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!
