The New Administration’s Tax Proposal includes several items that would hurt small businesses. The proposal includes…
1 – An Increase In Cap Gains
The proposed new taxes include an increase in the long-term capital gains rate on income over $1M from 23.8% to 44.6% This would have a devastating effect on individuals selling their businesses, causing an increase of $216K in tax for every $1M in LT gains.
2 – Elimination Of The Step-Up In Basis Rule
Current tax law affords beneficiaries who inherit property to have a step-up in basis shielding them from capital gains taxes. To explain, please consider the following example.
Let’s say that your parents purchased the building housing their business for $50K back in the seventies. They passed away last year, when the value of the property was $1.5M.
Currently, no tax would be due until the property was sold by the inheritors, and that would only be if the property after expense sold for more than $1M. Under the new tax law, they would be forced to pay long term cap gains tax on $1.450M at the higher rate when they inherited the property.
Think about it. You’d have to pay $646K in taxes with money you didn’t have. This would force most family businesses that one generation wanted to pass on to the next, to be sold just to pay the taxes.
3 – Elimination Of The 1031 Exchange
Starker Exchanges or 1031’s would no longer exist. This allows property owners to postpone an eventual cap gains tax by trading one piece of real property for another. This would paralyze the commercial real estate industry which is already headed for a recession.
4 – Corporate Income Tax Increase
The federal C Corp tax rate would increase from 21% to 28%. That’s on all income, whether your company makes $10K per year or more than $400K.
5 – Net Investment Income Tax Increase
Small Businesses with income above $400K would pay a Net Investment Income Tax of 5% instead of the current rate of 3.8%.
Let me leave you with this
That’s just five of the tax increases on small businesses. The proposal includes several others that would devastate our already fragile economy.
It includes perennial favorites like an increase in the individual income tax rate from 37% to 39.6%. Currently the lower tax rate is for individuals earning above $578K and MFJ taxpayers above $694K. That would change to singles above $400K and MFJ’s above $450K.
Let’s remember that all of this is happening under the backdrop of an economy headed for a recession. The worst thing for an economy suffering from high inflation headed for negative GDP is higher taxes and more spending.
We can only hope that our elected officials will stop drinking the kool-aid.
We’re all going to get through this. Let’s get through it together.
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