Unless you are marooned on an island somewhere (or are an SEC football fan), you are probably aware that one of the most talked about consequences of the mid-term congressional elections was that Congress might extend the so-called “Bush Tax Cuts.”  These rates were enacted early in President Bush’s first term, but with a provision that rates would automatically increase at the end of 2010.  With the economy at a standstill, however, many feared that an increase in tax rates would further dampen growth.  On the other hand, it was pointed out that extending the lower rates, even for a limited time, would also add to the deficit.  After months of political inaction, a dramatic mid-term election and a special post-election session of Congress, the Unemployment Insurance Reauthorization and Job Creation Act of 2010 was passed and signed into law, extending the lower rates for another two years.  As transaction advisors, we view this last minute extension as a tremendous incentive for every owner who thinks he may be ready to exit his business in the next few years, to plan how to take advantage of these low rates.  Just how much are these low rates worth to a business owner?  In order to help owners understand the value of these low rates, we will calculate the growth your business would need in order to cover the additional taxes once the cuts eventually expire at the end of 2012.

Under present law, the top federal capital gains rate is at an all-time low of 15%.  Those rates were set to automatically increase to 20% on January 1, 2011.  With the extension passed by Congress, those rates will stay at 15% for another two years before increasing to 20% on January 1, 2013.  In addition to the increase in the capital gains rate, a new 3.8% tax on investment income, already enacted as part of the Health Care law, will go into effect in 2013.  Both of these taxes will typically be levied on proceeds from the sale of a business, for an aggregate increase of 8.8% over current rates, effective on January 1, 2013.  How much of your retirement nest egg will that tax increase erode?  Put another way, how much will your business value need to appreciate between now and 2013 to provide the same after tax proceeds after January 1, 2013?


Sale                             2010                           2013                            2013

Cap Gain                     1,000,000            1,000,000                    1,115,486 (+11.5%)

Cap Gain Tax                 15%                           23.8%                          23.8%

Taxes paid                   150,000               238,000                       265,486

Proceeds                      850,000           762,000 (-10.3%)        850,000

Annual growth in value                                                                      5.6%/ year

In other words, in order to have the same amount available for retirement after 2012, your business value will have to increase over 11%, or 5.6% annually for each of the next two years.  Now, try to review what you know about the growth and value of your business and try to remember when it may have grown by over 5% annually for two years in a row.  If you can remember such a growth rate, recall the economic and other conditions at the time and determine whether you see those factors in the next couple of years.  Obviously, few funeral home owners will be able to realistically predict that sort of growth.  Most owners we see are working harder than ever just to maintain what they have, and for those already considering a sale in the near term, it is critical that they understand what happens to their value at midnight on December 31, 2013.  For those who plan ahead to take advantage of the extension of the low current rates, we predict it will be a very Happy New Year.  For others, the added retirement value of years of work will evaporate instantly.  Cheers!

 This article does not constitute tax advice and no action should be taken based on the information provided without consulting a qualified tax advisor. D. Brooks Cowles, Jr., Esq. operates the Atlanta, GA office (404.262.4750) for Johnson Consulting Group headquartered in Scottsdale, AZ (888.250.7747).  COPYRIGHT 2011.