of that gain if you sold it on December 31, and only $762,000 if you sold it the next day. One day would cost you $88,000.

Should You Rush to Sell?

First, you should sell when it’s right for the business and right for you, not when it’s right for taxes. Second, it takes time to sell a business, and if you’re not already in negotiations, it’s unlikely that you can hit year-end.

However, if you are already working on a sale, there’s a big incentive to ink the deal before the ball drops in Time Square. I helped sell a typography business years ago when there were tax motivations to close before year-end, and we signed the papers at 11:55 p.m. In a different bicoastal deal, signed with faxed signatures, we moved the physical location of signature collection from New York to San Francisco, to get an extra three hours.

If your buyer is smart, he or she will also understand your tax incentive, and may negotiate for a lower price to sign before 2013. But this year, there is plenty of tax benefit to share between buyers and sellers. The attorneys will be working late.

Sell Shares?  

You may be in a position to sell shares in your business, rather than the whole business. For instance, if you have outside investors who already know and like your company, they may be interested in purchasing some of your shares.  If so, do it before January 1.

Or sell shares to your employees. Do you have younger partners, senior employees, or family members who want an equity stake? Now’s the time to find out. You can give them a loan or make an installment sale to help get the deal done. For a larger business, an Employee Stock Ownership Plan may offer tax benefits plus a flexible ownership structure.

Gift Shares?

The other tax benefit on the chopping block is the estate and gift tax exemption, which is scheduled to drop from $5.1 million to $1 million per person. If your business is worth a lot of money, now’s your chance to transfer partial ownership to your children tax-free.

This can be as simple as an outright gift of shares to your daughter or son. Or it could be in the form of a family partnership or trust that allows you to transfer economic benefits without giving up control.

If you’re gifting a minority stake, often you can discount the value of that stake for tax purposes, which allows you to transfer more equity value within the $5.1 million credit. And future appreciation on the transferred equity will also escape estate taxes, which are scheduled to go from 35% to 55% on January 1.

Bottom Line: Don’t Try This Alone

These are particularly gnarly issues in a year of such tax change and uncertainty. So please talk to your tax accountant or tax attorney before you do–or don’t do–anything. But talk to them now. In late December, you may get a busy signal.


The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

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