President Biden has laid out a sweeping tax plan to raise the rates paid by wealthy Americans and corporations – but his proposal may inadvertently increase the tax bill of small businesses across the country.
Biden has called for imposing higher taxes on capital gains and income for the top slice of income-earners, in part by closing a decades-old loophole that allows individuals to inherit appreciated assets at current market value with no taxes on the unrealized gain. Known as the "step-up" basis, the quirky tax code allows beneficiaries to sell those assets and pay capital gains based only on the time they receive the asset and the time they sold it, allowing them to minimize the tax penalty.
WHAT BIDEN'S CAPITAL GAINS TAX PROPOSAL COULD MEAN FOR YOUR WALLET
But the Tax Foundation, in a new analysis published Wednesday, warned that taxing capital gains at death could potentially hit small, family-owned businesses.
Under current law, when a business owner dies and transfers the business to an heir, that individual does not incur any additional capital gains tax liability. If the heir chooses to sell the business, they only have to pay capital gains tax on the gain during the period they owned it rather than the starting value.
A separate analysis from the Agricultural and Food Policy Center found that repealing the step-up in basis could affect up to 98% of family-owned farms, resulting in an increased tax bill of $700,000 on average. Another analysis conducted by Ernst & Young suggested that the increased tax liability could exceed the yearly income generated by those businesses, forcing some owners to liquidate.
"The Biden administration has primarily focused on increasing taxes on top earners to generate revenue to fund its spending priorities," the Tax Foundation analysis, penned by federal tax economist Alex Durante, said. "However, these proposals would hit many pass-through businesses and much of pass-through business income, including small businesses, family-owned businesses, and farms."
The Biden administration has indicated that it plans to exempt farmers from some of the president's proposed tax changes in order to ensure that family-owed farms aren't forced into bankruptcy.
"Our reforms are designed with protections so that family-owned businesses and farms will not have to pay income taxes when given to heirs who continue to run the business," a White House spokesperson told FOX Business. "These protections will encourage family farms to stay in the family."
Congress estimates that stepping up the basis of inherited assets costs the government about $43 billion a year. Eliminating the practice – coupled with raising the top statutory rate on capital gains from 20% to 39.6% – would generate an estimated $113 billion in new revenue over the next decade, according to recent findings from the Penn Wharton Budget Model, a nonpartisan group at the University of Pennsylvania's Wharton School.
The money would go toward funding a massive expansion of the social safety net, including establishing universal pre-kindergarten, free community college, paid family leave and tax credits for low- and middle-income households.
FOX Business' Edward Lawrence contributed to this report