Investment Income Tax

When planning your Business Exit and preparing for your lifestyle after you leave your business behind, it is extremely important to know how much of the proceeds from the sale of the  business you actually get to keep.  We at Opus Consulting Group include tax planning in our Exit Strategy Planning and would like to revisit the Investment Income Tax and how it effects your take home pay.

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As part of the funding for the Affordable Care Act effective this year an additional 3.8% tax will apply to individuals on their “net investment income”.  Net investment income generally includes income from interest, dividends, rents and royalties.  In addition, business profits and gains from the sale of business assets are also considered investment income under the new law if the business is a passive activity with respect to the individual owner. The IRS has certain tests to determine if the activity may be deemed passive or not.

The tax applies when an individual’s income exceeds certain minimum threshold amounts ($200,000 for single individuals and $250,000 for married couples).  It is applied to the lesser of the amount of net investment income or the amount by which total income exceeds the minimum thresholds.

Using a simple example, let’s assume a married couple has combined wages of $230,000 and other investment income consisting of dividends, interest and capital gains of $100,000.  In 2013, they would incur an extra tax of $3,040 under the new law (3.8% * ($330,000 – $250,000)).

At the end of the day, it is more important to ‘know what you will keep’ from the sale of your business interests, not necessarily ‘what you will get’.  As demonstrated above, the 3.8% tax could have a meaningful impact on your exit proceeds.  Therefore, given that an opportunity to avoid this additional tax exists, you are well counseled in seeking the expert advice of your tax professionals to make this determination for your personal situation.  We hope that this information is helpful to you in keeping more of what you get for your business exit. Contact Opus Consulting Group for an initial consultation to determine how an Exit Strategy Plan can help you and your clients.

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