How New Capital Gain Tax Rates Affect Entrepreneurs

7 Feb

We’re finally in 2013, which means that Congress has approved a fiscal cliff deal. While we’re certainly not past all the obstacles toward economic recovery (hitting the debt ceiling, for example), at least there have finally been some changes put into place so that citizens, entrepreneurs, and businesses can have some solid answers.

The news may not be the best for some businesses, though. One change approved by congress was the very same one KKR’s Henry Kravis warned business sellers of back in December: the capital gains tax went up. Whereas in 2012, the tax rate was at an easy 15%, the tax rose to 20% flat and combined with the Health Care Act investment tax of 3.8%. The result is an effective overall capital gains tax rate of 23.8%.

What does that mean for businesses? Simply put, those looking to sell stock will find that they’ll be paying 8.8% more tax than they would have in 2012. That’s why Henry Kravis and KKR saw so many “people saying ‘if you want to buy my company you have to close it by December 31st.’” Many did rush to close those deals, and they’re probably glad they did now that the tax has gone up.

This tax increase particularly affects the private equity industry, which buys and sells companies for financial gain. A higher tax rate will mean a lower profit from transactions like those. Companies like KKR will likely head back to the drawing boards to determine how best to deal with the impending tax changes, and private entrepreneurs looking to buy or sell should consider their options carefully.

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