Not long ago, an executive of a potential buyer for one of our clients asked me if my client was pressing for a close by December 31 to take advantage of the lower capital gains rates. The question caught me a little off-guard for a couple of reasons. First, it is very late in the year to be trying to get a deal closed by year-end. Second, I have been largely taking it for granted, perhaps unwisely, that the lower capital gains rates would be extended for at least another year.
Political turmoil always creates risks and opportunities. Uncertainty is part of the game. However, I do not remember a time when operating a business had more uncertainties than today. Much uncertainty is unavoidable coming out of the economic turmoil of the past few years, but it is truly unfortunate that tax policy remains such a matter of uncertainty.
The President has called on Republicans to compromise and permanently extend the Bush era tax cuts to so-called middle-class taxpayers – those families with incomes of less than $250,000 per year and individuals with incomes of less than $200,000. Although the President’s official position is that the cuts should expire as scheduled on December 31, 2010, his current comments have softened a bit to usually state that he is opposed to making the cuts on those with incomes above $250,000 permanent. That leaves open the possibility of extending them for one or two years.
Personally, I believe that it is likely that there will be a one or two year extension of the status quo. However, it is already mid-November and the lame-duck session of Congress starts November 15. They have a huge agenda for a short session, but tax policy is at the top of the list. While there seems to be momentum toward compromise, it is hard to rule out any possibility, including a stalemate which might let the cuts temporarily expire as a result of non-action, although they could still be retroactively re-instated to January 1.
Where does this leave a potential business seller? Unfortunately, it leaves a great deal of uncertainty. Since it is probably too late for the vast majority of deals to get closed before year-end, we can hope for relief with the expected extension. Going forward, if the $250,000 ($200,000 for individuals) definition of “middle class” survives, there may be opportunities to structure sales in very specific circumstances to avoid the added tax bite from higher capital gains rates.