During his campaign, President Joe Biden promised the American people that he would not raise taxes on small businesses. Now safely in office, he is violating that promise. His tax plan imposes direct tax increases on small businesses.
The promise was made on Feb. 20, 2020 before a national audience during a Democratic debate hosted by MSNBC:
MSNBC’s Hallie Jackson: “I want to ask you about Latinos owning one out of every four new small businesses in the United States. Many of them have benefited from President Trump’s tax cuts, and they may be hesitant about new taxes or regulations. Will taxes on their small businesses go up under your administration?”
Biden: “No. Taxes on small businesses won’t go up.”
Click here or below to see Biden’s broken pledge
But Biden is pushing a series of tax increases that raise small business taxes:
1. Biden’s increase in the top marginal income tax rate to 39.6 percent will hit small business sole proprietorships, LLCs, partnerships and S-corporations.
Small businesses organized as pass-through firms don’t pay taxes themselves. Instead, the profits of the business “pass through” to the owners who pay individual taxes on their 1040 form. Biden wants to raise the top marginal income tax rate to 39.6 percent which will hit many small businesses.
From the Tax Policy Center:
“In 2017, individuals reported about $1.03 trillion in net income from all types of pass-throughs accounting for 9.3 percent of total AGI reported on individual income tax returns.”
According to the Congressional Research Service, “The majority of both corporations and pass-throughs in 2011 had fewer than five employees (55% of C corporations and 64% of pass-throughs). Nearly 99% of both corporations and pass-throughs had fewer than 500 employees, the most common employment-based threshold used by the Small Business Administration (SBA).”
As noted in a Senate Finance Committee report, “in 2016, only 42 percent of net business income in the United States was earned by corporations, down from 78.3 percent in 1980.”
2. Biden’s corporate income tax rate hike from 21 percent to 28 percent targets one million small businesses across the country organized as corporations.
As noted by the Small Business Administration Office of Advocacy, there are 31.7 million small businesses in the U.S. Of those, 25.7 million have no employees, while 6 million have employees. Of these 6 million small employers, 16.8 percent, or 1 million of these businesses are classified as c-corporations. The SBA classifies a small employer as any independent business with fewer than 500 employees.
Biden claims his spending plan makes large corporations pay their “fair share.” However, the plan will raise taxes on many small businesses that are structured as corporations.
3. Biden’s elimination of stepped up basis: A second death tax on small business.
Biden is targeting small businesses with a second Death Tax: Biden will eliminate step-up in basis. This is a devastating tax increase on small businesses. In this video, you can see a sample of the many times Biden has threatened to eliminate step-up in basis.
Elimination of stepped up basis would impose an automatic capital gains tax at death — separate from, and in addition to — the Death Tax.
In a Forbes piece titled “This Biden Tax Hike Hike Will Hit Mom & Pop Hard” tax lawyer Robert W. Wood writes:
Under current tax law, assets that pass directly to your heirs get a step-up in basis for income tax purposes. It doesn’t matter if you pay estate tax when you die or not. For generations, assets held at death get a stepped-up basis—to market value—when you die. Small businesses count on this.
Biden’s proposal would tax an asset’s unrealized appreciation at transfer. You mean Junior gets taxed whether or not he sells the business? Essentially, yes. The idea that you could build up your small business and escape death tax and income tax to pass it to your kids is on the chopping block. Biden would levy a tax on unrealized appreciation of assets passed on at death. By taxing the unrealized gain at death, heirs would get hit at the transfer, regardless of whether they sell the asset.
As reported previously by CNBC:
“When someone dies and the asset transfers to an heir, that transfer itself will be a taxable event, and the estate is required to pay taxes on the gains as if they sold the asset,” said Howard Gleckman, senior fellow in the Urban-Brookings Tax Policy Center.
As reported by Richard Rubin of the Wall Street Journal:
Manufacturers and farmers, who tend to be more asset-rich and cash-poor, are watching closely for those details, concerned they might have to sell illiquid businesses to pay the taxes.
Courtney Silver, president of Ketchie Inc., a family-owned, 25-employee machine shop in Concord, N.C. that started in 1947, said she was concerned about the potential impact.
“I really can’t imagine being hit with that decision of that potential tax implication,” said Ms. Silver, 40 years old, who took over the business when her husband, Bobby Ketchie, died in 2014. “That to me is really hard to wrap my head around.”
It could be challenging for asset owners to figure out their tax basis, which is what they paid for the property and invested in it. That complexity is part of what doomed a similar proposal in the late 1970s, which Congress passed, then delayed, then repealed.
As noted in an Ernst and Young study, if a small business is unable to provide sufficient evidence to prove the cost basis of an asset, then it may set to $0. In other words, tax would be applied to the entire value of taxpayer assets:
“Family-owned businesses may also find it difficult to comply because of problems in determining the decedent’s basis and in valuing the bequeathed assets. It seems likely that these administrative problems could lead to costly disputes between taxpayers and the IRS. Additionally, if sufficient evidence is not available to prove basis, then $0 may be used for tax purposes. This may result in an inappropriately large tax at death.”
To honor his small business tax pledge to the American people, Biden must forego the above tax increases.