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Biden says he will protect companies from certain tax hikes. It’s not clear how

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 he indicated that family businesses and farms would be protected from any planned increase in capital gains tax.

The celebration may be premature, as it’s still unclear how it would work.

On Wednesday, Biden unveiled his new US plan for $ 1.8 trillion families 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 .

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The proposal funds the programs by raising taxes for the wealthiest Americans and closing some loopholes. The plan increases the capital gains tax rate to 39.6% for households earning more than $ 1 million and closes the so-called “progressive base” for earnings over $ 1 million, or $ 2.5 million per married couple, less some real estate. derogations.

The White House said the plan will include protections for business and farm owners to protect them from what could be a significant tax impact if they wish to pass the asset to an heir, such as a child. or a brother, on their death.

“The reform will be designed with protections so that family businesses and farms do not have to pay taxes when they are awarded to heirs who continue to operate the business,” according to a fact sheet from administration on the tax invoice.

So far, experts are concerned about the protections that will be given to family businesses and fear that in some cases owners or heirs may still face significant capital gains or inheritance taxes.

“I have so many questions,” said Ali Hutchinson, managing director of Brown Brothers Harriman, referring to the one sentence dealing with protecting family businesses and farms.

On the one hand, we do not know what the protections will be, she said. It is also not clear that such protections would only be granted to heirs who already run the business, or whether they would also apply to those who would intervene after the death of an owner.

“I think there is cautious optimism for farms and family businesses,” Hutchinson said.

What additional taxes would mean for businesses

Experts wonder how companies would be protected from the proposed elimination of the base markup.

Removing the tax break would raise $ 113 billion over a decade, according to the Wharton School at the University of Pennsylvania.

But it would also be disastrous for family businesses, especially if they are not protected from the repeal of the tax break on the death of an owner, or if the heirs are taxed later if they want to sell a legacy business.

I think the best thing any small business owner can do is talk to a CPA or tax lawyer and see where they stand with their assets.
Courtney titus brooks
Senior Federal Relations Officer at the National Federation of Independent Business

“We are very concerned that this will preclude small business owners from being able to invest more in their employees, to invest more in their business operations,” said Courtney Titus Brooks, senior director of federal relations at the National Federation. independent businesses. . “Instead, it will go to estate planning.”

A recent Ernst & Young study with the Family Business Estate Tax Coalition, which is part of the National Federation of Independent Businesses, found that repealing the base mark-up could also affect workers’ wages and cut jobs. The study found that removing the break would be equivalent to losing 80,000 jobs in the first decade and 100,000 jobs each year thereafter.

Small businesses created 1.8 million net new jobs in the United States in the last year studied, according to a 2019 report from the Small Business Administration.

It would also affect the gross domestic product of the United States by $ 100 billion in the first decade and every $ 100 of income generated by the tax would reduce workers’ wages by $ 32, according to the study.

What to look for in the future

Of course, even if there are no adequate protections, the proposed taxes will likely only apply to businesses valued at $ 1 million or more, so few of the smaller businesses would be subject to a tax increase. , according to John C. Arensmeyer, founder and CEO of Small Business Majority, an advocacy group.

“A large majority of small businesses that really need the help offered by the American Jobs Plan and the American Family Plan will not be affected at all by the tax provisions,” he said.

Nonetheless, business owners should watch for developments in what the protections might look like, how their assets would be valued by upcoming rules, and when new laws might come 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 tax planning opportunities now, according to Hutchinson.

“Every business owner should consider their assets,” said Titus Brooks. “It’s not necessarily money that you have in the bank, it is money that you have tied to your business.”

As negotiations begin, the details of tax protections are something business owners should be watching very closely, she said.

“I think the best thing any small business owner can do is talk to a CPA or tax lawyer and see where they stand with their assets and also communicate in real time what that would mean to their representatives. “said Titus Brooks.

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