Startup Tax Misconception on Capital Gains

Recently I heard that there’s a tax misconception in the market with the new ObamaCare 3.8% surtax on investment income, capital gains, and other types on non-ordinary income. The thinking is that the top marginal tax rate, as of January 1, 2013, in the sale of equity held for over a year is 20% Federal long term capital gains plus 3.8% ObamaCare surtax for a total of 23.8% not counting state income tax (e.g. 6% state income tax in Georgia).

In reality, the 3.8% ObamaCare surtax is not applied to the difference in the transaction value and the amount it would be if it was an asset sale. So, the tax is applied to the appreciation of hard assets, like real estate or financial securities, but not to goodwill like the value of the brand or customers. So, if your company sold for $10 million and had $2 million of assets (current working assets e.g. cash in the bank, equipment, real estate, etc) and $8 million in goodwill (e.g. soft items like the growth opportunity), then the extra 3.8% tax would apply to the $2 million of assets but not to the $8 million of goodwill. Overall, this is great news for technology entrepreneurs as the majority of purchase value is for intangible assets, which won’t have the extra tax.

Note: this isn’t tax advice so consult your tax professional. More info is available in the Forbes article titled: Is Gain Attributable to the Sale of Goodwill Include in Net Investment Income?

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