Tax Liability for Small Business
By Randy Alexander
You are probably aware that the current capital gains rate of 15% will increase to 20% after the end of this year unless Congress enacts legislation to extend the Bush tax cut. You may not be aware, however, of the additional Medicare Tax on investment income that will also apply as a result of health care reform legislation passed in 2010. The Medicare Tax adds an additional 3.8% tax for most types of investment income, including capital gains, for single taxpayers earning more than $200,000 and married taxpayers with combined income of more than $250,000.
Therefore, the combined impact of these increased taxes on business owners who sell their business after 2012 could be a 58.7% increase – from 15% to 23.8%! As an example, if the profit from the sale of your business is $250,000 you would pay $37,500 under the current capital gains rate. At the 20% rate those taxes would increase to $50,000. If your income qualifies you for the higher rate of 23.8%, your tax liability would increase to $59,000!
The average time it takes to sell a business is 6 to 18 months: at The CBI+Team our average is somewhat less. In any event, if you are contemplating selling your business please be aware that selling it after this year may significantly reduce the profit from the sale!
If you are planning to sell your business in the near future, now is the time to get started! Delaying that decision could end up costing you a significant amount of money. Please call when you are ready to proceed.
Time is not on your side.