Make no mistake; the winds of dramatic fiscal change are bearing down. Tax increases and dramatic public federal spending cuts could create what some are calling Taxmageddon. Lest you find yourself ill-prepared, there are a number of key considerations when preparing for future tax burdens.
Depending on the size of your asset divestiture, the difference in tax obligation from 2012 to 2013 could be quite substantial. Let us do a quick “for instance” to paint the picture more clearly. Let’s say you sell your business in 2012 for $1M. With capital gains rates at 15%, you would hold a tax obligation at $150K. If you wait until 2013, however, your obligation immediately jumps to 23.8% (or $238K) which includes the elimination of the Bush tax cuts and the 3.8% tax increase for the Affordable Care Act.
For those planning to increase the value of their business back to or above 2006/2007 levels, a hold-out may be worth the time and extra stress of working business operations for a few more years. If you expect your niche to increase within that time, or you have an over-confidence bias in your own abilities to grow the company, holding out will most likely be more-than wise.
Some have asked, “is it too late?” For many the answer is a resounding yes. Thorough due diligence alone would take most acquirers into 2013. However, some smaller businesses can find other options helpful to shed tax burdens.
First, perform an assessment of your business, including a deep dive into all its performing and non-performing assets. Where possible, sell off individual assets in 2012 and shift non-competing and non-similar expenses into 2013. Such a strategy will help to have downward effect on your taxable income in both years. It may be late in the season, but luckily it’s not too late.
Second, you should consider selling other investment assets and holding, at least in the short term. Long-term capital gains (capital assets held >1 year) could be sold for a recognizable gain in 2012 with far less tax than in 2013. If you have been thinking of divesting other investments, besides your small business assets, now would be a great time to pull the trigger. Other investments will most likely be much more liquid as well, giving you the ability to sell quickly with a profit and hunker down for next season.
Avoiding tax should not be the only reason you sell in 2012, but if you had a previous inclination to sell all or part, for any number of reasons, now would be a good time to do so. Individual circumstances will vary in determining which is right for you, but proper planning in either direction will help to alleviate at least some of the sting inherent in paying and managing tax liabilities this year and beyond.