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.