President Joe Biden speaks during a joint congressional session in the U.S. Capitol on April 28, 2021.
Bloomberg | Bloomberg | Getty Images
Some business owners may have breathed a sigh of relief when the White House released details of President Joe Biden’s tax plan.
This is because family businesses and farms would be protected from planned capital gains tax increases.
The celebration may be premature as it is still unclear how this would work.
On Wednesday, Biden unveiled his new US $ 1.8 trillion family plan in a speech to Congress. The package, which follows Biden’s employment and infrastructure plans, supports American workers, children, and the economy with $ 1 trillion in spending and $ 800 billion in tax credits over a decade.
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The proposal funds the programs by increasing taxes on the richest Americans and filling certain loopholes. The plan increases the tax rate on investment income to 39.6% for households earning more than $ 1 million, and eliminates the so-called “top-up” for profits over $ 1 million or $ 2.5 million – Dollars per couple minus certain real estate exemptions.
The White House said the plan will include protection for business and farm owners to protect them from potentially significant tax damage if they want to pass the asset on to an heir such as a child or sibling after their death.
“The reform is designed with protective measures so that family businesses and farms do not have to pay taxes if they are passed on to heirs who continue to run the company,” said a data sheet from the administration on the tax invoice.
So far, experts have been concerned about the protection family businesses will receive and fear that owners or heirs may still face significant capital gains or estate taxes in some cases.
“I have so many questions,” said Ali Hutchinson, executive director at Brown Brothers Harriman, referring to the only sentence about protecting family businesses and farms.
For one, it’s not clear what the protection will look like, she said. Nor is it apparent that such protection is only granted to heirs who already run the company, or if it also applies to those who would intervene after the death of an owner.
“I think there is cautious optimism for family businesses and businesses,” said Hutchinson.
What additional taxes would mean for companies
Experts ask how companies would be protected from the proposed removal of the top-up base.
According to the University of Pennsylvania’s Wharton School, abolishing the tax break would make $ 113 billion in a decade.
But it would also be catastrophic for family businesses, especially if they are not protected from tax break waiver in the event of the death of an owner, or if heirs are later subject to a tax when trying to sell an inherited business.
I think the best a small business owner can do is speak to a CPA or tax attorney and see where they are with their assets.
Courtney Titus Brooks
Senior Manager, Federal Relations, National Federation of Independent Business
“We are very concerned that this will not enable small business owners to invest more in their people and in their businesses,” said Courtney Titus Brooks, senior manager, federal relations for the National Federation of Independent Business. “Instead, it goes to estate planning.”
A recent study by Ernst & Young with the Family Business Estate Tax Coalition, part of the National Federation of Independent Business, found that abolishing the base increase can also hurt workers’ wages and cut jobs. The study found that taking the break equated to losing 80,000 jobs in the first decade and 100,000 jobs per year thereafter.
According to a 2019 report by the Small Business Administration, small businesses created 1.8 million net new jobs in the US in the last year studied.
It would also weigh $ 100 billion on U.S. gross domestic product in the first decade, and for every $ 100 of sales generated by the tax, it would cut workers’ wages by $ 32, according to the study.
What to see in the future
Even in the absence of adequate protection, the proposed taxes will likely only apply to businesses valued at $ 1 million or more, so few of the smallest businesses would face increased tax damage, according to John C. Arensmeyer. Founder and CEO of Small Business Majority, an advocacy group.
“A large majority of the small businesses that really need help from the American Jobs Plan and the American Family Plan will not be affected by the tax regime at all,” he said.
Nevertheless, entrepreneurs should look for developments on what protective measures might look like, how their assets would be valued under future rules and when new laws might come into force.
When the start date is retroactive, companies don’t have time to plan. However, if the plan is passed with a start date in the future, there may be opportunities for tax planning now, according to Hutchinson.
“Every business owner should think about their net worth,” said Titus Brooks. “It’s not necessarily money that you have in the bank, it is money that you have put into your business.”
At the start of negotiations, entrepreneurs should carefully monitor the details of tax protection, she said.
“I think the best a small business owner can do is speak to a CPA or tax attorney and see where they are with their assets and communicate in real time what that would mean for their agents,” said Titus Brooks.
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