WEST MICHIGAN — If you’re thinking about selling your business and retiring — and plan to do the deal now, rather than in 2013 — you can save on the federal taxes you’ll have to pay on the transaction.
That’s because come Jan. 1, and barring any action by Congress in the lame-duck session or early next year, more than $600 billion in spending cuts and tax increases take effect as many of the tax cuts enacted in 2001 under former President George W. Bush will expire.
Among the coming changes: an increase in the capital gains tax to 20 percent from the current 15 percent.
The increased tax burden — part of the approaching “fiscal cliff” — makes now a good time to sell a business for those who have been considering it and have a willing buyer, experts say.
“If you are contemplating selling a business, there’s a pretty valid reason to get it done before the end of the year,” said Tim Anderson, chief investment officer at Legacy Trust in Grand Rapids.
Anderson has seen some activity among Legacy Trust clients who want to sell a business and want it done by year’s end because of the tax implications. In one case, “If it doesn’t get done by the end of the year, it doesn’t get done,” he said. “They probably retain the business.”
Mitch Stapley, chief investment officer for Fifth Third Asset Management, said he’s aware of at least four pending deals involving clients that want to sell a business prior to 2013 to avoid paying a higher tax rate on the sale.
Whatever business owners choose to do, however, Legacy Trust’s Anderson advises them not to make decisions solely on the tax implication. Good business sense still needs to apply to any transaction, he said.
“Make the deal on whether it’s a good deal. You can’t let the taxes be the driver,” Anderson said. “If the economics makes sense, forget the taxes. If it makes sense, it’s going to make sense on an after-tax basis.”
The move by some business owners who were already considering selling to expedite the process is just one reaction to the pending expiration of the Bush-era tax cuts, which were extended in 2010 to the end of 2012.
Anderson and others say their clients are also looking to make gifts now rather than in 2013 to mitigate their burden under the higher tax rates. The changes have clients feeling uneasy and calling them for advice.
“It’s creating a lot of anxiety,” said Brian LaFrenier, a CPA partner at Beene Garter LLP in Grand Rapids.
“No one knows yet where everything is going to land,” LaFrenier said. “They’re asking us to peer into our crystal ball and tell them where things are going to land.”
Neither he nor anybody else really knows. The resulting anxiety is on top of unease and uncertainty about the U.S. economy and where it’s going following the presidential election, LaFrenier said.
One thing is certain, though: The coming changes, without any action by Congress, will produce a higher tax burden for businesses and individuals.
“It’s going to affect everyone a little differently,” LaFrenier said. “If Congress allows the Bush-era tax cuts to expire, all individual taxpayers will see an increase in ordinary income tax rates.”
For a married couple filing jointly with a household income of more than $217,000, the tax rate increases to 36 percent from 33 percent and from 35 percent to 39.6 percent for married taxpayers with joint taxable income of more than $388,350, according to a Beene Garter analysis.
And it’s not just high net worth individuals or high wage earners that will pay more when the Bush tax cuts expire.
LaFrenier points out that a household with an income of more than $70,000 will move into a higher tax bracket as well, to 28 percent from 25 percent, as of Jan. 1.
And if you are an investor and own securities, take note: The federal dividend tax increases from 15 percent to 28 percent or 39.6 percent, depending on your tax bracket, he said.
“If there are planning issues that clients are considering, such as selling stocks or selling the business, we’re really encouraging them to move forward with that now. Let’s get it locked in at some of these lower rates,” LaFrenier said.
Among the steps that experts in the field are seeing are:
• Some business owners are expediting the planned exit or sale of a business to avoid the higher capital gains tax rate in 2013.
• Business owners, where they have the cash flow, are planning to award larger bonuses this year for themselves and employees. Business owners considering this option need to make sure they don’t violate loan covenants with their bank, LaFrenier said.
• Individuals with a high net worth are distributing more of their assets through gifts to their children while the federal gift tax is lower. The exemption on the estate tax falls from $5.1 million back to $1 million on Jan. 1 and the tax rates increase from 35 percent to 55 percent.
• Individuals, if they were already considering it, are selling stocks this year rather than in 2013 to avoid the higher capital gains tax and higher dividend tax.
Among the bits of advice Miller Johnson partner Raj Malviya, an estate and tax attorney, offers clients these days is to consider gifting appreciated assets, such as dividend-paying stocks to family members in a lower tax bracket and investing in growth assets.
Along with the 2001 tax cuts, several exemptions and breaks could also expire, Malviya said.
Whatever they choose, clients wanting to avoid the hit from the higher tax burden need to start weighing their options now to make decisions in time to complete the transaction by the end of the year.
“We’re running into a time crunch,” Malviya said. “The best advice we can give them is lay out the options and facts and circumstances and implement a plan.”