Tax Policy – What the Future May Hold
As we all know, business owners today are facing unprecedented challenges. Your ability to grow, maintain profits, expand, hire people, and meet the needs of your customers are being tested today as never before. What is even of greater concern to business owners is the extraordinary intensity of “unknowns” that they face.
We often hear this comment: How can I create a five-year plan when I am not sure what is in the cards for my business during the next 12 months?
This sentiment is growing and the level of risk associated with owning and operating a privately held business is as well. Our nation is facing challenges that we have not seen in modern times. Political gridlock, international geo-political unrest, ongoing fears of national security – not to mention that economic concerns have hundreds, if not thousands, of business owners operating in survival mode for the past several years.
Taxing Changes You Face
One critical pending unknown facing every business owner relates to tax policy changes. Unless Congress acts, at the end of this year significant changes in tax regulations will occur. Here is just a short list of some of the tax policy changes you are facing as a small business owner starting in 2013:
- On Jan. 1, 2013, the tax rate for top earners will increase from 35% to 39.6% when the Bush tax cuts expire.
- Medicare tax deducted from the salaries of top earners will increase by 0.9%, and a new 3.8% surcharge will be added to investment income to pay for healthcare reform.
- Cap gains taxes will increase from 15% to 20%.
- Dividend taxes will increase from 15% to 39.6%.
- Estate taxes will increase from 35% on estates valued at +$5 million (per person) to 55% and the exemption will drop to $1 million (per person)
What concerns many experts on family business ownership more than just these tax increases is that the complexities associated with tracking and filing taxes in 2013 will also increase significantly. This means that more and more of your time will need to be spent simply tracking your documentation, and less of your time will be available to spend on what you love: running your business.
Federal Taxes Only the Tip of the Iceberg
Federal taxes are only one example of increased complexity in owning and operating a business. As Gene Marks, owner of technology consulting firm Marks Group PC, put it in Free Enterprise, a U.S. Chamber of Commerce publication:
“Nowadays it’s not just the federal tax rate you have to deal with. My federal effective tax rate is in the 30% range. But then I’ve got state taxes, city taxes, property taxes, school taxes and tolls I pay everyday on the turnpike.”
And on top of tax policy, as we have discussed before, the new norm of business operation is constant and ongoing change. This is now a given. If you don’t continually adapt, improvise, and overcome, you stand the risk of being obsolete in short order.
So looking at this landscape, we routinely ask our clients what level of risk are you comfortable with and how long can you survive with it? Most business owners never take the time to get off the treadmill and look objectively at their financial situation.
The reality is that most of your net worth is tied up in two assets: your home and your business. We all know what has happened to home values the past four years, and you probably have no realistic idea what your company is worth.
Is the Risk Worth It?
So how long are you willing to fully shoulder the risk associated with having your family’s financial future in a very illiquid, risky investment vehicle? If you have a financial advisor handling your investments, he probably advises you to have a diverse portfolio of investments. But how can you given your complete dependence on the value of an unknown asset – your company?
The reality is you can’t. That is why the first step in the Generational Equity process is a thorough and complete evaluation of your business by our valuation professionals. This can be an eye-opening experience for many business owners.
During the evaluation you will be asked questions about your business that you have probably never considered. Your financials will be examined in detail and will be “recast” to reflect your true profitability. For years your accountant has helped you to legitimately minimize your profits for tax purposes, which understates your earnings in most cases. Recasting allows us to present the true profitability of the firm so that buyers can see how much money your company really makes.
In addition, you will be asked about your operations, your customers, and your key employees all with the goal of documenting your strengths to help you see what you may need to work on in order to improve your value.
It is a vital first step in your exit planning process. If you would like to learn more I encourage you to attend a Generational Equity M&A workshop in your area. If you fill out our contact form, we will have one of our M&A consultants contact you for a no-obligation discussion about your need to plan ahead for the unknown you are now facing.
No matter what, don’t fall into the trap we see too many business owners fall into: inaction and lack of planning. Human beings often freeze when facing the unknown. It is far easier to focus on the problems of today rather than the looming issues you will be facing in 2013 and beyond.
So take a few hours out of your schedule and attend an M&A workshop and begin to proactively take steps to protect the legacy you have built in your business!
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