The Biden administration has floated the possibility of tax changes that could have sweeping impacts on family-owned businesses, including those in the construction industry. In addition to potentially lowering the estate tax exemption – which were doubled under the prior administration – President Biden has posed the prospect of a change in how property is valued when it is passed on as part of an estate.
According to ElderLawAnswers, current tax law uses a “cost basis” when determining whether a capital gains tax is owed on property passed on at death. The value of the property is “stepped up,” meaning the current value – not the original purchase price – becomes the cost basis. Consequently, when someone inherits assets, they aren’t taxed on the appreciation that happened before they inherited them.
Repealing this provision could be costly, particularly to family-owned operations. According to a recently released report by EY, repeal would especially hurt middle-class, family-owned companies, which would be forced to pay capital gains accrued by the prior owner. They would likely face large tax bills that put the future of the business at risk.
“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,” noted 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.”
Repeal of the tax provision would also impact job creation and growth. According to the report: “By raising the tax burden on investment, the repeal of step-up of basis via tax at death increases the cost of capital, which discourages investment and results in less capital formation. With less capital available per worker, labor productivity falls. This reduces the wages of workers and, ultimately, GDP and Americans’ standard of living.”
The study estimates a repeal would result in:
- 80,000 fewer jobs in each of the first 10 years
- 100,000 fewer jobs each year thereafter
- workers’ wages being reduced $32 for every $100 raised by taxing capital gains at death
The study goes on to predict the repeal would reduce GDP relative to the U.S. economy in 2021 by approximately $10 billion annually, and $100 billion over a 10-year period.
“Stepped-up basis protects family-owned manufacturers from significant tax bills when businesses are passed on to the next generation,” commented Chris Netram, vice president of Tax & Domestic Economic Policy, National Association of Manufacturers (NAM). “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.”
The report, “Repealing step-up of basis on inherited assets: Macroeconomic impacts and effects on illustrative family businesses”, was conducted for the Family Business Estate Tax Coalition, which includes almost 60 organizations representing family-owned businesses. The full report with executive summary can be found here.