Protect Family-Owned Businesses

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On September 9th, FBETC sent a letter to the House Committee on Ways & Means stating our unequivocal support for the continuation of stepped-up basis. Read here.

On July 21st, 50 Senators urged the Biden Administration not to impose a capital gains tax increase on family-owned businesses, farms, and ranches and maintain stepped-up basis. Read the letter here. Senator Thune’s press release quotes FBETC Co-chair, NFIB Senior Manager Courtney Titus Brooks:

“At a time when small businesses are working to recover from the COVID-19 pandemic, repealing stepped-up basis would be a devastating setback for family-owned businesses,” said Courtney Titus Brooks, senior manager of federal government relations at National Federation of Independent Business (NFIB). “The current proposal to eliminate stepped-up basis would cause significant job losses and would leave heavy tax burdens on future generations. Small businesses thank Senators Thune, Daines, and Crapo for advocating on behalf of family-owned businesses and urge Congress to keep this important policy in place.”

Repealing Stepped-Up Basis Tax Provision Will Eliminate Thousands of Jobs, Take Billions Out of Economy Annually, New Study Finds

WASHINGTON, April 20, 2021 –A new report released today by EY finds that repealing the step-up in basis tax provision would damage the gross domestic product (GDP) and significantly decrease job creation. The study was conducted for the Family Business Estate Tax Coalition, which includes almost 60 organizations representing family-owned businesses.  

The EY study found middle-class, family-owned businesses would be particularly hard hit by the repeal. Currently, when someone inherits assets, they aren’t taxed on the appreciation that happened before they inherited them. If family-owned farms, small businesses or manufacturers are forced to pay capital gains accrued by the prior owner, they would likely face large tax bills that put the future of their business at risk.   

According to the study’s findings, repealing the step-up in basis would result in:  

  • 80,000 fewer jobs in each of the first ten years;  
  • 100,000 fewer jobs each year thereafter; and
  • a $32 reduction in workers’ wages  for every $100 raised by taxing capital gains at death. 

It would also reduce GDP relative to the U.S. economy in 2021, by approximately: 

  • $10 billion annually;
  • $100 billion over 10 years. 

“Repealing stepped-up basis is not a free lunch for those looking to generate tax revenue and would have significant consequences in the multifamily marketplace,” said Doug Bibby, President of the National Multifamily Housing Council. “Absent stepped-up basis, heirs could inherit an apartment property with a small amount basis and possibly sizeable debt. If they are taxed immediately, the resulting depreciation recapture and capital gains taxes could exceed their ability to pay without selling the asset. Even if funds to pay tax are available, heirs may have little left over to invest in and maintain the property, which could negatively impact the available affordable housing stock.” 

“Farmers and ranchers have been able to pass their farms on to the next generation thanks to the stepped-up basis tax provision,” said American Farm Bureau Federation President Zippy Duvall. “The value of many farms is tied up in land and equipment and most farmers don’t have large amounts of money on-hand to pay capital gains taxes. They could be forced to sell the farm or take out costly loans just to pay capital gains taxes. Eliminating the stepped-up basis isn’t a tax on the rich – it’s a tax on the middle class. We urge President Biden to remain true to his word that he won’t increase taxes on hardworking, middle-class Americans.” 

Chris Netram, Vice President of Tax & Domestic Economic Policy, National Association of Manufacturers (NAM) said, “Stepped-up basis protects family-owned manufacturers from significant tax bills when businesses are passed on to the next generation. As this report shows, repealing step-up could have a dramatic impact on small manufacturers across the country, potentially requiring families to liquidate businesses, leverage assets, or lay off employees to cover the tax hit. The NAM encourages Congress and the administration to keep in place this important policy for families across the country rather than increasing taxes on their job creating businesses.”  

“As this study shows, repealing the step-up in basis tax provision would hurt America’s family-owned businesses and destroy jobs,” said National Federation of Independent Business (NFIB) Senior Manager of Federal Government Relations Courtney Titus Brooks. “Eliminating step-up in basis would require small business owners to pay a new tax when a family business partner dies, and potentially force them to sell their business just to pay the tax and associated fees. NFIB encourages Congress and President Biden to stand up for Main Street and keep this important policy in place.”

EY Study Repealing Step-Up of Basis

The full report with executive summary can be found here.

Family Business Estate Tax Coalition (FBETC)

The Family Business Estate Tax Coalition (FBETC) is committed to the full and permanent repeal of the estate tax. The Coalition supports the following legislation to permanently repeal the estate tax: H.R. 1712, the Death Tax Repeal Act, sponsored by Rep. Jason Smith (R-8th MO) and Rep. Sanford Bishop (D-2nd GA) and S. 617, the Death Tax Repeal Act, sponsored by Sen. John Thune (R-SD). Read more about the new FBETC study and letter that repealing stepped-up basis tax provision would hurt small businesses and destroy jobs. 

What is the Estate Tax?

The estate tax applies to property transferred at death if the value of the property exceeds the estate tax exclusion. While the owner of the estate is responsible for the tax, the heirs often are responsible for the actual payment of the tax upon the death of the owner. The value of the estate to which the tax is applied includes all property the owner has an interest in at the time of death including life insurance, annuities, and business assets.

How Does the Estate Tax Unfairly Burden Family-Owned Businesses?

Family Business Estate Tax Coalition

The owner of a family-owned business must include the value of the business assets in calculating the value of their total estate. The tax is applied to all business assets whether liquid assets (like cash) or illiquid assets (like machinery or land). In many cases, the majority of the value of an estate is in the illiquid assets, so to pay the tax the business owner must sell the actual assets of the estate.

If the business owner wants to ensure that the business remains with the family, they must plan for the tax. The costs associated with planning—such as drafting a will, attorney fees, purchasing life insurance—are expensive and leads to less capital invested back in the business.

The cost associated with planning for and eventually paying the estate tax reduces business capital. All of which means less investment in business growth and job creation.