Colorado small businesses — battered by the COVID crisis — are facing yet another threat in the form of tax proposals from Washington politicians that will make it far more difficult for family-owned businesses to operate and pass the company down to the next generation.
To pay for the proposed $3.5 trillion American Families Plan, President Biden’s “human infrastructure” plan, Congress is searching for new sources of revenue, including problematic changes to family-owned businesses. While advocates assert that this legislation is a new opportunity to “tax the rich,” the fact is the tax changes will hit a wide range of small businesses in Colorado, be it a manufacturer on the Front Range or a family ranch on the Western Slope.
One proposal would create a new “double death tax” by eliminating what is known as “stepped-up basis.” It’s a long-standing part of the U.S. tax code that is absolutely key to the continuation of multi-generational family businesses.
Currently, the provision “steps up” the value of family farms, ranches, small businesses, homes, trusts, or other assets passed along to the next generation at the time of a previous owner’s death to current market value, so an heir doesn’t have to pay capital gains immediately after death.
The federal government has already imposed a death tax, and now it’s trying to impose a “double death tax” on present assets of the dead. Under President Biden’s proposal, families would pay capital gains taxes on inherited assets after the death of a loved one. To make matters worse, the President’s plan would nearly double the top capital gains tax rate to 43.4%
Here’s a hypothetical example. Consider a family-owned Colorado manufacturing company, valued at $2.1 million, that a daughter inherited from her father — who paid $100,000 for the business in 1985. Under current law — when the daughter inherited this company from her father, the tax basis stepped up to current marketplace value. Meaning, if the daughter would sell the company in five years, she would be responsible for paying a capital gains tax on the business’s growth over five years at the point of sale. Under President Biden’s proposal, his daughter would be saddled with a substantial capital gains tax (minus $1 million exemption) upon her father’s death. The fact is that owners of many Colorado small businesses would have nowhere near the cash on hand to pay such a large tax. This unprecedented change in the historical norms of the U.S. tax code would likely result in family-owned companies being forced to sell against their will or mortgage the family business just to pay federal taxes. According to a recent NFIB survey, 64% of small businesses would have to take out a loan or sell part of the business to pay the new burden.
In many cases, the buyer would be large conglomerates or private equity firms at below market value. Decades, even generations, of history of growing a locally-owned, community-based businesses would be erased.
Other proposals that would negatively impact small businesses include limiting the Small Business Deduction (Section 199A), an up to 20% deduction for the three-quarters of small employers organized as S corporations, LLCs, sole proprietorships, and partnerships, and increasing business income taxes on these types of businesses. The Administration also proposes to increase the corporate tax rate by 33%. One-quarter of small employers are organized as C corporations.
When President Biden entered the White House, he pledged not to raise taxes on the middle-class or small businesses. Together, these tax increases would significantly damage the fragile small business recovery at a time when inflation is impacting Main Street, filling open positions is a chronic problem, and the Delta variant of COVID-19 is spreading.
There is not a community in America that is more representative of our country’s middle class than family small business owners. Colorado’s economy has long been dominated by small business, and recent statistics from the Small Business Administration shows that 99.5% of private companies in our state are small businesses. This includes the growing number of minority-owned small companies that employ more than 100,000 Coloradans.
The unintended but extremely serious consequences of this ill-considered taxes on family-owned businesses must be halted. Sens. Bennet and Hickenlooper supported an amendment earlier this year to protect small business owners from tax increases during the pandemic. Colorado’s small business community is counting on these Senators to step up and speak out against these problematic tax increases.
Tony Gagliardi is the state director of National Federation of Independent Business (NFIB) – Colorado.