Data shows that sales of small businesses are slightly on the rise. If you’re thinking about selling your business, this year may be the best time to do it. The appraised value of your business and your personal goals are, of course, the primary factors in deciding when to sell a business. However, you may realize a greater after-tax return in 2012 than if you delay a sale until 2013 or later.
Here are three tax reasons why selling in 2012 may prove advantageous.
1. Low capital gain rates
The historically low capital gain rate of 15 percent for most capital gains applies for 2012. It is unclear what the rate will be after 2012; much depends on election results, the state of the economy, and other factors.
If allowed to expire as scheduled at the end of 2012, the capital gain rate could revert in 2013 to its previous level of 20 percent. A five percent increase costs you $50,000 in additional federal income taxes for every $1 million in profit. Alternatively, Congress could raise the rate even higher, or create a higher rate exclusively for high-income taxpayers.
2. No additional Medicare tax
On top of any additional capital gains tax, it may cost you nearly four percent more in new taxes for delaying a sale to 2013 rather than completing it in 2012. The reason? There is an additional Medicare tax of 3.8 percent that begins in 2013 on unearned income (i.e., investment income). More specifically, the tax is 3.8 percent of the lesser of net investment income or modified adjusted gross income (MAGI) in excess of the following amounts based on filing status:
- $250,000 for joint filers
- $200,000 for singles
- $125,000 for married persons filing separately
Net investment income includes gain from the sale of property (other than in the course of business). Thus, it applies to the sale of an interest in a business. However, when selling an interest in a partnership, limited liability company or S corporation, only the net gain attributable to property held by the entity which is not attributable to an active trade or business is taken into account. This technical rule means that not all of an owner’s gain may be subject to the Medicare surtax tax; some may be exempt because it is not viewed as net investment income.
3. Other unfavorable tax rules after 2012
Tax changes on the horizon may support making a sale now:
- Federal income tax rules may make it more costly to operate a business in the future, so you may want to get out while you can. For example, starting in 2014, companies with 50 or more employees are required to provide health coverage (unless the U.S. Supreme Court declares this to be unconstitutional). This could depress the price of a business on the sales block.
- Federal estate and gift tax rules, which are highly favorable in 2012, are unclear thereafter. If an owner sells a business in 2012, he or she may want to engage in estate planning and the opportunities for doing this successfully abound in 2012. For example, there is a $5 million federal gift tax exclusion that can be used to gift some of an owner’s profits from the sale to family members on a gift-tax-free basis. What will happen to estate and gift tax rules in 2013 is anyone’s guess.
When selling a business, taxes should be factored in to determine how much of the profits from the sale you get to keep. If you decide to sell, be sure to work with a knowledgeable tax advisor so that the deal is structured for optimum tax advantage.
Barbara Weltman is an attorney, author of J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.