HARPSVILLE (AP) – Michael Kovach got into farming 13 years ago by purchasing a 107-acre farm in Mercer County after retiring from the oil and gas industry at 39.
“I’ve worked too hard on this piece of ground to really think about how it is turning into something other than what it is and getting better than it is.” said Kovach, 52, owner of Walnut Hill Farm in Sharpsville.
He has two full-time employees who help him raise grass-fed animals such as Angus cattle, lambs and chickens, which are sold directly to consumers on the farm. His wife Karen runs the estate.
Kovach bought the farm in the hope that one day he could pass the ownership on to his 17-year-old daughter. Now he and other family farmers across the state are concerned about how changes to the tax law could affect their plans to carry their farms from one generation to the next.
President Joe Biden has proposed tax changes to pay for the American Families Plan, which offers state benefits and tax breaks for middle- and low-income people.
The proposal that has received the most attention in the business world is Biden’s plan to raise the corporate tax rate of 21% that has been in place since 2018. He suggests changing it to 28% aimed at the largest corporations, some of which are effectively not paying income tax on billions in earnings.
Small business owners are most concerned about increased taxes on capital gains – profits from the sale of assets – and on inherited wealth. Biden’s plan is to nearly double the top tax rate on capital gains and a significant tax break on valued assets known as the “Building in the base.” The combined tax rate increase could be up to 61% of inherited wealth.
For example, if someone dies after starting a business decades ago that is now worth $ 100 million, under applicable tax law, the business would move to family members with no capital gains tax as the company’s cost base is raised to its current value on death .
Under Biden’s plan, heirs would immediately owe a capital gains tax of $ 42.96 million based on the capital gains rate of 39.6% plus the net capital gains tax of 3.8%, minus the inheritance tax exemption of $ 1 million. The proposal would reduce the estate tax exemption from $ 11.7 million to $ 1 million.
If inheritance tax remained unchanged, the family would also pay 40% inheritance tax on $ 57.04 million of the remaining property. Inheritance tax including exemptions would be $ 18.13 million.
The combined state estate tax and capital gains tax would be $ 61.1 million on the heirs’ original inheritance of $ 100 million. That is without state capital gains and inheritance taxes.
“This is very important if I am the daughter of an entrepreneur and want to inherit shares in the family business.” said Elizabeth “In the” Connolly, a partner in the accounting firm Connolly Steel in Avalon. “As a normal person, I couldn’t theoretically be affected, but it will affect everyone negatively.”
Dividend distributions and share buybacks
The tax proposal most closely related to the larger economic recovery is to raise corporate tax, which could rise from 21% to as high as 28%, although negotiations are still ongoing and media sources have reported that Biden is promoting the idea of a minimum corporate tax of 15%.
Before the corporate tax rate was lowered in 2018 by the Tax Cuts and Jobs Act, companies paid a tax rate of up to 35%.
Pennsylvania state treasurer Stacy Garrity said she has met with small business executives across the state who are interested in expanding their businesses but are holding back due to uncertainty about tax changes.
Pennsylvania has 1.1 million small businesses that make up 99.6% of all businesses in the state, according to Garrity.
She said farm owners in rural Pennsylvania were particularly concerned about capital gains tax increases.
According to Credit Suisse’s Global Wealth Report 2020, more than 8% of US adults have assets of at least $ 1 million. That’s just over 20 million Americans.
The Pennsylvania Farmers Union has 300 members who all own family farms. The national farmers’ organization has 200,000 members.
“Some of these farmers have had these farms in their families for generations, and now if they passed the farm on to the next generation, they’d have to pay capital gains tax on anything over $ 1 million.” Garrity said.
Farm owner households tend to have more wealth than the average US household because they have significant investments such as arable land and equipment necessary to run a farm. In 2019, the average farm household had assets of $ 1,042,855, according to the U.S. Department of Agriculture.
Gus Faucher, chief economist at Pittsburgh-based PNC Financial Services Group, said the bank was waiting to get a better sense of what is likely to come through Congress before including the tax hikes in its forecast.
But on the surface, he said, it is unlikely to have a significant impact on economic growth.
“We saw very little change in growth when the 2017 corporate tax cut was passed under the Trump administration.” said Faucher. “After the tax cuts were passed, there was a modest acceleration in growth in corporate capital investment, but this slowed in 2019.
“The main impact of the corporate tax cut has been to increase dividend payouts to shareholders and boost stock prices, with little impact on the real economy. Therefore, I would expect the proposed tax cuts in Biden to have very little negative economic impact. “
“Tax is a price”
A tax increase of a few percentage points can be absorbed by most profitable companies.
“If you know the tax rate, they’ll adjust to it over a period of months.” said Robert Fragasso, Chairman and CEO of Fragasso Financial Advisors, Downtown. “They will adapt just as we do in our homes and our personal finances. We adapt to price changes. Tax is a price. It’s part of what companies pay to do business.
“You could argue that companies are spending too much money on this or that, or overpaying the people at the top.” he said. “This is just financial management. But taxes in themselves are neither good nor bad. This is how they are applied to business. I am not advocating higher taxes. But we have to pay for what we spend. “
Fragasso, whose company manages nearly $ 2 billion for clients, said lawmakers could mislead how much businesses make without taking into account that profitability fluctuates from year to year and responsible corporate managers save money for unforeseen events that focus on their future.
“This is what we do” he said. “A lawmaker might look at us and say, ‘Tax them more because they are a rich company’ when we are saving it for the future to cover the unexpected or to grow the company and create more jobs.”
Connolly noticed that nothing was set in stone yet.
“Over the years I don’t get upset about anything until I see it go into effect because there will be a lot of changes.” She said.
“At the moment everything is still speculation because there will be a lot of negotiations.”
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