Tax Moves Being Dictated by the Fiscal Cliff

By:  Bob Adelmann
11/05/2012
       
Tax Moves Being Dictated by the Fiscal Cliff

Small business owners, some of whom have spent their lifetimes building their businesses, are unloading them before the end of the year in order to save taxes.  

The current capital gains tax rate is 15 percent, but in January it is scheduled to increase to 20 percent, plus the ObamaCare tax of 3.8 percent added on top brings it to 23.8 percent, a jump of 58 percent. Even if a lame-duck Congress extends the present rate of 15 percent, there is no conversation in Washington about repealing the ObamaCare tax, so at best capital gains taxes will increase by 25 percent after the first of the year.

Small business owners, some of whom have spent their lifetimes building their businesses, are unloading them before the end of the year in order to save taxes. With taxes on capital gains increasing by almost 60 percent on January 1, Bert Wolf decided to sell his compressed-gas business, Acetylene Oxygen Company in Harlingen, Texas. It wasn't in his plan to sell, but the offer from Praxair, and the uncertainty about what Congress might, or might not, do during the upcoming lame-duck session to avoid the fiscal cliff, made it too good to resist: “It just made more sense for me to take my chips off the table and go do something else.” Besides, the increase in taxes is so onerous that, if he had decided to keep the business, it would take him “at least 3 or 4 more years [of building the business] to achieve the same after-tax sales dollar.”

The current capital gains tax rate is 15 percent, but in January it is scheduled to increase to 20 percent, plus the ObamaCare tax of 3.8 percent added on top brings it to 23.8 percent, a jump of 58 percent. Even if a lame-duck Congress extends the present rate of 15 percent, there is no conversation in Washington about repealing the ObamaCare tax, so at best capital gains taxes will increase by 25 percent after the first of the year.

John Emerick, one of the owners of IM Solutions LLC, an online marketing company that focuses on the legal profession, calculated that if they waited to sell until 2013, it would cost him $1 million out of his share:

It was pretty clear to us that it made more sense for us to pull the trigger early. For me — I'm 49 — I'm thinking I might not earn that much for the rest of my life. The earnings for the rest of my life would be equivalent to the tax I'd be paying by waiting until 2013.

George Lucas, the founder and chairman of Lucasfilm, best known for developing the Star Wars and Indiana Jones franchises, no doubt did the math and decided to sell his company to the Walt Disney Company last month for $4 billion. Mark Calvey from the San Francisco Business Times calculated that Lucas saved at least $200 million in taxes on the deal compared to waiting until after the first of the year to close on the sale.

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Photo:Fiscal Cliff via Shutterstock

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