The Obama Administration’s sweeping tax reforms will have a significant impact on entrepreneurs thinking about selling their businesses over the next few years. The following is a brief summary of the Obama Administration’s tax proposals and the impact they may have on our clients:

1. Capital Gains Taxes Will Increase. The Obama Administration proposes increasing capital gains rates from a historic low of 15% up to 20% on long-term capital gains and qualified dividends. This rate would apply to married taxpayers filing jointly with income over $250,000 and for single taxpayers with income over $200,000.
   
   
2. Ordinary Income Tax Rates Will Increase. Beginning after 2010, the Obama Administration proposes increasing the ordinary income tax rate in the top income bracket from 35.0% to 39.6%. The highest tax bracket will start at taxable income of approximately $373,000.
   
   
3. Itemized Deductions Will Be Limited. Beginning after 2010, the Obama Administration proposed to limit the value of all itemized deductions to 28% if they would otherwise reduce taxable income in the two highest tax brackets. A similar limitation also would apply under the Alternative Minimum Tax.
   
   
4. Estate Taxes Will Be Retained. The Obama Administration proposes to continue most of the tax reductions (with the exclusion of the changes noted above for higher income individuals) enacted under the Bush Administration that were set to expire on December 31, 2010. The one exception is the repeal of estate and generation-skipping transfer taxes. Under the Obama Administration’s proposal, estate and gift taxes would be extended at 2009 levels with a top rate of 45% and an exemption amount of $3.5 million.

For entrepreneurs thinking about selling a business in the near future, careful consideration of your goals and objectives, an acute knowledge of the current state of your business and careful tax planning are all essential. And, it may be worthwhile to understand your options now in order to take advantage of significant tax benefits by closing a deal in 2009.