The federal tax rate on long-term investment gains is currently 15 percent. Under current law it’s set to rise to 20 percent in 2011. How might this affect you? If you have an investment you plan to sell, and do so in 2010, you’ll pay a little less tax. For example, if you invested $300 and sell it for $500, your gain will be $200. Sell it in 2010 and your tax will be $30. Sell it in 2011 and your tax will be $40, a 25 percent increase.
Selling a business? First of all, most healthy, profitable businesses sell for more than their book value. Here’s a typical example. Sale price of $1.15 million — $1 million after sale expenses, i.e., legal and broker fees. Based on its assets, it’s $500K, so the first $500K is not taxable. Depreciation recapture of $100K taxed at ordinary income rates. Assuming the entire amount will be taxed at the highest rate, the tax on this portion will be $35K. The remaining $400K of sale price is taxed at capital gains rates. If your deal closes in 2010, under current federal law, the tax on the capital gain portion of your sale will be $60K. Close in 2011 and it’ll be $80K. Here’s the breakdown of your total tax:
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2012.
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