Family Business Survival Strategies in an Era of Sweeping Tax Reform
John Goralka
President at Goralka Law Firm P.C. We help successful families, business and real estate owners minimize income and estate tax, better protect assets and transition your legacy and family values to the next generation.
NOTE: This Article was written earlier in the year. Some changes described have not yet occurred. However, the concepts and strategies are very relevant and applicable for the family business owner.?
by:?John M. Goralka,?David W. Holaday, ChFC?, CAP?
The family business, in the best of times, faces unique challenges, particularly with business succession and estate planning. Moreover, the family business is often not merely a business, but a lifestyle. The hard work, long hours and heightened risk can be common challenges. The business owner’s very identity is more likely to be tied to the success, or failure, of the family business.
This is particularly evident for agricultural or farm businesses. The family farm is connected to the land, which is critical to success. In California, where our firm is based, the news is replete with stories of fires and critical water shortages as our mega drought continues.
In addition to such forces of nature, family farms and other family businesses face another threat: An increasingly inhospitable tax environment. First, let’s examine some of the changes in the wind. We must all remember that these are all simply proposals, and any final tax changes may be dramatically different. We remain uncertain that the Biden administration has enough votes to enact any truly meaningful tax change. Predictions are always tricky — consider how accurate the pollsters were in the 2016 and 2020 presidential elections.
That said, this examination is timely as the House Ways and Means Committee (House W&M Committee) released its proposed tax changes on Sept. 13. Note that most provisions would be effective Jan. 1, 2022. However, caution is needed as some provisions would have an earlier effective date. We’ll explore the changes that are particularly meaningful for the family business further, but some highlights of the House proposal include:
The House W&M Committee’s proposal (click here?for the text of the committee’s report) is just one of many we’ve seen recently. In addition to this most recent proposal, there’s President Biden’s?American Families Plan; the?Sensible Taxation and Equity Promotion Act of 2021?(the STEP Act), introduced by Sen. Chris Van Hollen (D-Md.); and Sen. Bernie Sanders’ (I-VT)?For the 99% Act.
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A Look at Challenging Changes for Family Businesses
Each of these plans has elements that affect family businesses in different ways. Here is a wrap-up on some of the major changes that are either proposed or recently implemented.
Proposed: Higher Marginal Rates for Ordinary Income and Capital Gains
Mentioned by more than one of the recent tax proposals, the potential return of the 39.6% tax rate (up from the current 37%) could affect the bottom line of profitability of the family business. The economic pain is worsened with higher tax rates in many states. For California residents, a 13.3% state marginal tax rate results in a top overall combined marginal tax rate of over 50%. New York State residents pay 8.82% state income tax for a combined rate of 48.42%. A resident of the city of New York will pay an additional 3.816% for a combined rate of 52.296%.
The family business, in the best of times, faces unique challenges, particularly with business succession and estate planning. Moreover, the family business is often not merely a business, but a lifestyle. The hard work, long hours and heightened risk can be common challenges. The business owner’s very identity is more likely to be tied to the success, or failure, of the family business.
This is particularly evident for agricultural or farm businesses. The family farm is connected to the land, which is critical to success. In California, where our firm is based, the news is replete with stories of fires and critical water shortages as our mega drought continues.
In addition to such forces of nature, family farms and other family businesses face another threat: An increasingly inhospitable tax environment. First, let’s examine some of the changes in the wind. We must all remember that these are all simply proposals, and any final tax changes may be dramatically different. We remain uncertain that the Biden administration has enough votes to enact any truly meaningful tax change. Predictions are always tricky — consider how accurate the pollsters were in the 2016 and 2020 presidential elections.
In addition, potentially higher capital gains rates may also be on the horizon.