If you have been thinking about selling your business, you might want to consider a sale before the end of 2012. Otherwise, the tax consequences could be noticeably worse.
For shareholders who have held their shares for more than one year, the long-term capital gains rate will be 15% through the remainder of 2012 (assuming the taxpayer is in the 25% tax bracket or higher for total income). This 15% rate is set to expire at the end of 2012 with the other “Bush tax cuts”, and long-term capital gains are generally expected to be subject to tax at a rate of at least 20% thereafter.
The Patient Protection and Affordable Care Act enacted in 2010 (Obamacare) includes a new Medicare tax that will apply commencing in 2013. This tax law change imposes an additional 3.8 percent tax on the lesser of a stockholder’s (i) net investment income or (ii) modified adjusted gross income (MAGI) in excess of $200,000 (for single filers) or $250,000 (married, filing jointly). MAGI includes, and “net investment income” (for purposes of this rule) probably includes, capital gains from the sale of a business. Thus, an owner of a business could potentially be subject you to an additional 3.8% tax on the sale of the business if the transaction occurs after year-end 2012.
Max has owned and operated a company for many years. He owns 100% of the shares of the company and his tax basis in the shares is close to zero. If Max were to sell his shares and receive, say, $10 million in net proceeds, the tax difference between a sale in 2012 and a sale in 2013 could be close to $900K for Max.
Of course, the Bush tax cuts may be extended, including the 15% long-term capital gains rate, and Obamacare may be struck down by the U.S. Supreme Court. Then again, maybe neither of those things will happen. We won’t know about the Bush tax cuts until long after the November elections, probably not until the eve of their expiration. Unless there is a Republican sweep in November, a compromise on the tax cuts seems likely and the 15% capital gains rate looks vulnerable in such a compromise. We should have a decision from the Supreme Court in June or July, but this does not help very much for planning purposes. First, a Court decision in mid-Summer does not allow much time for a sale of a business before year-end. And second, even if the Court declares invalid the part of the Obamacare legislation that requires individuals to obtain health care coverage (or pay a penalty) unless they are covered by an employer’s plan, it is quite possible, even likely, that the Court will not invalidate the remainder of the legislation. Such a result could make Obamacare untenable from a cost perspective, but that is not the Court’s problem. It would be a problem for the White House and Congress–a problem that would not be touched until after the November elections. If parts of Obamacare survive the ensuing political battle, the Medicare tax is likely to be one of those parts. The 3.8% tax has not been a particularly controversial issue in the heated debate over Obamacare, and the government certainly needs the revenue.
Information in this blog is for general educational purposes only and should not be construed as legal advice or a legal opinion on any specific facts or circumstances.