Income and capital gains tax rates will rise Jan 1 if Congress allows the George W. Bush-era tax rates to expire, and business owners are considering a variety of measures to mitigate the dam- age from a potential spike. Those plans range from tweaking their year-end tax planning to selling the business this year, so as to avoid the risk that capital gains tax rates will be higher in the years ahead and eat into their profits from the sale of the company.
Most New Jersey businesses are private, family-owned firms in which profits are distributed to the company's owners, who pay personal income taxes on those profits. These can be very large business- es: New Jersey is home to S corporations, limited liability companies and partner- ships with revenue in the millions and billions that employ hundreds or thou- sands of people.
Harry Quagliana, New Jersey tax leader for Deloitte Growth Enterprise Services, said he is advising companies that pay taxes on their profits via the owners' personal income taxes to accelerate income into 2012, when their tax rate may be lower than in 2013.
"For example, a company may get an advance payment for services to be performed over the next two or three years," he said, and the business could elect to pay the taxes on the income up front, instead of over the life of the contract.
Quagliana said businesses may be waiting to make income-timing decisions until after the election, when they will try to assess the impact on 2013 tax rates from any changes in the White House or Congress. But executives should be ready to pull the trigger after Nov. 6, he said. "You have to be ready and be nimble, and you should start thinking about this today," he said. "Because if there is 2012 tax planning you want to do, and you want to implement it post-election, you had better be ready in November and December."
Michael LaForge, of the accounting and consulting firm Sobel & Co., in Livingston, said most of his business clients pay their business taxes on their personal tax returns — and they face higher taxes on several fronts in 2013 if Congress does not act. The top personal income tax rate rises from 35 percent to 39.6 percent, and the top capital gains tax rate rises from 15 percent to 20 percent. In addition, a new 3.8 percent Medicare surtax on investment income kicks in next year.
"I have people looking at selling their business, and looking at offers, and wondering if they can close before the end of the year," LaForge said. In office and industrial parks all over New Jersey, companies that look small in reality would fetch tens of millions of dollars in a sale; "companies are now contemplating doing these things (selling their business), and they are running out of time if they don't have things in place."
LaForge said companies can accelerate revenue into 2012 to take advantage of lower income tax rates, and defer deductions into 2013, when tax rates may be higher. "Companies can be a little more aggressive as far as getting orders out the door; this year, people are going to try to get them out in December so they can pick up the income on those orders" in 2012. Conversely, a company planning a major repair or maintenance will try to postpone it to 2013, when tax rates may be higher and the expense deduction will help lower 2013 taxes.
Meanwhile, Robert Klein, of BDO USA LLP, in Woodbridge, said depreciation deductions will be less generous after Dec. 31 unless Congress takes action, so companies looking to buy fixed assets — machinery, computers, office furniture — should do so before the year ends. Firms that hire unemployed veterans are eligible for tax credits that also expire Dec. 31.
But attorney Alan F. Kornstein, of McCarter & English, said businesses should take a sensible approach.
"No one really knows whether the presently scheduled tax increases are really going to go through," and even if they do, he said, Congress can always change the rates midway through 2013, retroactive to Jan. 1.
He said he's telling clients that "if it makes business sense to sell (the business), now might be the time, because of the possibility that the capital gains tax rate might increase."
E-mail to: email@example.com