New “Zombie Taxes” on Family & Privately Owned Enterprises
Upending decades of tax law and family business financial planning, a new draconian tax proposal in Congress that is supported by the Biden administration could be uniquely disastrous for family-owned and multigenerational private businesses attempting to survive. This new proposal – the STEP Act or the “Zombie Tax” as it is being called – would retroactively tax the surviving beneficiaries who carry on a business or enterprise after the death of its primary owner based on the accumulated value of assets passed on.
Essentially, the “Zombie Tax” would apply – for the first time ever – federal capital gains taxes to the appreciated value of a business being passed on to subsequent generations and do so at the higher rate of 43.4% proposed by President Biden. Furthermore, it does not take into account inflationary impacts or the fact that such assets (businesses, farms, etc.) are often tied up in land, buildings, equipment, technology, intellectual property, or other “hard assets” rather than cash or more liquid assets. Elements include:
• Retroactively taxing the accumulated value rather than the stepped-up basis of an asset such as a business or farm over the last 21 years as a capital gain;
• Subjecting the new accumulated value of a capital gain at an increased tax rate of 43.4%, as well as any applicable state capital gains, estate, or inheritance taxes.
Ultimately, the “Zombie Tax” would treat the death of a business owner as a forced valuation and sale of their assets, resulting in families potentially being forced to lay off workers, or sell off their businesses or farms just to pay for the new tax liabilities. For those who may seek to borrow money to pay these new taxes, they would likely find that banks and other lenders would disqualify them as the taxes would be viewed as non-revenue generating liabilities (i.e. cash debt) that need to be paid prior to any loan consideration. Accordingly, small business and agriculture groups, including the Small Business and Entrepreneurship Council, National Federation of Independent Business, the American Farm Bureau Federation, and others are strongly opposed to the “Zombie Tax” proposal.
Estate “Death” Taxes
Federal estate taxes, or “death taxes,” are highly controversial since they are taxes applied to the assets of someone who has died before the remaining assets can be passed to beneficiaries such as family members. While limited in view of certain sizable exemption levels for individuals and spouses, these taxes have long been viewed as particularly devastating for small businesses, family- or privately-owned enterprises, farmers, and ranchers. In addition to the Biden administration’s plan to nearly double capital gains taxes and impose new “Zombie Tax” treatment on the accumulated value of those assets, the federal tax code will also apply the following to assets of the deceased above exemption levels:
• Keeping in place a subsequent 40% federal estate tax on the remaining value of the asset(s);
• No accounting for inflationary impacts on the value of assets and property over the time that it has been owned.
In addition to the 40% federal estate tax and newly applied “Zombie Taxes”, family businesses and farms would also be subject to varying state-specific estate and inheritance taxes.
General Business & Employer Tax Increases
While the Biden administration and progressive members of Congress claim that their proposed tax hikes on small businesses and employers are intended only for the ultrawealthy and large corporations to pay their “fair share,” the economic reality for small businesses, family- and privately-owned enterprises, farmers and ranchers will be quite different if passed into law. This includes:
• Increasing marginal income tax rates to 39.6% for those who own small businesses and report their business income on their personal tax returns;
• Taxing long-term gains on assets and businesses at the highest individual income rates, nearly doubling the current rate of 20%;
• Increasing the “corporate” tax rate from 21 to 28% on countless small and medium sized businesses, many of them family owned and multi-generational enterprises, that file as C corporations for tax purposes;
• Applying additional Social Security payroll taxes on higher income earners and small businesses;
• Deferring of gains for like-kind exchanges of real estate, equipment, livestock, etc. for any gains greater than $500,000, which would require farmers and ranchers to incur debt simply to keep their businesses.
The multitude of these and other proposed tax hikes, as well as costly new regulations on businesses and employers, create added and significant uncertainty with respect to any realistic business planning, capital investments and hiring new workers as we emerge from the COVID-19 economic shutdowns. Furthermore, tax hikes disproportionately affect small businesses and labor wages far more than the heads of corporations or hedge fund managers. In fact, according to the Tax Foundation, the American workforce bears between 50 and 70% of the cost of such taxes.
Federal Capital Gains Tax Increases
A fragile post-COVID-19 economic recovery and spiraling inflation hasn’t stopped the Biden administration and progressive members of Congress from proposing about $4 trillion in new taxes on employers, workers, families, and consumers. This includes their call for nearly doubling the *effective federal capital gains tax rate. The increased capital gains taxes they’ve proposed can apply to the sale of almost any long-term investment such as a small or private business, stocks, equipment, technology and even your own home. The Biden plan includes:
• Increasing the federal capital gains tax rate from 20% to 39.4%;
• Making the 3.8% net investment income tax (NIIT) permanent, increasing the *effective federal capital gains tax to 43.4%;
• Retroactively applying the capital gains tax increase to April of 2021 rather than after passage of any changes to federal tax law;
• No accounting for inflationary impacts on the value of assets and property over the time that it has been owned.
For those who risk everything to start or expand a small business, family enterprise, R&D based start-up, farm or ranch, or other private entity—the American Dream for many—the prospect of the federal government taking nearly half of any financial gain in the event of a sale will chill future personal and business investment considerations and decisions. Add to this that states have their own applicable capital gains taxes – ranging from 13.3% in high tax states like California to 0% in more business friendly states such as Texas.
Despite proponents’ claims that increasing capital gains taxes will create new sources of government revenue for new spending programs, a University of Pennsylvania study showed the opposite, finding that increasing the capital gains tax would actually decrease government revenue by $33 billion over the next ten years. As such, such tax increases likely will be at the expense of family-owned businesses and federal government coffers.