Exiting a private company can be a taxing matterWhen a private company owner decides to liquidate their investment, they will ultimately have to address the tax consequences in one manner or another.  In many cases, liquidating involves transferring the business to the next generation, which may have gift and estate tax ramifications.  In other cases, all or some material element of an exit strategy may involve a taxable sale transaction of some kind.  Typically, a significant portion of taxable income resulting from such a transaction will be taxed as a long-term capital gain.

Long-term capital gains are taxed at the Federal level at a maximum rate of 15 percent for 2012.  In 2013, the Bush-era tax cuts on long-term capital gains are scheduled to expire, which would result in an increase in the maximum rate to 20 percent.  In addition, a tax provision of the new healthcare legislation, the Patient Protection and Affordable Care Act, is scheduled to take effect in 2013, which will result in a new 3.8 percent tax on investment income for wealthier taxpayers (investment income is defined to include capital gains).  Plus, the return of provisions in 2013 that limit the benefit received from itemized deductions can result in a further 1.2 percent indirect tax increase, as capital gain income is included in the base used in measuring this limitation.

The situation is complicated by the fact that prospects for where tax rates will ultimately settle after the November election are, at best, are uncertain. Events of the past few years suggest that, absent control of both legislative houses and the White House by the same party, gridlock on significant new tax law may be on the foreseeable horizon.  Although, it’s worth noting that the tax rate changes described above don’t require affirmative political processes to occur; rather, they come into play if nothing happens.

In short, if you’re anticipating a taxable sale as a material component of your exit strategy at some point in the near future, time is of the essence.  Begin by identifying and evaluating your options. A short-term decision may be appropriate to buy some time until after the November elections, when the tax picture may become more clear and you may be in a better position to move forward with any particular transactions.


Subscribe to the blog