For Owners, Lighter Tax Burden and Wider Range of Options
After more than a decade of fighting, small-business owners won decreased inheritance and capital gains taxes and other key measures in the tentative federal tax package announced Monday.
Offspring trying to run the family business after the sudden death of the founder would find tax relief in a measure that would increase the existing $600,000 exemption on the value of the estate to $1.3 million next year.
Business owners who want to sell out and retire would get a break from a retroactive decrease in the capital gains tax from 28% to 20%.
And the self-employed would benefit from expansion of the home-office deduction and a 100% deduction for health-care costs by 2007.
“For the first time in 16 years, we have significant tax cuts in terms of death taxes,” said Susan Eckerly, a lobbyist with the National Federation of Independent Business in Washington, D.C., the nation’s largest association of small-business owners.
That and other proposed changes “will make it much easier for people in business now to grow their business and provide jobs,” Eckerly said.
The NFIB, National Small Business United and other associations lobbied Congress hard for half a dozen small-business measures. When the dust cleared Monday, it appeared that small-business owners walked away with more than half of the changes they had sought.
They include:
* A doubling of the inheritance tax exemption, providing the heirs are actively involved in running the business and do it for the next 10 years.
Although only about 40,000 individuals pay estate taxes each year, and only 12% of the $17 billion collected annually comes from family-owned businesses and farms, thousands of family-owned businesses are affected, said Jamie Wickett, an NFIB spokesman.
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Sometimes businesses limit their growth to avoid paying estate taxes, or they end up spending thousands of dollars in legal and accounting fees, seeking loopholes in the 55% inheritance tax, Wickett said.
“All those actions . . . are a constant drain year in and year out that could be invested in the proper growth of the business,” said Todd McCracken, NSBU president.
John Campbell, president of Campbell Automotive Group, which owns five Saturn franchises in Orange County, said the new tax law would help ensure that family-owned firms like his can be preserved for the next generation.
Campbell said car dealerships and other capital-intensive businesses are particularly vulnerable to estate taxes because so much of their value is tied up in equipment, vehicles and buildings. He said he has seen family-owned dealerships put up for sale following the death of the founder because there simply wasn’t enough cash on hand to pay Uncle Sam.
“If I got hit by a bus tomorrow, the estate taxes would probably prohibit my family from continuing with this business,” Campbell said. The proposed higher exemption “is definitely a step in the right direction.”
* The capital gains tax cut, which would be retroactive to May 7. Rates will decrease from a maximum 28% to 20% and from 15% to 10% for those in the lowest income bracket (older investors earning less than $41,200 per couple).
Many small businesses have waited for years to sell their companies because they wanted to avoid paying the 28% tax, said Ken Anderson, a financial consultant with Arthur Andersen in Los Angeles. The tax break will mean that many owners who are ready to retire will be more likely to sell to new owners who could revitalize the firms, Anderson said.
Roland Boucher, a Costa Mesa business owner, said that the change will provide some relief to small-business owners but that indexing for inflation should have been included.
“A lot of people who start their own business keep it until they retire,” he said. “When they sell it, the capital gains bites you pretty bad.”
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Wickett added that the capital gains tax cut will also benefit business owners seeking venture capital. In states like California, with many small high-tech and entertainment companies, a decrease makes small-business investing more alluring for venture capitalists, he said.
* A health-care deduction for the self-employed.
Self-employed business owners who argued that they were being treated unfairly because corporations could deduct 100% of their health-care costs received a break last year. Congress approved an immediate 40% deduction for health-care costs; it will double to 80% by 2003. The proposed changes will bring the deductions to 90% by 2006 and 100% by 2007.
Although small-business activists praised the change, some self-employed business owners like Lynne Hoopingarner, a business consultant in West Hollywood, were less enthusiastic.
“We have to wait another five years for 100%, but Bill Gates can deduct 100% right now,” Hoopingarner said.
* An expanded home-office deduction that would take effect in 1999.
Two years ago, the U.S. Supreme Court narrowed the home-office deduction by excluding the self-employed who did the majority of their work outside their home and performed only administrative duties at their residence. The proposed legislation would restore the deduction and specifically exclude telecommuters with corporate-provided offices elsewhere.
Small-business groups lost one important fight. Their effort to clarify the definition of independent contractors was defeated in the face of opposition from organized labor and the Clinton administration. The issue is likely to resurface next year.
