July 20, 2024

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Biden’s STEP Act will tax farmers, small business owners hardest

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President Joe Biden, who is promoting an effective tax increase on many middle-class Americans to pay back the unions that helped fund his campaign, is also pushing the STEP Act, a tax increase that will hit family farmers and other small business owners.

One of the ways Biden proposes to pay for the nearly $6 trillion in spending he has proposed within his first 100 days is raising the capital gains tax from 20 percent to the top marginal income tax rate of 39.6 percent, and eliminating the “stepped-up basis at death.”

The Biden administration says this would “eliminate the loophole that allows the wealthiest Americans to entirely escape tax on their wealth by passing it down to heirs. Today, our tax laws allow these accumulated gains to be passed down across generations untaxed, exacerbating inequality. The President’s plan will close this loophole, ending the practice of ‘stepping up the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and making sure the gains are taxed if the property is not donated to charity.”

In brief, the stepped-up basis means that an heir who sells property (or investments) is taxed based on the current market value, rather than what the property was worth when it was purchased. 

Currently, if a business was purchased for $500,000 but was worth $1 million at the time of the owner’s death, and then his heirs sold it, they would be taxed based on anything over $1 million on the sale. Biden’s proposal would mean that the business owner’s heirs would be taxed based on the original $500,000 purchase price.

The Sensible Taxation and Equity Promotion or STEP Act, and its companion, the “For the 99.5% act were introduced late last month by Senators Chris Van Hollen of Maryland, Cory Booker of New Jersey, Elizabeth Warren of Massachusetts, and Democratic Socialist Bernie Sanders of Vermont, and contain these — and many other troubling provisions.

STEP Act hits small business owners and farmers the most

While Democrat proponents say this would impact the super-wealthy, it would hit small business owners and farmers hardest.

According to CPA Brenda Benning, a director at BKD Advisors in Wichita, this would mean being taxed twice on the same income.

“It would really be double taxation,” she said. “Because normally what we do is we pay estate tax … right now the maximum rate is 40%. Then we get a step up on the basis of the fair market value of those assets that are in the estate, we get a step up for income tax purposes.”

Under the administration proposal, the heirs to a small business or family farm would have to pay as much as a 40% “death tax,” which could require selling just to cover the taxes, and they would also have to pay income taxes on any gains realized over the original purchase price, or basis, of the business.

Senator Roger Marshal, (R-Kansas), in a statement to the Sentinel, called the STEP Act a “direct attack” on farmers, ranchers, and private landowners.

“There is a saying in Kansas that ‘farmers live poor but die rich,'” Marshal said. “That’s because much of a farmer’s net worth is in land assets that appreciate in value. Those in support of this bill claim it will only target the wealthiest family dynasties, but in reality, the increased tax obligations and additional costs could wipe out the next generation of family farms if those inheriting the land can’t afford these unnecessary financial burdens.”

Senator Jerry Moran concurred.

“Farms that are passed from generation to generation make up the fabric of rural Kansas, and Congress should work to protect these institutions,” he said. “The STEP Act would place such a steep tax on the transfer of land that many families would be forced to sell at least part of their property just to pay the tax on the rest of the farm. I will work in the Senate to oppose this legislation and others like it that are damaging to our rural Kansas way of life.”

The administration claims there would be protections for small businesses and family farms so they will not have to pay taxes “when given to heirs who continue to run the business.”

However, it is not uncommon for farms and businesses to already have to be sold to cover taxes, and some heirs may not want to continue to operate, meaning a substantial portion of the estate would evaporate into federal coffers.

The bills also would make substantial changes to the way trusts are handled — currently many farms and small businesses are held in one of a number of trusts that help to avoid the “death tax” that can force the break up of holdings families may have had for generations.

As Ag Web notes: 

“Most of Sen. Sanders’ Act simply shows how much extra tax would be owed by wealthy people at their death,” Ag Web writer Paul Neiffer wrote. “For example, Warren Buffet is listed with a net worth of $96.5 billion and Sen. Sanders indicates that his heirs would pay an extra $24 billion of estate tax under his Act.  However, Mr. Buffett has already indicated his net worth is going into a Private Foundation which will likely mean that no extra estate tax will be paid and in fact, no estate tax will be owed.  Unless rules are changed to prevent a deduction for transfers to private foundations or other charitable entities, wealthy taxpayers will continue to escape this extra tax.

“However, farmers with estates in the $10 to $25 million range likely will end up paying substantially more if this Act is passed.”

Wealthy Americans likely to avoid the tax impact

The Biden Administration is promoting the STEP Act as a tax on the wealthy, but they have many options to avoid or minimize the tax.

Fox Business reports that the nonpartisan Penn Wharton Budget Model, of the prestigious University of Pennsylvania’s Wharton School of Business, released a study that shows that Biden’s claim of  $1 trillion in revenue would be cut by $900 billion thanks to tax avoidance strategies that would remain legal.

“Our results indicate that the broader tax policy context is key,” the study concludes.

Under current law, PWBM estimates that raising the capital gains rate would cost $33 over the budget window. If some of these opportunities for tax planning were restricted, the proposal would raise $113 billion. Even with stepped-up basis eliminated, several avenues for tax avoidance remain.

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