Small Business Council of America Warns That Estate Tax Repeal Will Harm Many Small Business Owners

BETHESDA, Md.--(BUSINESS WIRE)--April 14, 2005--The Small Business Council of America ("SBCA") warned today in testimony before the Subcommittee on Tax, Finance and Exports of the Committee on Small Business of the House of Representatives that more small business owners would be hurt if the estate tax were to be permanently repealed in 2010, than if the law were frozen in 2009. "Proponents of repeal tout the benefits of estate tax repeal to the small business owner when, in fact, repeal will actually harm most small business owners because of the loss in the step-up in basis," said Paula Calimafde, Chair of the SBCA.

In order to protect small businesses, the SBCA called for immediate reform of the estate tax system. The following steps should be taken immediately in order to protect small businesses from estate tax:

-- Increase the estate tax exemption amount immediately to $3.5 million and then increase it gradually over a number of years until it reaches at least $5 million and thereafter have it increase by COLA

-- Preserve the step-up in basis at death for simplicity and fairness

-- Reunify the estate and gift tax exemptions, increasing the gift tax exemption to immediately equal the estate tax exemption, for simplicity and flexibility

-- Exempt retirement plan assets from the estate tax in an amount up to an additional $1 million if assets are going to a surviving spouse and up to an additional $500,000 if the assets are going to other heirs

-- Reduce the top estate tax rates, particularly if an interest in a closely held or small business is subject to the tax.

By implementing these steps, small business owners who have worked a lifetime to build their companies will be virtually exempt from the estate tax system which is the professed goal of many in Congress. Additionally, by implementing these proposals, many small business owners will find themselves in a better tax position than they would if the proposed repeal were to take place. Why? Total repeal would mean a loss of the step-up in basis and a continuing $1 million cap of the gift tax exemption. Further, the SBCA supports exempting part of retirement plan assets from the estate tax to promote retirement plan savings.

Under the estate tax law today, any assets that a person receives from another person's estate receive a "step-up" in basis - this means that the person receiving them gets them with a tax basis increased to fair market value as of date of death. Thus, when the person decides to sell the property, he or she would be taxed on the difference between the sales price and the date of death fair market value (this gain would be subject to either income tax or capital gains tax depending upon the asset).

A step-up in basis is contrasted to a "carry-over" basis where the heirs receive the assets with the same basis that the deceased owner had. For example, assume a father bought an investment property for $20,000, did not improve it in any way, and 35 years later at his death, the property is valued at $200,000. If the son received the property with a "carry-over" basis, his basis in the property would be $20,000. If the son then sold the property for $200,000, he would have $180,000 of gain, which would be subject to tax. If instead the son received the property with a stepped-up basis, his basis in the property would be $200,000 and there would be no gain subject to tax when he sold the property for $200,000.

Under current law, upon the full repeal of the estate tax in 2010, the current rule providing for a step-up in basis (or receiving the asset with a tax basis equal to its fair market value) is repealed. Instead, the heirs will have the basis that the decedent had in those assets. The heirs will be entitled to an aggregate basis increase of $1.3 million (adjusted for inflation after 2010). In addition, the decedent's surviving spouse will be entitled to an additional aggregate basis increase of $3 million (adjusted for inflation after 2010). So, if estate taxes are repealed and a decedent is survived by the decedent's spouse and the value of the decedent's estate is $4.3 million, the full amount of the estate will pass to the spouse free of any estate tax and the surviving spouse will have a stepped-up basis for the entire estate. If there is no surviving spouse, then only $1.3 million of assets will receive the step-up in basis.

At the end of the day, the proponents of repeal have won over the small business community with flashy slogans - "Kill the Death Tax" or "Is it fair that you have to pay taxes when you die?" (Of course, most of the owners did not realize that the estate tax never would have applied to them in the first place because the estate tax exemption is higher than their total assets.) Nor has anyone explained to them that a great number of small business owners will be worse off if repeal is enacted and only an extraordinarily few will be better off.

Despite attempts by Representative Pomeroy and others, who understand how repeal actually hurts small business owners, the House yesterday voted for permanent repeal (even though in reality this is a tax increase on small businesses). The SBCA urges the Senate to proceed with more deliberation in light of harm that can be done to the most vital segment of our economy - small business.

The Small Business Council of America (the SBCA) is the only national organization whose sole purpose is to represent the interests of private and family owned businesses in federal income and estate tax, pension, health care and other employee benefit concerns. The SBCA, through its members, represents well over 20,000 enterprises in retail, manufacturing and service industries, virtually all of which sponsor retirement plans and provide health insurance for their employees. The primary goal of the SBCA is to enact favorable federal tax and employee benefit laws for small businesses. The SBCA supports legislation that creates important economic incentives, and opposes burdensome and oppressive laws and proposals.