With all of the Bush tax cuts set to expire in January 2011, the capital gains tax rate would have jumped from 15 to 20% for high earners and from zero to 10% on low earners.  Up until just recently, the rhetoric was on the side of letting the tax cuts expire for high earners, which included letting the cuts on capital gains expire as well.  

The looming increase in capital gains taxes set off a flurry of M&A activity in Q4 of 2010.  Letters of intent were in place, due diligence complete and companies were too far down the road on transactions to put the brakes on when the political climate began to shift following the mid-term elections.  It was apparent until the past few weeks that rates are not going to go up – at least not for two more years. 

With the tax cuts being extended, we may see the rapid pace of M&A slow back down to expected levels. Regardless of the tax cuts or not, M&A and corporate growth is expected to continue in the Nation’s Capital and across the country, well into 2011. The pressure of selling before the tax hikes take effect has simply been lifted…for now. 

By Carl Grant, Executive Vice President of Business Development at Cooley LLP

Disclaimer: The postings on this site are my own and do not represent Cooley LLP’s positions, strategies or opinions.