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High-Tech & Obamacare

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.

14 comments on “High-Tech & Obamacare

  1. FLYINGSCOT
    July 26, 2012

    I wonder how this rate compares to other industrialized nations and whether things might change in this election year?

  2. Brent Lorenz
    July 26, 2012

    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.

  3. Houngbo_Hospice
    July 26, 2012

    @Brent,

    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? 

  4. Houngbo_Hospice
    July 26, 2012

    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. 

  5. Clairvoyant
    July 26, 2012

    Wow, that is quite the tax rate! However, it may be good in being able to possibly lower tax rates for low income earners.

  6. Brent Lorenz
    July 26, 2012

    Hospice,

    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.  

     

     

  7. JLS
    July 26, 2012

    I see nothing in this article about Obabmacare!  Was that just to get us to read an article that has not new information in it about anything?

  8. Brent Lorenz
    July 26, 2012

    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.  

  9. elctrnx_lyf
    July 26, 2012

    Does this new tax law deter any acquisitions from technology companies?

  10. Brent Lorenz
    July 27, 2012

    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.

     

     

  11. Himanshugupta
    July 28, 2012

    Brent, i want to ask not directly related but what do you think will happen to the manufacturing cost and how will this affect the government's plan to push companies to increase jobs in USA either by creating them or bringing them back. 

  12. ITempire
    July 29, 2012

    I dont know whether tax year 2013 in US is beginning from july 2012 or january 2013. If its January 2013, then certainly the sellers of their business will quote higher prices till December 2012 in order to put pressure on buyers that they need to buy before that period to avoid a higher rate tax levy. 

  13. ITempire
    July 29, 2012

    @ Hospice

    government will tax incomes of more than €1 million ($1.25 million) at a rate of 75 percent”

    Now this is why EU has been struggling to attract investors. I just dont understand that why EU is so eager to push investors out. Any tax rate above 40-50 % is just unacceptable. Why dont they forcefully nationalize the companies working there if the government is so interested in their profits.

  14. itguyphil
    July 29, 2012

    Hmmm. Not much usually changes in election years. People/Politicians do no like too much change during the year because it can adversely affect their platform.

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