Last Call Sale!- Likely end to 15% Federal Capital Gains Tax Rate

The Following is from the IBBA Weekly Newsletter

By:Dolliver H. Frederick
President, Frederick Capital Corporation, Newport Beach, CA

Most of us are familiar with our wives "encouraging" us to participate in "The Sale Event of the Year" as leading retailers cajole us (well, at least our better halves) into believing that the savings will make the shopping event memorable! Well, we have just that ocurrence "before our eyes" as we make our way through the balance of 2008!

What I am referring to is the LIKELY END to the 15% Federal Capital Gains Tax Rate. With "absolute certainty" we hear and see the Democrats expound on "just what rate" they would like to see in place, be that 25% on the low side, most talked about 28%, but sometimes as high as 35%. It could be expected that even with a Republican White House, the desire for appeasement (reaching across the aisle), will likely cause the Capital Gain Rate to be increased as a result of "trade offs" for other tax concessions. Couple with State (9.5% plus here in California) Capital Gain tax rates, we have a MATERIAL CHANGE on the horizon! Many state rates are a function of the Federal rate, so they merely move up "in sync" with the Federal rate.

This "highly probable" Tax Change will make a very significant difference to our clients. The business owners who are "wholly motivated" by the net proceeds after tax that our divestiture will provide them, by way of example, a $20 Million sale (with minimum tax basis) would drive a tax liability of approximately $4.9 Million. With the expected "new rates" posted January 20, 2009 (or shortly thereafter) the Tax Liability would be approximately $6.9 Million on the low side, to over $9.0 Million if the higher limits are achieved. We can see that this difference of grater than $2.0 Million tax liability will certainly make our days far more difficult. Now, what can we do about it?

Firstly, we can make certain that any one of our clients who is "on the fence", gets off that fence, and moves forward with a sale that closes before January 20, 2009, or better even, a close before year end 2008, just in case "they" cause the rate increases to be retroactive to January 1, 2009.

Now, that is good news for us for the last half of the year. Further, we can begin to educate our clients on the various finance vehicle that are within our purview, any of which could eliminate (or at least "permanently defer until death) their tax liability. For example the ESOP is a superb tool, which would allow the seller to take 1042 Election, and defer the entire proceeds (through an appropriate investement in an "allowed investment") from tax liability throughout his/her lifetime, at which time the proceeds would get a step up, and the liability would disappear. We also have the Structured Sale alternative, wherein his tax liability is deferred against an annuity and life insurance, once again providing him/her with a permanently deferred tax alternative to having to pay his tax within twelve months (or less) of the sale.

It is my belief that we, as Business Brokers/Investment Bankers have a distinct responsibility to ensure that our clients are receiving the most contemporary of approach alternatives, to ensure that they are making "an informed decision" at all times. We are starting to touch on some of these areas at our Conferences, as I am certain we will expand on these "teachings" as their necessity becomes compelling and the courses become available.

These are very exciting days. The paradigm is shifting, and shifting quickly, as we are expected to be "fast on our feet" to provide answers, compelling answers to business owners who have worked their entire life to now realize upon their life's work. And we are expected to provide the optimum advice (or assist them in identifying practitioners) to ensure that their course of action is best for them.

We find it imperative to work with Financial Advisory firms who will act as a "go to" for the Business Owner, the people with whom he will trust his proceeds and provide him/her with the "right" level of risk/reward to their proceeds. The sooner the business owner "engages" with the fund's manager, the sooner he/she will be focused on "life after" the deal closes, and the more inclined they will be to embrace an early close. Also, to take advantage of the current BARGAIN Capital Gain Tax Rates, which "we" will probably never see agin in our lifetimes!

As Tim Russert said so often, and with gusto..."go get them. Tiger", and occasionally "go Bills" too!

Advantages to Small Business Ownership

The Following is an excerpt from the book: Buy The Right Business- At The Right Price by Brian Knight

One of the most interesting discoveries we have made as consultants and agents in small business acquisitions is that the advantages of small business ownership are not widely understood. For example, it comes as a great surprise to some, that Congress has blessed the small business owner with a great deal of tax shelter in various forms.

For those who are constitutionally suited to small business ownership, the freedom and independence involved are even greater rewards that anticipated.

Because so few people understand how important the advantages of small business ownership can be when an acquisition is properly designed, this outline will be a helpful starting point.

1. Those who value their independence will find plenty of it in small business. They will have no one to answer but themselves. They will be completely responsible for workin ghours and conditions and for the success of failure of the enterprise.The small business owner has virtually unlimited freedom of choice to grow or stay small, change businesses, determine hours, products, services and organization, etc. Those who are well-suited to small business ownership often consider this the most important reward it offers.
2. The business owner will experience a much broader degree of business and management activities than it is possible to find in most careers. He or she will not be confined to a single management or job activity. This can lead to a far more complete understanding and knowledge of business processes.
3. The rewards will be directly tied to performance. A business owner will not be competing wiht others in the same organization or be required to work for someone else's goals.
4. One can earn an unlimited amount of money if sufficiently capable and committed. Conversely, one can lose everything of not up to the challenge involved.
5. A small business can offer an unlimited opportunity for creative talents of the owners. Small business ownership can be an ideal existence for people with talent and creative abilities.
6. It is possible to make a small business a family operation for those who wish to be clsoer tot heir families. Under good circumstances it can be an ideal learning and working environment for young people who are given the opportunity to participate. Conversely, those who do not wish continuous associations in work in addition to home life are well-advised to avoid the pressures a small business can create.
7. A small business is probably the best legal tax shelter in existence. Extensive benefits and tax write-offs can be built into a small business operation, particularly when the real estate is owned. Small business owners rarely have to pay substantial taxes until they are earning a substantial amount of money and enjoying an abundant life-style. Special benefits can include subsidized living expenses and shelter, transportation, entertainment, company insurance, medical benefits and many others.
8. A small business with real estate assets and responsive management can be virtually inflation-proof.
9. A well-run small business can be an even better estate builder than residential or income real estate. With the demand for small business growing and a scarcity of attractive, profitable ones, many owners find themselves with a much greater net worth than they would have had in traditional careers.
10. A great deal of assistance (far more than most people realize) is available for those wanting to consider small business ownership. A wealth of outstanding information, manuals, industry data, management assistance, courses and helpful organizations make the risk far lower and the rewards far higher than most people believe it will be.
11. Small business ownership has an increasing status as the institutional structure of society faces change and challenge. Even small businesses that were once considered routine or unexciting are now commanding great respect as the attractions of small business ownership become more widely recognized.
12. It appears that the small business sector of our country is now growing far more rapidly than big business.
13. Those with good basic management training will usually find a major competitive advantage over most competitors. Trained corporate managers often find that their planning, marketing, operating and/or organizational skills give them a major competitive edge. The required skills can be learned and developed by anyone with determination and normal intelligence.
14. Many families are able to get a large amount of equity to buy a business as a result of the steep inflation in residential housing in the last twenty years. This equity earns nothing intil it is liquidated; by investing it in the earning assets of a small business, a substantial earning power can often be generated.
15. One is free to choose, within limits, the environment and area that is most pleasing and healthy, entirely according to one's own value system. Those who find their present area of work a problem will have no such restrictions in choosing a small business. Similarly, the small business owner is free to conduct his or her business activities entirely according to personal ethics and values.