Biden has proposed to nearly double the capital gains rate to 39.6% for those earning more than $1 million.
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Small businesses play a vital role in America’s economy given the fact that they make up 99.9% of all businesses according to the Small Business Administration’s Office of Advocacy. However, the importance of small businesses has been diminished by President Biden’s capital gains tax proposal which, if passed, would make America’s rate nearly the highest in the world. With many small businesses still working to get back on their feet following the hardship created by the pandemic, this proposal could decimate small businesses across the U.S.
What’s being proposed?
Currently, the long-term capital gains tax rate is 20% for single households with more than $445,850 in taxable income in 2021. Biden has proposed to nearly double the capital gains rate to 39.6% for those earning more than $1 million. In addition to the new tax rate, businesses must pay a 3.8% Medicare surtax bringing the rate to 43.4% before local and states taxes are factored in.
Businesses lose big
So, what does this look like for business owners? For examples sake, let’s say a California business owner has a $100 million company that they’d like to sell keeping in mind that $11.7 million isn’t subject to estate tax. Under Biden’s proposal, the business owner would owe $43.3 million in federal income tax (capital gains and Obamacare tax), $13.3 million in state tax and $35.3 million in estate tax. In the end, this leaves this business owner with $8.1 million, effectively reducing their wealth by over 90% after taxes are paid.
Second-generation businesses will struggle to survive
In addition to increasing the capital gains tax, Biden has also proposed to remove the step-up in basis and instead carry over an asset’s tax basis from the decedent to the next generation. This means that if you own a business when you die, your inheritors must pay income taxes regardless of whether or not they sell the business, saddling them with a huge tax bill that currently doesn’t exist under today’s policies. For example, let’s say a parent owns a $10 million small business and passes it on to their child when they die. If Biden’s proposal is passed, the child would now owe nearly $4 million in capital gains taxes that they likely can’t afford as it’s nearly half of the value of the business. If they can’t afford the capital gains taxes they’ll have to sell, but who can afford to buy the business? Big corporations. So rather than the family business continuing on and passed on for generations, larger corporations win in the end.
When it comes to initiatives posed in Biden’s tax proposals, big businesses continue to receive a majority of the benefits. Why is that the case? We’ll discuss why capital gains from real estate entrepreneurs and small businesses get hammered while big businesses can acquire companies without capital gains in my next article.