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The
Center for Financial, Legal & Tax Planning, Inc. |
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Advisories
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Conditions Are
Favorable: Consider Selling Your Business Now Introduction The time is ripe to sell your business. With the reelection of President Bush,
favorable tax consequences are in place for business sales and succession to
take place. The tax environment under
the Bush administration has been one of low capital gains and low ordinary
tax rates. Both of them being in place
make for a unique opportunity to sell your business. The importance of
taxes is even more important to sales involving small businesses. A $300,000 tax burden will be felt more in
a $1,000,000 business sale (where the owner walks away with $700,000 and
cannot retire) as opposed to a $3,000,000 tax burden where the owner walks
away with $7,000,000 and is nicely set to retire. The following explains why conditions are
favorable to sell a business at the present time. Low Capital Gains Rates The
capital gains rates are currently 5% and 15%.
Historically, the capital gains rates have been as high as 20%. These new rates produce much more favorable
tax consequences than in the past. For
example, if a company is sold and capital gains are determined to be
$1,000,000, in this tax year, the seller of the company would pay $150,000 in
capital gains taxes as opposed to $200,000.
The result is a tax savings of $50,000 for selling now. Low Ordinary Tax Rates Ordinary
tax rates are also some of the lowest they have been in recent times. Since ordinary taxes usually result from
business sales, sellers are at an advantage this year to sell their companies
as opposed to waiting for a future year. For
example, historically the top ordinary tax rate has been around 40%, now the
top tax rate is 35%. Given a taxpayer
has $100,000 in ordinary gains; the taxpayer will pay $5,000 less in taxes
for selling under the lower rates.
Remember, taxes can go just so low before Congress has to raise them
or increase our debt. Special Consideration for C Corp. Asset Sales The taxes at the C
corporation level are the same as they have been in the past. Additionally, it is a long standing fact
that corporations do not benefit from the low capital gains rates which
individuals benefit from. Even though
this might make a sale of a C Corporation seem bleak as far as tax
consequences are concerned, this is not the case. In the recent past, the concept of
“Personal Goodwill” has been developed.
Personal Goodwill results when the owner of the business develops
goodwill outside of the company. This
type of goodwill is taxed only at the shareholder level and not at the
corporate level. The result is
favorable tax treatment at personal capital gains rates. However, since this concept is new, it may
change rapidly. Therefore C
Corporations still face high taxes to operate their business, but low taxes
to sell their business. C Corporation
owners are advised to take advantage of this concept before it is changed or
modified. Future Tax Changes Now
that President Bush has been reelected, there will be changes. Many of the
current tax changes expire during the next four years. Then, what happens is up to Congress! President Bush is determined
to not leave the White House without cutting the nation’s deficit. To do this, he will have to either cut
spending, raise taxes or both. This
leaves the future of tax rates and structure uncertain for the remainder of
his term. Being that this uncertainty
exists in the tax laws; it is advisable to begin your business succession
plan now and not wait. Conclusion From a tax
perspective, now is a great time to sell your business if you are thinking
about retiring. The tax rates are at
low levels. Anyone planning to sell a
business should do so now as long as taxes are a factor in the decision
process. 11-04-2 To receive the Advisory by e-mail,
please send your address to lacie@taxplanning.com |
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The Center for
Financial, Legal and Tax Planning, Inc. |
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Satellite Office: Longboat Key, FL |
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(618) 997-3436 Fax: (618) 997-8370 ©
Copyright 2005. All rights reserved. |
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