Dear Business Owner,
This may be the opportune time to take action to avoid the increase in capital gains tax rates that will take effect after 2010.
As you may know, the Bush tax rate cuts, including the current 15% capital gains tax rate, are slated to expire at the end of 2010.
In addition, if the U.S. economy starts to turn around in the third or fourth quarter of this year, we believe there is a strong possibility that the Obama budget for 2010 will propose an increase in the capital gains tax rate starting in 2010 rather than in 2011.
Assuming that you have an interest in locking in the capital gains tax at the current rate but do not wish to sell your entire company to a third party, there are two tax strategies that you can use to lock in the current capital gains tax rate, provided that you act before the end 2009 or 2010.
The first tax strategy is to sell part (or all) of your stock to an ESOP and elect tax-free rollover treatment under a special tax code section that only applies to ESOPs. Under this provision the capital gains tax is deferred for as long as you want, provided that your company is a C corporation (or converts to C status,) and provided that the sale proceeds are reinvested in qualified replacement securities.
The second tax strategy is to sell part (or all) of your stock to an ESOP and elect to pay tax on the entire transaction in 2009 or 2010. Under this approach, all of the gain will be taxed at the current capital gains tax rate. Even if you receive a seller note for a portion of the purchase price, the entire sale will be taxed at the current tax rate, provided that you do not elect installment sale treatment on your seller note.
More information about the tax and financial advantages of an ESOP can be found in the ESOP Information Section of our website where you can also watch our most recent web seminar entitled The ABCs of ESOPs. If you are interested in obtaining a Free Preliminary Analysis as to how can ESOP could be designed to accomplish your objectives, please fill out the Confidential Feasibility Questionnaire section of our website.
Very truly yours,
John D. Menke