Tax uncertainty causes Baldor to push dividend early

The uncertainty about what a lame-duck Congress or the new Congress will do with respect to tax policy has filtered down to Fort Smith in a very real way.

Fort Smith-based Baldor Electric Co. announced Tuesday (Nov. 16) it would expedite payment of its fourth-quarter dividend, with payment of the 17-cent per share dividend scheduled for Dec. 30 to shareholders of record on Dec. 17.

“The Board chose to make this payment during 2010 rather than in January 2011 due to the uncertainty of future tax rates on dividend income,” the company noted in the dividend statement.

With a little more than 47 million shares outstanding, the company will pay about $8 million in dividends. For the first nine months of 2010, the company has paid out about $24 million in dividends to shareholders.

While there are many factors that may impact the tax liability of a person or company, the greatest impact is that the top rate may move from 15% to 39.6% if the Bush-era tax cuts are allowed to expire.

If the rate rises effective Jan. 1, 2011, a person or company holding 100,000 shares could see their tax liability increase from $2,550 to $6,732.

David Potts, a certified public accountant and owner of Potts & Company, said the early payment is a financially smart move by Baldor because many of its employees — salaried and hourly — own company shares.

“From my standpoint it would be prudent for them to declare the dividend and pay it early, because for many people it could be a significant tax advantage,” Potts said.

It’s uncertain how many U.S. publicly and privately held companies will adopt an early payout, but several U.K.-based companies made such a move in early 2010 ahead of an April 6 implementation of a higher tax rate.

According to this Times Online report, British companies pushed early more than £840 million (roughly $1.34 billion) in dividend payments so shareholders could avoid the higher tax. The British income tax was bumped from 40% to 50% for incomes above £150,000 (roughly $240,000).

Potts said individuals or companies who may fall into higher tax brackets shouldn’t assume rates on capital gains will remain at the 15% level.

“This will probably be the last time in my lifetime that we will see 0% to 15% tax rates on dividends and long-term capital gains. Even if they extend the Bush tax cuts, I believe the extension of the tax cuts will be short lived,” Potts explained. “If I was a taxpayer, I would review my current tax situation or talk with my tax adviser to determine if I could take advantage of these low rates before they expire.”