The US Supreme Court's recent decision backing the Affordable Care Act will certainly affect technology businesses in many ways. Whether you support Obamacare or not, business owners and investors need to be armed with the facts about the impact of the ACA, specifically the tax affects.
Specifically, ACA imposes a new 3.8 percent tax on capital gains starting in 2013. To be clear, that additional tax does only apply to individuals with incomes exceeding $200,000 or married couples exceeding $250,000. However, obviously the sale of most technology businesses will far exceed that threshold in the year that the business is sold.
The current capital gains rate is 15 percent, which was enacted as part of the George Bush tax cuts. Currently, the Bush tax cuts are set to expire at the end of this year, which would bring the capital gains rate back to 20 percent, plus the ACA charge. While the president seeks to keep the Bush tax cuts for those under the $200,000/$250,000 limit, again that limit would be exceeded in selling a typical technology business.
The likely scenario is that starting in 2013, capital gains for a typical technology business sale will rise to 23.8 percent, which is a 59 percent increase from 2012 levels. If for example, a business is sold in 2012 for $20 million and $10 million is capital gains, the tax due would be $1.5 million. If sold in 2013, that tax bill would be $2.38 million.
Again, the goal of this blog is not to debate the fairness of the tax increase, which can be discussed elsewhere. Business owners just need to understand the facts so that they can plan accordingly. There are many factors to consider when deciding on the time to exit a business, with tax implications only being one of them. An M&A advisor can help you understand exit options and the process for maximizing the value of your business, given your unique situation.
In addition, any business owner considering selling his or her firm should also consult a tax advisor and/or wealth advisor for more guidance on their specific situation.
That is a great question. In short, a 24% personal capital gains rate is high relative to most of the rest of the world, although some countries like Denmark go as high as 45%. Many developed and developing nations actually have a 0% personal capital gains rate in order to encourage investment.
Thanks for the blog. As you said, tax is not the only parameter to consider when you plan to sell your business. My question is whether "business selling" will contribute that much to the Obamacare funds. What is the average number of companies sold annually in the US?
French prime minister has recently announced that the "government will tax incomes of more than €1 million ($1.25 million) at a rate of 75 percent". I suppose that is more than what is practice in most conutries.
According to Mergerstat, which is an M&A publication that we subscribe to at The McLean Group, in the last 12 months ending 6/30/12, there were 9,163 acquisitions in the US. (These would not include retail businesses, mom and pop shops, etc.)
Our of those, you have:
$1 billion+ 153 deals
$1000M to $999M 697 deals
<$100M 1024 deals
Undisclosed: 6,696 deals
Most undisclosed deals are <$100M because they are smaller and not required to report publicly to shareholders.
So what this means is a lot of middle-market businesses being sold, call it 7,000+, most subject to significantly higher capital gains tax starting next year.
The key point is that Obamacare imposes an additional 3.8% to the capital gains tax rate. Combined with the expected expiration of the Bush tax cuts from 15 to 20%, this increases capital gains to 24%.
I agree that it is not exactly breaking news, but an 8% increase in capital gains is a significant consideration for business owners planning an exit strategy for this year versus next year.
Obamacare should actually positively impact M&A activity in tech sectors that support some of the changes in health care. This could be informatics, remote patient monitoring, device applications, etc. Change creates new opportunities, and companies that want to take advantage of the change but can't develop the technology quickly and/or cost-effectively enough will seek acquisitions to fill the gaps.
Otherwise, I don't think it will necessarily deter tech acquisitions, it just clouds the vision of companies either seeking to acquire or be acquired. Predictably, with taxes going up, you have a lot of mid-sized companies (tech and otherwise) trying to consumate a transaction this year if possible, in order to save the additional 8% tax.
With an election year, then there is the indecision - will taxes go up only 3.8% for Obamacare, or will they go up 8% with expiration of the Bush tax cuts? Or will a deal be made to extend the Bush tax cuts? Would a new administration repeal Obamacare and the 3.8%?
What we see in middle-market M&A is the same thing that we saw 2 years ago when the Bush tax cuts were set to expire the first time. Companies that feel that the time is good to sell go ahead and start the process now so they can take advantage of lower taxes this year. This time around it seems extremely likely that one way or another, capital gains taxes will go up, whether it ends up being 3.8%, 8%, or even higher.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Archived Dialogues
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Euro-Crisis: What It Means for High-Tech Firms Join EBN Editor in Chief Bolaji Ojo and Contributing Editor Jennifer Baljko on Thursday, July 12, at 10:00 a.m. EDT for a Live Chat on high-tech and Europe's economic difficulties.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.
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