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Proposed federal tax changes could hurt succession plans, lawyers say

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Legal | Market Trends | Repair Operations
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The Family Business Estate Tax Coalition (FBETC) was joined in conversation Thursday by two attorneys to discuss tax increases included in President Joe Biden’s fiscal year 2024 budget.

While the budget is considered an ideological document and not a legislative proposal, participants said it is still important to pay close attention to proposed tax increases as Congress could choose to use them in the future to finance federal spending.

During the 50-minute discussion, Jeffery Levin, senior partner at Squire Patton Boggs, discussed a number of proposed federal tax increases through Biden’s budget request, including:

    • An increase of the federal corporate income tax rate from 21% to 28%.
    • An increase and expansion of the Net Investment Income Tax (“NIIT”) rate by 1.2% from 3.8% to 5% for taxpayers with more than $400,000 of earnings.  An expansion of the tax base for certain pass-through business income of high-income taxpayers.
    • Repealing the deferral of gain from like-kind exchanges greater than $500,000 for each taxpayer.
    • Requiring 100% depreciation recapture of depreciation deductions as ordinary income for certain depreciable real estate property (Section 1250 property).
    • Long-term capital gain and qualified dividends of taxpayers with taxable income of more than $1 million would be taxed at ordinary income tax rates.
    • Imposing a 25% Minimum Income Tax on the Wealthiest Taxpayers – applies to taxpayers with wealth greater than $100 million.

The meeting was held about a week after the U.S. Department of the Treasury released its Greenbook, which outlines new tax proposals to “reduce the deficit, expand support for working families, and ensure the wealthy and large corporations pay their fair share.”

However, some are concerned the changes could have consequences for small businesses, including independent repair shops, as well as succession plans for multi-generational shops.

Levin noted one change on the table would see previous capital gain income taxed as ordinary income. Another provision deals with long-term capital gains and qualified dividends for taxpayers with taxable income of more than $1 million.

“If the taxpayer does have this income of more than $1 million, long-term capital gains and qualified dividends would be subject to ordinary income tax rates,” Levin said. “Now, based on current rates for 2023, the increased rates would be 37% and 40.8% if you include the net investment income tax’s current rate of 3.8%.”

The effective date for that provision would be on, or after the date of enactment.

Lee Wendel, a Squire Patton Boggs partner and succession planning specialist, said taxing capital gain as ordinary incomes would be especially harmful for those seeking to sell their businesses.

“Putting some of this together, that means for a business owner who’s looking to sell, I would advise today that much–if not all of the income–would be taxed at a maximum federal rate of 23.8%,” Wendel said. “[That includes] the 20% capital gains rate plus 3.8% net investment income tax, if all that applies and it may not be for a passive entity.

“… If you layer on all of these proposed tax changes, the federal income tax rate on the gain from the sale, would be you know, it could be as much as 44.8% and that’s even before you get to state income taxes.”

Even for clients with less wealth, Wendel said the proposed changes could result in higher income tax on real estate sales.

He also highlighted some things missing from the Greenbook proposal, including a rule that would say a trust that is a grantor trust for income tax purposes and subject to estate tax when the grantor dies.

The Greenbook also omits a proposal to increase the tax rate for estate taxes, gift taxes or generation-skipping taxes, which Levin said seem to remain at 40%. Finally, he said the proposed legislation lacks mention of reducing lifetime exemption amounts.

He said the Biden administration is proposing to take away the stepped-up basis through a proposal that would see transfers at death, with certain exceptions, become income recognition events.

“The proposed change would be that when the asset transfers, either at death or by lifetime gift, if it transferred to anybody other than my spouse or to charity, that’s an income tax recognition that it’s treated for income tax purposes as if I had sold the asset for its fair market value,” he said.

He added that there would be an exemption that could exclude recipients from current gain recognition of up to $5 million cumulative during their lifetime.

In other words, with some exceptions, the Biden administration’s proposal would see that anytime there is a transfer of wealth, it would trigger a tax.

“I didn’t touch on minimal exemptions or exclusions, but for the most part, yes,” Wendel said. “The objective is you either pay an income tax or you pay gift tax–and you may pay a state tax–and you may pay both for large transfers. The exceptions would be for transfers to your spouse or transfer to charities.”

Being in the midst of tax season, the National Federation of Independent Businesses is encouraging people to think about how the proposed changes might affect them. It is encouraging small business members to share their stories so that it can share them with Congress.

The federation noted that much of the small business tax relief from the 2017 tax law is scheduled to expire after 2025. Expiring provisions include:

    • The creation of the Small Business Deduction (20% deduction for qualified business income),
    • Nearly doubling the standard deduction,
    • Doubling the estate tax thresholds,
    • Lowered individual tax rates and broadened tax brackets.

The Society of Collision Repair Specialists is among the organizations pushing for Congress to make this tax relief permanent. Other associations seeking to add their support can reach out to the offices of Rep. Tracy Mann (R-Kansas) or Rep. Adrian Smith (R-Nebraska). Those wishing to share their stories can email Courtney Titus Brooks, the NFIB’s director of federal government relations,  at


Featured image: (hamzaturkkol/iStockphoto)

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