News Release
Increased M&A Activity Anticipated From Higher Capital Gains Tax Rates
Chicago, January 21, 2010 − Business owners contemplating the sale of their business should consider the proposed tax rate hikes beginning in 2011. The likely result of these 2011 tax increases is to encourage selling before the end of 2010. As a first step, business owners should consult tax advisors about the significant adverse impact that the proposed tax rates will have on after tax sale proceeds.
Bush era tax cuts scheduled to expire at the end of this year will cause long-term capital gain rates on higher income taxpayers to rise from 15% to 20% for years after 2010. In addition, the U.S. House of Representatives has proposed a surtax of 5.4% on the income of high income taxpayers. Assuming the 15% rate is not extended and the 5.4% surtax is enacted, the combined Federal tax rate on capital gains will rise from 15% to 25.4%, an increase of 69.33%.
"Potential business sellers need to know about the proposed changes in tax legislation and many may be disappointed when they calculate the tax increase on their sale price," states Howard I. Bernstein, Principal of the J.H. Chapman Group, LLC, a leading investment bank in the food industry. "Planning for this proposed tax change is likely to cause more businesses to be placed on the market now so the sale can be closed in 2010," he added.
Bernstein outlined an example of the sale of a company being sold for $100,000,000 with a tax basis of $30,000,000, resulting in a long-term capital gain of $70,000,000.
Federal Tax Rate Amount of Tax After Tax Proceeds
2010 15.0% $10,500,000 $89,500,000
After 2010 25.4% $17,780,000 $82,220,000
Difference $ 7,280,000
In this example, the purchase price would have to increase by $9,758,710 or 9.76% just to make up the $7,280,000 the seller loses because of the higher Federal tax rate which may be in effect after 2010.
The possibility of higher tax rates on business sales after 2010 does not necessarily mean that business owners should rush to sell, as there are other factors that need to be considered. Owners who make the decision to sell in 2010 need to start the process now or before May 2010 in order to conduct an orderly sale process to be completed by year-end.
