Capital gains stealing your equity?

July 22, 2010

Taxes are a major determinant of the returns on any investment, and especially for an entrepreneur whose company is often his or her primary vehicle of wealth creation.

Two significant changes to the tax code are likely to occur in the next few years, both of which will directly affect entrepreneurs:

  1. The tax cuts passed by Congress in 2001 and 2003 expire at the end of 2010.
  2. The recently enacted health care reform initiates additional taxes on all investment gains starting in 2013, including the extension of Medicare taxes to all investment gains – effectively adding an additional 3.8% to the long term capital gains tax rate.

We have published a brief white paper which highlights how an entrepreneur could take taxes into consideration when contemplating a capital raise, and how he or she might maximize the value of the after-tax proceeds from a minority recapitalization.

No entrepreneur should make significant changes in the long term plans for his or her business based solely on likely changes in the tax code. However, if you or your shareholders are currently considering a capital raise and/or would like to consider realizing some liquidity on part of your investment over the next 12 months, it may well make sense to accelerate the timing to beat the December 31, 2010 and/or 2013 deadlines.

UPDATE 7/23/10:

A recent editorial in Investors Business Daily entitled The Tax Tsunami On The Horizon maintains that there are three upcoming “waves” of taxes, including those we mention above: (1) the expiration of various tax cuts enacted last decade, (2) new taxes designed to pay for health care reform, and (3) the alternative minimum tax’s widening net, upcoming tax hikes on employers, and the loss of deductions for tuition.

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