> small business owners who are unfairly penalized for selling their business.
If you work for little profit and low salary for 10 years and finally managed to sell your business for $200k gains, I can understand why you don't want to pay 33% just for that one year, especially since you no longer have a source of income until you create another business or get a job. Paying 33% instead of 15% seems unfair. I personally fit into the same dilemma where in 2011 my wife and I will have high income but I won't be making anywhere close in 2012 when I go full-time on my app/startup.
I believe there can be solutions to this such that SMBs are not harmed while at the same time, making sure top 0.01% doesn't qualify for it. Changing the brackets for LTCG can work (15% for < $250k, 20% for < $500k, 33% for < $1m, 35% otherwise). Tax deferment could be another solution.
Problem is that SMBs are used as a shield to defend the ones with Cayman Island and Swiss Bank accounts. It's not about being anti-corporation or anti-government. It's about being pro-fair.
If you work for little profit and low salary for 10 years and finally managed to sell your business for $200k gains, I can understand why you don't want to pay 33% just for that one year, especially since you no longer have a source of income until you create another business or get a job. Paying 33% instead of 15% seems unfair.
Can you elaborate on why this is unfair? From a simplistic point of view, this hypothetical person worked for 10 years and ended up with a gain of 200k (assuming income in other years was negligible). Why is it unfair to tax this gain - which can be thought of as receiving the income for 10 years in one shot - at normal income rates?
Is it because if it was normal income, the 20k/year amount would not be taxed at 33%?
> Is it because if it was normal income, the 20k/year amount would not be taxed at 33%?
Correct. If you make 15k taxable income for 4 years (i.e. 60k), you'd pay 10% in taxes filing married = 6k/year. If you make 60k in a single year (after 3 years of no income), you'd pay 10% of 17k, and 15% on 43k. That's over $2k in difference. Double the year, add more risk and zeros to the income/gains figures and you'll see why raising taxes on capital gains will take away the incentive to start a business. So it is fair to give SMBs a break. I just don't want to extend this break to investment bankers and hedge fund managers making $30m/year, regardless of how useful their services are. They should pay the same taxes as anyone with salary of $30m.
There is an easy fix though, allow them to use low/ no tax years to offset the gain amount. Anyone using it as a big wage will still be in the same tax bracket as usual.
But let's say you knew your LTCG would be taxed as income. It seems you would've either
1) opted in for a larger salary over the last few years to realize the income under a bracket that you're comfortable with, and drive the sale price of a business down
2) come up with a structure where you can split up the proceeds over several tax years (selling 50% on Dec 31st and 50% on Jan 1st comes to mind, but there're probably better ways to optimize this)
I agree. Both 1 and 2 are possible. However 1) is unknown because of the inherent risk. You can't give yourself a large salary just in case business sells. 2) is probably possible already (sorry, not a tax accountant) but might be costly/friction.
First, if your payoff after 10 years is $200k, then perhaps you chose poorly :-)
Second, if you know those are the rules, why would it be unfair? Don't do it if you don't want it. Phase out long term capital gains 20% over 5 years, and we're done!
If you work for little profit and low salary for 10 years and finally managed to sell your business for $200k gains, I can understand why you don't want to pay 33% just for that one year, especially since you no longer have a source of income until you create another business or get a job. Paying 33% instead of 15% seems unfair. I personally fit into the same dilemma where in 2011 my wife and I will have high income but I won't be making anywhere close in 2012 when I go full-time on my app/startup.
I believe there can be solutions to this such that SMBs are not harmed while at the same time, making sure top 0.01% doesn't qualify for it. Changing the brackets for LTCG can work (15% for < $250k, 20% for < $500k, 33% for < $1m, 35% otherwise). Tax deferment could be another solution.
Problem is that SMBs are used as a shield to defend the ones with Cayman Island and Swiss Bank accounts. It's not about being anti-corporation or anti-government. It's about being pro-fair.