If you’ve followed this blog over the past couple of years, you know that I keep an eye on national issues that affect my clients – who are mostly mid-size business owners that are making plans to exit their business. In particular, I’ve written several past posts and articles (such as my article at AllBusiness.com entitled “Avoid the Rush: Consider the Capital Gains Tax Increases Now”) to alert my clients and readers about tax policies that would make a substantial difference in how large a return they would realize from the sale of their business.
Yesterday, it seems, progress was made towards a bipartisan agreement to extend the Bush-era capital gains tax cuts that are set to expire a month from today, on January 1, 2011. President Obama met with congressional Democrats and Republicans in a two-hour closed-door session to try to reach agreement on what should be done about those cuts. If they are allowed to expire as scheduled, the tax rate for the highest income brackets will increase to 20% from the 15% rate that has been in effect since 2003 for capital gains transactions.
The final outcome is not yet determined, but apparently those involved in the discussion left the meeting hopeful that both sides would find a compromise – at least for the time being – that would keep the tax cuts in place, not just for the lower tax brackets, but across the board. “We’ve got a path forward” on the tax-cut issue, said one prominent Democrat attendee.
Extending the cuts will require both sides to compromise on issues that have deeply divided them. But this meeting resulted in a bipartisan group with a mission to gain agreement about the tax cuts within the next few weeks, certainly before the end of the year. Even though many Democrats in Congress are opposed to extending the cuts for those with an income over $250K, a deal to extend all tax cuts temporarily would give time for more work on the issue.
Given that most of the gains on the sale of a business are capital gains, the 5% tax increase is substantial. If you are a business owner looking to exit your business, my advice is to keep an eye on the decisions made by lawmakers between now and New Year’s.
