Top 20 Destroyers of Business Value # 13 Not Understanding Tax Consequences

Posted on October 30, 2012 · Posted in Blog

With the impending elections and never ending debate about taxes, we thought this would be a good time to talk about tax consequences in business sales and valuations.   Unfortunately, we are often asked for advice when it is too late to make any significant changes.

Like anything else tax related, our best advice is to always have a competent tax CPA in your corner.   Tax strategies are dependent upon the specific situation and parameters.  It is important to start early and work with an advisor that is familiar with the industry, company and all state and federal tax laws.

You can download a PDF that provides general guidelines to the tax impact of a business sale and here are a few of the most common issues we see:

  1.  C-Corp Asset Sale – Most privately held business sales are structured as an asset sale.  If the business is a C-Corporation, then the assets of the business are sold and first taxed at the corporate level.   There is then an additional tax when the cash is distributed out to owners and shareholders.  This can result in an effective tax rate of nearly 50%.  Many business owners are shocked to realize this and unfortunately there is very little that can be done.
  2. Extreme Uncertainty and Most Likely Increased Tax Rates– The future tax climate can be best characterized by its extreme uncertainty, which will be brought on by changes resulting from the Supreme Court upholding the Affordable Care Act and a number of provisions in the Bush tax cuts that are set to expire.   Capital gains are scheduled to move from 15% to 20%.  This would mean a 33% increase in the amount of taxes paid on capital gains.
  3. Impact on Valuation- When calculating the value of a business, shareholder ownership and investor return, most valuation models use after tax cash flows.    Tax strategy and timing can be an important part in determining the value of a business and investor returns.
  4. Increase in Estate Tax- Significant changes are forecasted in estate tax. This tax is set to increase from 35 percent this year to a potential maximum of 55%. The lifetime exemption amount is slated to go down from $5.12 million to $1 million.    Think about this potential for a minute…an estate valued at $3 million would have $0 taxes in 2012, but would potentially have over $1 million in taxes in 2013.   That might make for some unhappy kids.

Download a PDF that provides general guidelines, but business owners should work with a knowledgeable, experienced tax CPA to determine the best strategy.

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