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Tax stuns small business
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February 4, 2000: 7:24 p.m. ET
Provision makes selling small businesses a very costly transaction
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PHOENIX (CNNfn) - Bruce Ayer sold his business to his son a little over a year ago. It was something he had worked his entire life for. He built his plastic distribution business, based in Massachusetts, to a healthy size and handed it down to the next generation.
Today, he might not be able to do the same thing because of a little-known tax provision that was passed by Congress, buried deep in an omnibus spending bill that was passed in the final moments before lawmakers recessed in December.
Under the new law, small business owners who sell their companies will have to pay tax on the entire value of the sale in the same year they sell.
The problem is that most small business owners do not see the profit from their sale that year. Rather, most structure the sale so the buyer makes installments over a period of years.
For example, a business owner who sells their business for a total of $1 million may structure the sale so that the buyer pays $100,000 every year for 10 years. Until now, they paid ordinary income tax on the amount of money the new buyer paid them every year.
Small businesses change hands in that fashion, said Bill Lindsay, an executive board member of National Small Business United, because most buyers don't have the cash on hand to buy the whole company in one transaction.
That provision, according to Lindsay and many other small business owners, will prevent many owners from selling their businesses. And it has the potential to force some small business sellers into bankruptcy to cover their tax bills.
Needless to say, small business owners and advocates want the provision deleted from the tax code.
Passed into law on December 17, it effects not only those people who are selling their companies today, but also those who were in contract but had not completed the sale on that date.
Many small business owners, like Richard Valdez, a self-employed attorney from Albuquerque, NM, had not heard about the new law until Friday, where it was discussed at length at the meeting of National Small Business United.
The news was greeted with a collective gasp. Most small business owners and advocates already believe they are not treated fairly, compared to big business, when it comes to matters of taxation. To them, this is another reminder that they wield little power, despite being the most dynamic job-creating sector of the U.S. economy.
Big businesses have options when they sell, such as stock swaps, pointed out Thelma Stevenson Ablan. As a rule, small businesses do not. "It's truly unbelievable," said Ablan. "It is really going to hurt a lot of people."
Ablan and her husband sold their non-ferrous hardware supply company in June of 1998. Had they waited until this year, or had the sale not gone through, they would not consider selling. The tax bill, she said, would likely be larger that the first installment they received from the buyer.
Small business advocates and lobbyists will be pushing hard to have the tax provision repealed. Already a bill has been introduced in the U.S. Senate, sponsored by U.S. Sens. Don Nickles (R-Okla.) and Conrad Burns (R-Mont.) to repeal the tax.
Few hold much hope, however, that the unexpected provision will ever disappear. Once a revenue generating bill is written into law, they say, it becomes difficult to get Congress to repeal it. 
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