It's crunch time for dealers trying to sell their stores before the end of the year to avoid what is likely to be a higher capital gains tax rate in 2011.
Retailers and dealership brokers, accountants and lawyers say the uncertainty about next year's federal tax structure has potential sellers moving quickly to try to wrap up deals and get manufacturer approval before year end. For many deals, they say, it's coming down to the wire.
"It's really a problem as we get to the end here," said Joe Aboyoun, a Pine Brook, N.J., lawyer who handles dealership sales. "I just had a recent deal fold because the buyer would not commit to a year-end closing date. It literally killed the deal."
Waiting until 2011 to close a deal will cost sellers more in taxes. Missing the deadline would have cost Aboyoun's client several hundred thousand dollars on a high seven-figure deal, he said. So the dealer decided to keep operating the store -- for now, at least.
Democrats and Republicans in Congress are mired in the tax cut issue heading into the midterm elections. If nothing happens, Bush-era tax cuts will expire at year end. At minimum, that will cost sellers an extra 5 percentage points on capital gains, as that tax rate jumps to 20 percent, from 15 percent -- an additional $50,000 on every $1 million in gains.
Some dealer advisers anticipate last-minute legislation could increase the capital gains rate even more, or even eliminate it. Elimination of the capital gains tax would leave gains subject to the much higher rates for ordinary income.
Rates on ordinary income for top earners also are likely to jump -- to nearly 40 percent from 35 percent -- if the Bush tax cuts expire. That also plays into dealers' divestiture strategies, as some proceeds from a sale could be classified as income in certain situations, accountants said.
By now, buyers and sellers pretty much need the terms of their deals settled, experts said.