Why Your Business Will Be Worth As Much As 8.8% less in 2013

Remember that bill congress needed to pass to see what was in it?  Well, surprise!!  The Medicare Tax has been expanded to include almost ALL income (active and passive) over $200k for singles and $250k for couples.  This even includes the gain on the sale of a personal residence over the exclusion amount. 

If the Democrats win it is likely the capital gains rate will also increase to 20% and some are saying it could go to the pre-1996 level of 28%.  Here is an example of how it will work:

Let’s say you are married and your annual income from your business is $125,000.  Your spouse works elsewhere and earns an income of $50,000 for a combined income, or AGI, of $175,000.  (NOTE: for most of us the trigger will be our Adjusted Gross Income, NOT our Net Taxable Income).  If you realized a $1,000,000 taxable gain on the sale of your business this year (2012) your taxes on that sale would be 15% or $150,000 leaving you $850,000.  If you sell the business under the same circumstances in 2013 your capital gains tax is likely to be $200,000 (20%) and some think it may be $280,000 (28%).  Then comes the Medicare tax of 38% on the amount over $250,000.  In your case this would be AN ADDITIONAL $35,150 on top of the capital gains tax!!! 

 

 

 

 

 

 

 

 

 

 

 

Of course with any tax change there are nuances and it is not my purpose to practice taxation (or, for that matter to influence your vote).  If you are at the point where you are thinking about the possibility of selling the business (whether to an acquisition firm or to a family member) better to do it this year than next.  If you are enjoying what you are doing and want to stay in the game then it is likely (at least in many instances) that the appreciation in value over time will partially offset this loss in value.

See your tax planner for specific information.

This Post May Not Be Reproduced Without Permission. You may, of course, forward it as a link in its entirety to any parties you feel may be interested.  If you publish your own blog or electronic editorials and want to link back to this article contact me at alan@alancreedy.org

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