Historic Tax Treatment of Family- and Privately-Owned Small Businesses and Enterprises
Congress has long encouraged families to be able to hold onto farms, homes, and businesses they created by not taxing the appreciated value of assets when the owners dies if being passed on to subsequent generations. The federal government does, however, impose a significant 40% estate or “death” tax on assets valued above $11 million. And while this figure may seem substantial on its face, one must also consider that often this value for family businesses and farms is disproportionately, sometimes almost wholly, tied to hard assets such as land, buildings, equipment, livestock, intellectual property, technology, etc., rather than serving as liquid capital assets such as cash. As such, liquidity is a significant issue.
Accordingly, Congress has recognized that appreciation of assets includes not only the increase in value that the owner has created, and already paid taxes on over the years, but also inflation, which is out of an owner’s or subsequent heir’s control. Accordingly, any such appreciation historically has not been taxed when an owner dies, and an asset is passed on. In such cases, the value of the assets are normally “stepped-up” in basis – readjusted to the current fair-market value – to avoid imposing massive tax liabilities that would hinder a business, farm, etc. from being an ongoing concern after an owners death.
Recent White House and legislative proposal in Congress would eliminate this bedrock of federal tax policy and multi-generational businesses as a means to secure new revenues for new government spending programs.
Biden Tax Proposals and “STEP ACT” Impacts (i.e. New “Zombie” Taxes)
Under President Biden’s proposed tax plan and those being offered in Congress, a business owner’s death would treat a business or asset as if it had been sold and heirs would be subject to a newly applied capital gains tax rate of 43.4%, as well as any applicable state capital gains rates, on its accumulated value. Subsequently, the business or asset being inherited would then be subject to an already unfair and punitive 40% federal estate, or “death” tax, as well as any relevant state estate or inheritance taxes. Considering that these taxes are retroactive back to the beginning of time, opponents have labeled these proposals as the “Zombie” taxes on America’s small businesses, family and privately-owned enterprises and farmers and ranchers, considering they are taxes that came back from the dead to haunt the living, so to speak.
On the capital gains, the first $1 million in value would be exempted from federal taxes and, on the estate, or “death”, a federal exemption of $11.7 million is provided. Again, however, these amounts are often locked into fixed assets which cannot be leveraged to pay the taxes unless they are forced to sell them. Not only will this force many subsequent generations wanting to carry on family enterprises to sell them in order to pay the taxes, these tax liabilities would likely impact even their ability to borrow from financial institutions to pay them if they wanted to go into debt to do so. The adverse impacts of these proposals would be systemic to family and privately held businesses, affecting not just the next generation of owners, but also their employees and the communities they support.