Selling Your Business in 2013
January 07, 2013 at 3:27 PM
We found some great intelligence on the tax implications for sellers of businesses in 2013,
in the attached article that Monty Walker, CPA turned out immediately after Congress’s last minute deal to stave off the “fiscal cliff”.
When you sell a business, you are creating a taxable event, and your proceeds are going to be taxed as either ordinary income or as capital gain. The bad news is that for single filers over $400,000 and joint filers over $450,000 the rates on both types of income have gone up.
The good news for sellers is that the capital gains rate still remains at about half that of the ordinary income rate. You can still take advantage of that lower rate with careful planning and structuring of your transaction.
Two key members of the team you are assembling to sell your business can help make sure the total tax bite is more favorable to you than to the tax man. First, a good CPA like Monty is going to work with you ahead of time in your financial planning and in analyzing the numbers so you know what to expect.
Second, and equally important, is that your M&A Advisor or Business Broker will develop the plan for positioning your company for sale and negotiating the deal to your benefit. Part of our job as an Advisor is finding the right buyer. The right buyer is the one who is so motivated to acquire your business that they will address such issues as how deal structure affects the taxation of proceeds to the seller. The deal has to work for both sides, and your M&A Advisor will raise the issues, set expectations and keep the deal moving to the closing table.
2013: some new rules and some new rates – but still a good environment for selling your business. With the right advice, that is.
Congress Passes American Taxpayer Relief Act of 2012
Monty W. Walker, CPA, CGMA, CBI
During the early morning hours of Tuesday January 1, 2013, the Senate passed a bill that had been heralded and, in some quarters, groused about throughout the preceding day. By a vote of 89 to 8, the chamber approved the American Taxpayer Relief Act, H.R. 8, which embodied an agreement that had been hammered out on Sunday and Monday between Vice President Joe Biden and Senate Minority Leader Sen. Mitch McConnell, R-Ky. The House of Representatives approved the bill by a vote of 257-167 late on Tuesday evening, after plans to amend the bill to include spending cuts were abandoned. The bill now goes to President Barack Obama for his signature.
With some modifications targeting the wealthiest Americans with higher taxes, the act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), and Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). It also permanently takes care of Congress's perennial job of "patching" the alternative minimum tax (AMT). It temporarily extends many other tax provisions that had lapsed at midnight on Dec. 31 and others that had expired a year earlier.
Among the tax items not addressed by the act was the temporary lower 4.2% rate for employees' portion of the Social Security payroll tax, which was not extended and has reverted to 6.2%.
Here of some of the act's key features impacting businesses:
Individual tax rates
All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).
Capital gains and dividends
A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.
Alternative minimum tax
The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.
Estate and gift tax
The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax "portability" election, under which, if an election is made, the surviving spouse's exemption amount is increased by the deceased spouse's unused exemption amount, was made permanent by the act.
Business Specific Provisions
Reduction in S Corporation Recognition Period Built-in Gain - Code Section 1374(d)
An S corporation generally is subject to the built-in gains tax during its "recognition period." The recognition period is defined as the 10-year period beginning with the first day of the first tax year for which the corporation is an S corporation. For years 2012 and 2013, this recognition periodic reduced from 10 years to 5 years. Thus, no built-in gain tax will be due if an S corporation is 5 years into its built-in gain period by the beginning of Years 2012 or 2013.
100 percent gain exclusion on certain small business stock - Code Section 1202
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) increased the capital gain exclusion from the sale of Qualifying Small Business Stock "QSBS" held more than five years to 100% for qualified stock acquired after September 27, 2010, and before January 1, 2012. This 100% gain exclusion has been extended to included stock acquired before January 1, 2014. Thus, qualified stock acquired in Year 2012 and Year 2013, if held for a period of at least 5 years, will be subject to a 100% gain exclusion when sold.
Expensing limit for section 179 property set at $500,000 - Code Section 179
For tax years beginning in 2012 and 2013, the maximum amount a taxpayer can expense is $500,000 and the phase-out threshold amount is $2 million.
Treatment of certain real property as section 179 property - Code Section 179(f)
For tax years beginning in 2012 and 2013, up to $250,000 of qualified real property costs may be included as a part of the section 179 deduction limit. Qualified real property includes, (I) Qualified leasehold improvement property costs as defined by IRC Sec. 168(e)(6), (II) Qualified restaurant property costs as defined by IRC Sec. 168(e)(7), and (III) Qualified retail improvement costs as defined by IRC Sec. 168(e)(8).
Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements - Code Section 168(e)
For tax years beginning in 2012 and 2013 (I) Qualified leasehold improvement property as defined by IRC Section 168(e)(3)(E)(iv), (II) Qualified restaurant property as defined by IRC Section 168(e)(3)(E)(v), and (III) Qualified retail improvement property as defined by IRC Section 168(e)(3)(E)(ix), will be depreciated over a 15 year recovery period as opposed to a 39 year recovery period.
In addition to the various provisions discussed above, some new taxes also took effect January 1 as a result of 2010's health care reform legislation.
Additional hospital insurance tax on high-income taxpayers.
The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer's spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.
For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.
Medicare tax on investment income.
Code Section 1411 imposes a tax on individuals equal to 3.8% of the lesser of the individual's net investment income for the year or the amount the individual's modified adjusted gross income (AGI) exceeds a threshold amount. For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.
For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separately, it is $125,000; and for other individuals it is $200,000.
Net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.
Medical care itemized deduction threshold.
The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013-2016, if either the taxpayer or the taxpayer's spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.