Tony Gagliardi
Small businesses in Colorado – hit by the COVID crisis – face another threat in the form of tax proposals from Washington politicians that will make it significantly more difficult for family businesses to work and pass the business on to the next generation.
To pay for the proposed $ 3.5 trillion American Families Plan, President Biden’s “human infrastructure” plan, Congress is looking for new sources of income, including problematic changes in family businesses. While proponents claim this legislation is a new way to “tax the rich,” the fact is that the tax changes will affect a wide variety of small Colorado businesses, be it a Front Range manufacturer or a family ranch in the Western Slope .
One proposal would create a new “double mortality tax” by abolishing the so-called “tiered base”. It’s a longstanding piece of U.S. tax law that’s absolutely critical to the continuation of multigenerational family businesses.
Currently, the provision “increases” the value of family farms, ranches, small businesses, houses, trusts, or other assets that are passed on to the next generation at the time of a previous owner’s death to their current market value so that an heir does not need capital gains immediately to be paid after death.
The federal government has already levied a death tax and is now trying to levy a “double death tax” on the assets of the deceased. According to 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 almost double the highest capital gains tax rate to 43.4%.
Here is a hypothetical example. Consider a family business in Colorado valued at $ 2.1 million that a daughter inherited from her father – who paid $ 100,000 for the company in 1985. Under current law – when the daughter inherited this company from her father, the tax base was increased to the current market value. That is, if the subsidiary sold the company in five years, it would be responsible for paying capital gains tax on the company’s growth over five years at the point of sale. According to President Biden’s proposal, his daughter would face sizable capital gains tax (less a $ 1 million exemption) upon the death of her father. The fact is, many small business owners in Colorado don’t have anywhere near the cash to pay such a heavy tax. This unprecedented change in the historic norms of U.S. tax law would likely result in forcing family businesses 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 charge.
In many cases, the buyers are large conglomerates or private equity firms that are below market value. Decades, or even generations, of building a locally-run, community-based business would be wiped out.
Other suggestions that would adversely affect small businesses are to limit the small business deduction (Section 199A), a deduction of up to 20% for the three-quarters of small employers classified as sub-companies, LLCs, sole proprietorships, and partnerships are organized, and increasing corporate income taxes on these types of businesses. The administration is also proposing to increase the corporate tax rate by 33%. A quarter of the small employers are organized as C companies.
When President Biden moved into the White House, he promised not to levy taxes on the middle class or small businesses. Together, these tax hikes would seriously damage the fragile small business recovery at a time when inflation is affecting Main Street, filling vacancies is a chronic problem, and the delta variant of COVID-19 is spreading.
There is no community in America more representative of our nation’s middle class than family business owners. Colorado’s economy has long been dominated by small businesses, and recent statistics from the Small Business Administration show that 99.5% of private businesses in our state are small businesses. This includes the growing number of minority-owned small businesses that employ more than 100,000 Coloradans.
The unintended but extremely grave consequences of this ill-considered taxation of family businesses must be stopped. Sens. Bennet and Hickenlooper supported a change earlier this year to protect small business owners from tax hikes during the pandemic. Colorado’s small business owners are counting on these senators to speak out against these problematic tax hikes.
Tony Gagliardi is the state director of the National Federation of Independent Business (NFIB) – Colorado.