Getting Down to Brass Tax: Could Expiring Tax Cuts Make 2012 the Year to Sell?

Many Business Owners Likely to Head for the Exits in 2012

By Chris Rowe

As it stands today, the Bush-era tax cuts will expire on January 1, 2013. Given the politics of an election year, it is unlikely that the current administration or Congress will compromise on an extension, resulting in a tax increase for all taxpayers in 2013. Especially hard-hit are business owners. More specifically, those business owners seeking to sell their business in the near term – the next five years – will bear the brunt of the tax increase for the following reasons:

  • Less capital for growth and personal income – Ordinary income tax rates are projected to rise from 35% to 44.6%, while tax rates on dividends will rise from 15% to 44.6%, a 197% increase.
  • Lower net proceeds in a sale – Capital gains tax rates are expected to increase 67% for those in the marginal tax bracket, from 15% in 2012 to 25% in 2013. That would be a tax increase of $100,000 per $1 million of capital gains.
  • Potential double dip recession – Higher rates may translate into low macroeconomic growth due to lower disposable income. Given the fragile economy, many analysts fear that tax increases combined with mounting energy prices and inflation will stall the economic recovery.

Therefore, a business owner should weigh whether the time is right for a sale. Most analysts believe that there will be an uptick in the volume of mergers and acquisitions in 2012. U.S. corporations must decide how to invest more than $2 trillion in cash on their balance sheets, and the private equity industry, which purchases privately held businesses, has $436 billion of investable capital. The result of this phenomenon already has caused prices to increase.

Couple this activity with the spectre of higher tax rates, and many believe the time is right for owners to lower their risk and take some – or all – of their “chips” off of the table.

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