Some business owners may have breathed a sigh of relief when the White House released details of President Joe Biden’s tax plan.
That’s because he indicated family owned businesses and farms would be protected against any projected capital gains tax hikes.
The celebration may be premature, as it’s still unclear how this would work.
On Wednesday, Biden unveiled his new $1.8 trillion American Families Plan in a speech to Congress. The package, which follows Biden’s jobs and infrastructure plans, further supports American workers, children and the economy with $1 trillion in spending and $800 billion in tax credits over a decade.
The proposal funds the programs by hiking taxes on the wealthiest Americans and closing certain loopholes. The plan raises the capital gains tax rate to 39.6% for households that make more than $1 million and closes the so-called “step up in basis” for gains of more than $1 million, or $2.5 million per married couple, minus certain real estate exemptions.
The White House said that the plan will include protections for owners of businesses and farms to shield them from what could be a significant tax hit if they want to pass the asset on to an heir, such as a child or sibling, upon their death.
“The reform will be designed with protections so that family owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business,” according to an administration fact sheet on the tax bill.
So far, experts are concerned about what protections will be given to family owned businesses and worry that, in some cases, owners or heirs could still be hit with a significant capital gains or estate tax.
“There’s so many questions that I have,” said Ali Hutchinson, managing director at Brown Brothers Harriman, referring to the single sentence addressing protections for family owned businesses and farms.
For one, it’s not clear what the protections will be, she said. It’s also not apparent such protections would only be given to heirs who are already running the business, or if it would also apply to those who would step in after an owner’s death.
“I think there’s cautious optimism for family farms and businesses,” said Hutchinson.
What additional taxes would mean for businesses
Experts question how businesses would be shielded from the proposed elimination of the step-up in basis.
Taking away the tax break would raise $113 billion over a decade, according to the University of Pennsylvania’s Wharton School.
But it would also be disastrous for family owned businesses, especially if they are not protected from the repeal of the tax break in the event of an owner’s death, or if heirs are hit with a tax later if they want to sell an inherited business.
“We are highly concerned that this will prohibit small-business owners from being in a position to invest more in their employees, invest more in their business operations,” said Courtney Titus Brooks, senior manager of federal relations at the National Federation of Independent Business. ”Instead, it’ll go to estate planning.”
A recent study by Ernst & Young with the Family Business Estate Tax Coalition , a part of the National Federation of Independent Business, showed that repealing the step-up in basis could also hit worker wages and eliminate jobs. The study found that taking away the break would be equivalent to losing 80,000 jobs in the first decade and 100,000 jobs each year thereafter.
Small businesses added 1.8 million net new jobs in the U.S. in the last year studied, according to a 2019 report from the Small Business Administration.
It would also hit U.S. gross domestic product by $100 billion in the first decade and each $100 of revenue raised by the tax would lower worker wages by $32, according to the study.
What to watch going forward
Of course, even if there aren’t adequate protections, the taxes proposed will likely only apply to businesses valued at $1 million or more, so few of the smallest firms would be subject to an increased tax hit, according to John C. Arensmeyer, founder and CEO of Small Business Majority, an advocacy group.
“A vast majority of small businesses who really need the help being offered by the American Jobs Plan and the American Family Plan will not be at all adversely affected by the tax provisions,” he said.
Still, business owners should be watching for developments on what protections may look like, how their assets would be valued by any rules going forward and when new laws might go into effect.
If the start date is retroactive, businesses won’t have time to plan. But, if the plan is passed with a start date in the future, there may be opportunities for tax planning now, according to Hutchinson.
”Any business owner should be considering their assets,” said Titus Brooks. “It’s not necessarily money you have in the bank, it’s money you have tied up into your business.”
As negotiations begin, the details of the tax protections are something that business owners should follow very closely, she said.
“I think the best thing any small-business owner can do is talk to a CPA or tax attorney and see where they are with their assets and also communicate in real time what that would mean to their representatives,” said Titus Brooks.
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