For the first time, profits earned by owners of “pass through” businesses structured as S corporations would be subject to the 2010 health care law’s 3.8% investment income tax, if they make more than $400,000. Combined with higher ordinary income rates, pass-through businesses could face a 6-point marginal tax rate increase.
That’s on top of other tax increases already scheduled to take effect next year, including tighter limits on interest expense deductions from the GOP tax law in 2017.
“We’re going to a place we’ve never gone before, and I think for private companies, they’re going to have a really hard time surviving this environment,” said Reardon, who thinks the Fortune 500 will benefit at their expense. “Flyover country is just going to get screwed.”
Biden’s picked a head-spinning number of lobbying fights, any one of which would make headlines — and he’s doing it all at once.
He’d revoke the century-old deferral of capital gains tax on “like-kind” real estate exchanges of similar properties, ranging from office buildings to grazing land. After a $500,000 annual exclusion — half of what President Barack Obama proposed when he tried to kill the tax break — gains would be taxed immediately.
That’s going to affect the big commercial real estate deals where most of the economic activity occurs, said Chicago Deferred Exchange Company’s Mary Cunningham, who helps arrange like-kind transactions. “It becomes a major disincentive for investment, which is desperately needed in the wake of the pandemic as we have to reimagine and reinvent how commercial real estate is going to be used,” Cunningham said.
A who’s who of influential lobbies is fighting the proposal, including the American Farm Bureau Federation, American Hotel & Lodging Association, National Association of Realtors and The Nature Conservancy, which supports like-kind exchanges between landowners to protect environmentally sensitive areas.
In another major shift, heirs would have to pay capital gains tax on the appreciation in value of inherited property from the date the deceased originally purchased it, above a $1 million per spouse exemption with up to $500,000 more allowed for gains on primary residences.
Once the estate tax captures whatever’s left, the Tax Foundation says the combined effect is a 61% tax on large inheritances. The take would total nearly 70% in California and New York City after state and local taxes. If heirs decide to keep running the farm or family business, they can defer paying capital gains tax until they eventually sell. But they’d be on the hook for tax on the entire gain going back to the deceased’s original cost basis.
Groups like the Farm Bureau, National Association of Manufacturers, National Multifamily Housing Council, National Federation of Independent Business and other powerful stakeholders are opposing the change. NFIB is already putting small businesses out there to try to sway lawmakers, like Steve Ferree, a Portland, Ore., plumbing business owner and constituent of Senate Finance Chairman Ron Wyden.