2011 Federal Tax Increases: Does Selling Your Business in 2010 Make More Sense?

Are you one of the numerous business owners who want to sell their business but are thinking they should operate one more year? Maybe you are hoping to bring revenue and profits back to prior levels?

Here is one thing to consider as you make a decision about selling: The government might tax away any net increase you may obtain in the selling price.

Since 2003, the top tax rate on most long-term capital gains has been 15% for most people. The current capital gain rates are scheduled to expire effective December 31, 2010. Then, starting in 2011, the top 15% rate is scheduled to revert to its former pre-May 6, 2003 level of 20%.

The big question now is: Will the top rate only rise to 20% or will Congress raise it higher? The recent historical Capital Gains rates are as follows:

Pre 1978:  35%

1978:         28%

1981:         20%

1987:         28%

1997:         20%

2003:         15%


Discussions on Capitol Hill range from extending the 15% sunset, to raising the rate above the 20%. Only time will tell. However, if no alternative proposal is voted into law, the rate will automatically adjust to the 20%.

Also it is important to keep in mind that with the pending Health Care Reform, people classified as wealthy will experience an additional tax levy or surtax. There are various proposals that could raise taxes on those earning over $250,000 by 0.5%, increasing to 5.4% on incomes over $1M.

And finally, regular Income Taxes are slated to increase. That’s right, in Year 2011, along with an increase in capital gain rates, the top federal tax rate returns from 35% to 39.6%.

The sale of a business typically causes the seller to incur both capital gains and regular income taxes on the sale proceeds. With both of these scheduled to increase in 2011, it makes sense to seriously consider selling now.  If an entrepreneur wants to experience the lowest tax impact possible from selling his / her business, selling before the tax rates increase is the way to go.

CenterPoint is available to work with business owners and their accountants to individually analyze the tax savings of selling now versus selling in 2011.