You’ve worked for decades making your business a success. The sweat equity you and your family invested over the years is about to pay off. You are going to sell off a major portion of your life , your identity for oh-so many years , and with good reason you expect to be handsomely rewarded for all your hard work.
Your nest egg is about to hatch , or so you think.
Late last year as Congress was winding down, a tax provision was signed into law that stopped most small-business owners planning to sell their company dead in their tracks. The tax measure, part of the gargantuan Ticket to Work and Work Incentives Improvement Act of 1999, requires taxes on the proceeds from the sale of a business must be paid all at once.
While that may sound logical, consider this: Many business owners set up a sale based on an installment plan, so the buyer does not have to come up with the cash all at once. A sale often is spread out over several years.
In short, the seller must pay taxes on money that hasn’t even been received yet. And most businesses with less than $50 million in annual revenues rely on installment arrangements, since buyers normally can’t get full financing.
According to one estimate, about 260,000 businesses nationwide will be affected by the new law this year. But a Treasury Department official was quoted as saying it’s not the “death knell” of business deals.
Yes, deals will still take place. But there’s no denying such a law will have a huge effect on small businesses. Those who opt to sell their businesses with an installment plan under the current law essentially are paying good dollars now for dollars that will be worth less when they get them later , if they get them at all.
The law hurts both parties. Those selling their business inevitably will reduce their price, and, of course, buyers must come up with more cash.
So who wins? The federal government. It is expected that over the next five years, the tax will amass nearly $2 billion. Quipped one tax analyst, “It’s bad policy that raises good revenue.”
Few, however, are laughing. Some 40 small-business advocate groups have banded together to overturn the law, and for good reason. It is estimated most corporate unions are small businesses. The deals normally are valued at $500,000 to $2 million. Not exactly Time Warner-AOL proportions, to be sure.
The National Federation of Independent Businesses and the U.S. Chamber of Commerce are urging everybody and their brother in Washington, D.C., to repeal the law. “Simply put,” stated a letter from the NFIB to Treasury Secretary Lawrence Summers, “if the full impact of this provision had been known, it would have never become law in the first place.”
The provision, which was part of a large tax bill, was added to raise money to offset revenue drain created by the bill’s major provisions. Translation? The little guy gets steamrolled again by big government.