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As we get used to the idea of 2024, it is not too early to start planning, and fighting, for what’s coming in the way of tax changes in 2025.
This year will be critical in many ways for family-business owners, not only to fend off damaging proposals, but also to begin laying the foundation for 2025, a year that could dramatically alter the tax code for family-owned businesses across the nation. And the clock is ticking.
Let’s start with the legislative side. There’s a lot on the table in the House of Representatives. In a large part this is because the 2017 Tax Cuts and Jobs Act, which included many temporary provisions that significantly affect family-owned businesses.
Here’s a quick recap of what’s coming.
Rates and Brackets
The 2017 legislation reduced all the tax rates, but also increased the brackets of income subject to the tax rate.
For example, the top tax rate was reduced from 39.6% to 37%, and the lower rate applies to income above $600,000 for a married couple (inflation adjusted to $693,750 for 2023), up from the $470,700 that applied in 2017.
According to the most recent survey by Family Enterprise USA, 80% of family-owned businesses operate as a pass-through, such as an LLC, Limited Partnership or S corporation. As a result, many of these owners will be directly affected if the top tax rates reverts to 39.6% at the end of 2025 and hundreds of thousands of dollar more pass-through income is subject to this higher rate.
Section 199A Deduction
To make the tax rates applicable to corporations and pass-through businesses more equivalent, the 2017 tax reform bill introduced a 20% deduction applicable to a pass-through business owners’ income. In effect, that deduction reduces the current top rate of 37% to 29.6%. Unfortunately, again, that deduction expires at the end of 2025.
Estate-tax Exemption Amount
The 2017 bill also doubled the then $5 million lifetime exemption from the estate and gift tax for individuals to $10 million. For 2023, the inflation-adjusted amount is $12.92 million. While the increased exemption amount expires on December 31, 2025, it will revert back to the prior level, but as if it had continued to be adjusted for inflation – likely to be around $7 million, especially if inflation rates remain high.
R&D Expense Surprise
If you don’t think change happens, look at last year’s R&D tax surprise.
Starting in 2022, research and development tax laws shifted (also due to the 2017 tax reform). The shift required that R&D expenses paid or incurred during a year be deducted over a 5-year period, rather than the full amount expensed in the year occurred. This is a big deal.
This change says companies can only deduct 20% of R&D expenses in the current year and then each of the next four years. There is strong bipartisan support to return to immediate deductibility (“expensing”) of R&D expenses, and a fix was, at the time of this writing, expected to be in a new package. Such a fix was also in the house Ways & Means Committee economic package reported way back in June 2023.
Clock is Ticking
Beyond these expiring provisions important to family-owned businesses, the entire tax code could open up in 2025 given the confluence of political pressures, federal budgetary strains, and potential economic conditions.
On the political front, much will turn on the outcome of the November federal election. Regardless of how the election plays out – a return to one-party control of the White House, House and Senate, or a continuation of divided government in one form or another – several themes will likely remain.
Whether President Biden sees a second term, or a Republican moves into the White House, the first year of a new administration is the most fertile ground for major tax legislation. The candidates’ tax platforms will be a roadmap to the agenda pursued.
In Congress, Democrats are likely to continue their campaign to increase taxes on high income individuals and large corporations, given the perceived public support for ensuring these groups “pay their fair share.” In the meantime, the current Chairman of the Ways and Means Committee, Rep. Jason Smith (R-MO), has shifted the tenor of the House’s tax agenda to a more populist view of families, farms, and small businesses.
The Senate Republicans, however, have been less forward leaning in their approach to tax reform.
While much will depend on whether Republicans are in control of either or both chambers, their support for continuing the 2017 reforms and reducing the tax burden on family-owned businesses is a safe bet.
The bottom line is that family-owned businesses, small to large, must stay vigilant.
The new year presents a great opportunity to educate Congress on the important legislative and regulatory issues on the horizon. We can do this by getting our stories out to the new Congressional Family Business Caucus. They need to know the importance of family-owned business to the national economy and local communities across the country.
Importantly, family-owned businesses should not approach the legislative and regulatory arena just from a defensive position.
Owners of family businesses need to use the new year to identify beneficial changes and build the case for what they want out of any tax reform that comes together in 2024, in 2025, and beyond.
Pat Soldano, President of Family Enterprise USA, and the Policy Taxation Group, both are non-partisan organizations advocating for family businesses of all sizes and are the organizers of the Family Enterprise USA Annual Family Business Survey.
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The need for fact-based reporting of issues important to multi generational businesses and protecting a lifetime of savings has never been greater. Now more than ever, multi generational businesses and family businesses are under fire. That's why Family Enterprise USA is passionately working to increase the awareness of issues important to generationally-owned family businesses built on hard work, while continuing to strengthen our presence on Capitol Hill. The issues we fight for or against with Congress in Washington DC include high income tax rates, possible elimination of valuation discounts, increase in capital gains tax, enactment of a wealth tax, and the continued burden of the gift tax, estate tax and generation skipping tax.
Family Enterprise USA promotes generationally owned family business creation, growth, viability, and sustainability by advocating for family businesses and their lifetime of savings with Congress in Washington DC. Since 2007, Family Enterprise USA has represented and celebrated all sizes, professions and industries of family-owned enterprises and multi-generational employers. It is a bi-partisan 501.c3 organization. Family foundations can donate.
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