ARM Owners Curious about Capital Gains Tax

At the DBA conference in Las Vegas in early February, I heard a lot of talk about deteriorating economic conditions, the lack of financing, and speculation on when debt portfolio prices would bottom out.

But the big topic on the mind of many accounts receivable management firm owners was their exit strategy and what was going to happen to the capital gains tax rate now that President Obama is at the helm.  Is it going to remain at 15 percent, or climb up to 20 percent? 23 percent? 27 percent?

President Obama has said publicly that it would be at least 20 percent and less than 28 percent, but the question is: when would this take effect?  With all of the economic turmoil our country is experiencing, I can’t see capital gains making it to the top of the list, but Obama will need to address the capital gains tax by the end of 2010, when the current 15 percent rate is set to expire. If nothing is done, the rate will revert back to 20 percent, where it was before the Bush administration changed the tax laws in 2003.

If you are thinking about selling your business in the next 12-18 months and are concerned that you will face a substantial increase in the capital gains rate, realize that President Obama has enough on his plate before he can make capital gains taxes a priority.  I think Obama and his Cabinet will wait for the stimulus plan to be successfully implemented to help our country push out of this recession and restore confidence in our troubled banking system before pushing for a hike in capital gains.

My message to owners is this: don’t lose a lot of sleep on capital gains and hastily decide to pursue a sale now specifically because of a potential substantial hike in the capital gains tax rate.  Instead focus on growing your business and effectively managing your P&L in this difficult time, which would likely help to offset any value lost with a tax hike when it comes time to sell.

My prediction

I wouldn’t expect much to change with capital gains.  My prediction is that Obama is going to let the 15% rate expire and then leave it at 20 percent.  A 20 percent rate is equal to the lowest rate that existed in the 1990s and the rate that President Bush proposed in 2001. It is almost a third lower than the rate that President Reagan signed into law in 1986.

What do you think is going to happen with capital gains?  I look forward to hearing your thoughts/commentary.

Michael Lamm advises owners on their growth and exit strategies for Kaulkin Ginsberg’s Strategic Advisory Group. Michael can be reached at 240-499-3808 or at mlamm@kaulkin.com

Editor’s Note: insideARM is a sister company of Kaulkin Ginsberg.