A decline in the number of small businesses means an increase in unemployment and an uncertain economic outlook for the next generation. Everyone loses when small business fails.

When a business is sold, the former owner pays Uncle Sam a capital gains tax based on the profit gained in the sale. Unless Congress acts to extend the current Bush-era tax rate, the capital gains rate of 15% will increase to 20% at the beginning of next year.

As of this date, it seems we will have to play the wait-and-see game hoping that someone in Washington will tackle this onerous tax increase on small business owners.

Another tax of which many may not be aware is the additional Medicare Tax on investment income that comes into play as a result of the 2010 health care reform act. The Medicare Tax adds an additional 3.8% tax for most types of investment income, including capital gains. It applies to single taxpayers earning more than $200,000 and married taxpayers with combined income of more than $250,000. Therefore, the total impact of these increased taxes on business owners who sell their business after 2012 could be a whopping 58.7% increase.

Here's a simplified scenario in a small mom and pop shop. If the profit from the sale of the business is $200,000, a $30,000 tax under the current capital gains rate would be levied. At the new 20% rate those taxes would increase to $40,000. If mom and pop's income qualifies them for the higher rate of 23.8%, the tax liability would increase to $47,600.

The profit from the sale of most small businesses would likely be higher than $200,000. If you are a small business owner, do the math and find out what it would mean to you.

Baby-boomer business owners have reached retirement age and are thinking about the exit zone. This hard-hitting tax burden could sabotage those plans, thereby hindering the sale and transfer of the business to a person who would continue to foster its ongoing prosperity.

Typically, as boomer owners age, their businesses suffer and decline because the owner is not as energetic and gung ho as in previous years. This could result in a decreased number of healthy operating small businesses in future years.

According to the U.S. Small Business Administration, small businesses --
  • represent 99.7% of all employer firms
  • represent half of all private sector jobs
  • generated 65% of all new jobs over the past 17 years
  • generate a majority of the innovations that come from U.S. companies

A decline in the number of small businesses means an increase in unemployment and an uncertain economic outlook for the next generation. Everyone loses when small business fails.