On January 1, 2013 Federal taxes in the United States on investment income will increase, one way or another. As of this moment, it appears Congress will fail to reach a budget agreement and we will be poised to go over the “Fiscal Cliff”. The term “Fiscal Cliff” refers to the abrupt, and economically disruptive, measures which will take effect if no budget is passed. These include a 5% to 10% bump to capital gains taxes and an even more drastic raise in the dividend tax rate. Even if an agreement is reached on New Years Eve, it is almost a certainty that capital gains and dividend tax rates will go up and this will have a negative impact on small businesses seeking investment capital.
Currently, capital gains are divided into two categories: Short Term gains from assets held for last than one year are taxed at an the ordinary income rate vs. Long Term gains which are taxed at either 0% or 15% depending on whether an individual’s income places them in the top 25% of earners. On January 1, 2013 the tax rates on Long Term gains will revert to 10% and 20% respectively. Capital gains will also be subjected to a 3.8% Medicare Tax.
Dividends will undergo an even more dramatic tax increase. Currently qualified dividends, from a domestic or qualified foreign corporation which an individual holds stock in for more than 60 days, are taxed at a 15% rate. On January 1, 2013 the distinction of qualified dividends will be erased and all dividends will be taxed at ordinary income tax rates, which for the wealthiest investors could be up to 35%.
If a budget deal is reached today, it will almost certainly still contain provisions for raising long term capital gains rates for wealthy investors to 20% and erase qualified dividend tax rates. What does this mean for small businesses seeking capital? The Wall Street Organization, Inc. agrees with leading economic experts who feel it will mean less investment capital available to small businesses. Wealthy investors who were previously attracted by the incentive of lower tax rates for medium to long term investments in small businesses with qualified dividends may now choose to invest in other areas, such as Real Estate Investment Trusts, whose steady and reliable dividends were never qualified for lower tax rates and which will now come into parity.
This does not spell doom for all small businesses seeking investment capital however, it simply means the market will be more competitive. This will mean small businesses which wish to compete for investment capital will need to step up their game. Tight, professional, and attractive proposals to Broker/Dealers and expertly produced sales materials those Broker/Dealers can distribute to prospective investors will be vital. If your small businesses will be seeking startup or growth capital in 2013, contact the experienced professionals at The Wall Street Organization, Inc. today to find out how we can help you prepare to compete in this new investment marketplace.