Tax avoidance is not an option for family businesses

It is unlikely that you will see the concern. But they know something is coming.

It came for people like Casey Roscoe, a former marketing executive for the family-owned Seneca lumber company in Oregon. It also came for Mark Peters. Mark’s father founded Butterball Farms in Grand Rapids, Michigan. You would never know they faced an existential threat, but it is there.

It also came for George Bartell. The former chairman of Seattle’s Bartell Drugs, the legendary 67-store chain founded by George’s grandfather in the Central District in 1890. Bartell’s was sold to Rite-Aid two years ago.

The common thread between these three people is that they own or have owned a family business.

This can be a drugstore, a lumberyard or a farm. You all know that this often cross-generational family livelihood will likely one day have to be sold and gone forever. Why? It’s an old story, but it’s usually about death and taxes. Selling is often the only logical answer.

Research shows that family businesses account for $7.7 trillion of our annual GDP and make up 59% of the country’s private workforce. Family businesses in America are made up of 23.7% manufacturing, 10.4% construction/facilities, and 9.75% real estate.

In short, family businesses are America.

But unlike corporations, a family business, large or small, must plan death carefully. For Casey and George’s family, the decision was a tough one, but easy: sell. Markus was luckier. He survived the death of his father, but he worries about his children.

Unlike corporations, family businesses are treated differently by the tax code. When a company’s CEO dies, there is no tax bill. Business goes on as if nothing happened. However, if you are a family business and the family owner dies, the Grim Reaper is in for a big surprise. It wants a big chunk of what your family business is worth. And it wants it now.

Sometimes harmful government actions are coldly stopped, like the proposed new increases in estate and income taxes in last year’s rejected Build Back Better Act. Few noticed new regulations or taxes, but they added up to a death by a thousand cuts. Research shows that increased income taxes and estate taxes (death taxes) are the key pitfalls most family business owners fear.

The taxes of greatest concern are increases in individual income tax rates. Because 79% of family businesses operate as “pass-through” organizations, they pay normal income tax rates, currently 30% to 35%. However, a corporation gets away with just 21%.

There are other tax scares, such as proposals to increase capital gains taxes from 20% to 39.6%, as well as proposals to halve the lifetime inheritance tax (death) tax exemption and increase the inheritance tax rate on the death of the family business owner.

Sometimes the results of advocacy are invisible. But make no mistake. advocacy works.

In the recently passed anti-inflation law, taxes were increased, but fortunately not for family businesses. This time it was a minimum income tax of 15% for companies with profits over $1 billion that affected about 150 to 200 companies.

Rest assured it has taken many, many meetings to oppose taxes that you haven’t seen in various bills. That behind-the-scenes work included stopping a new 3.8% tax on non-passive or business income. That was important. The operating result is the income of family businesses. This proposed tax was known as the “Net Investment Income Tax”. But thankfully, no matter what it was called, we helped get it off the bill.

That’s not all that was stopped.

A 3% income surcharge on trusts and estates earning more than $200,000 was also removed. And another 5% income surcharge tax on trusts and estates earning more than $500,000 was eliminated.

That’s all good news for family businesses, but it’s not over yet. Everything can be proposed again at any time and does not have to be decided by Congress. Taxes can be tacitly levied by the Treasury, as well as the elimination of haircuts. The sad truth is that 70% of voters believe a wealth tax on successful family businesses is in order, and there are legislative proposals waiting in the wings.

Family businesses like Casey’s, Mark’s and George’s and maybe yours need to tell their stories of how they grew their business, how they funded their employees during the pandemic and how local communities depend on their support.

One by one voters need to hear these stories.

Writing to and meeting with your congressmen can be a tedious and frustrating process. You might think it doesn’t work, but it does, as evidenced by these recent victories.

Informing your representatives of the economic harm they are proposing can and does change the outcome. Their ears perk up when told of lost jobs, the elimination of family legacy, and shattered community support.

Your vote counts. It can change everything.

Pat Soldano is President of Family Enterprise USA and the Policy and Taxation Group, Washington DC. Both are advocacy groups fighting for family businesses and cutting taxes and regulations that harm them. A longer version of this article originally appeared in the Seattle Times.

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