Bill Would Restore Tax Option for Small Firms

California Congressman Wally Herger (R-Marysville) said Tuesday that he will draft legislation to change a controversial new tax provision that has some small business owners facing a hefty tax bill when they sell their companies on the installment plan.

Herger’s bill would restore the ability of sellers who use the accrual method of accounting to spread their tax liability over a number of years as payments are received from the buyer, rather than be taxed upfront on the entire capital gain.

That new rule, which was quietly inserted into a package of year-end tax extenders, caught small-business activists by surprise. They’ve since mobilized to lobby members of Congress for its repeal.

U.S. Treasury officials had recommended closing the loophole, because the new tax is expected to raise about $2 billion over the next five years. But small-business advocates say it could depress the value of some businesses by 20% or more. The installment method is by far the most popular method by which small businesses are sold, with nine out of 10 closely held firms changing hands that way, according to some estimates.

Herger, a member of the powerful House Ways and Means Committee, said the new rules would force some business owners to pony up more in taxes than they receive in cash in the year of the sale.

“The new tax treatment has resulted in unexpected hardships for small-business owners,” Herger said in a statement.

Groups such as the National Federation of Independent Business say they’ve already documented some cases of price declines and scuttled transactions among their members.

“These concerns are not hypothetical,” said Dan Danner, NFIB senior vice president in a recent letter to Treasury Secretary Lawrence Summers earlier this month. “This problem needs to be addressed quickly.”

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Times staff writer Marla Dickerson can be reached via e-mail at marla.dickerson@latimes.com.