May 1, 2023

Biden’s Tax Proposals: Potential Impacts on Baby Boomer and Family-Owned Businesses

President Joe Biden’s 2024 budget proposals include several tax changes that could significantly affect small businesses and their finances.

The proposed budget features increases in the top capital gains rate for incomes over $1 million, the elimination of the “step-up in basis” loophole, expansion of who must pay investment income tax and the rate at which it is paid, and an increase in the corporate tax rate.

NFIB President Brad Close warns that the $2.5 trillion in proposed tax hikes could hinder the growth and job creation potential of Main Street businesses. He also claims that some tax increases are being misrepresented as closing “tax loopholes” and would directly impact small businesses.

Despite the challenges faced by small businesses due to inflation, hiring pressures, and other adverse business conditions, tax experts remain skeptical about the likelihood of Biden’s proposals passing as they currently stand. Many provisions have been previously suggested, and a divided Congress reduces the chances of their adoption without revisions.

The budget attempts to rebalance some of the cuts made by The Tax Cuts and Jobs Act of 2017, particularly for higher-income individuals, according to Eric Hylton, National Director of Compliance at Alliantgroup.

Biden’s proposal includes raising the top individual tax rate from 37% to 39.6% and changing the income threshold to $400,000 for single taxpayers and $450,000 for married couples filing jointly. This change would be effective for taxable years beginning after December 31, 2022, potentially impacting more businesses.

Ray Beeman, leader of Ernst & Young’s Washington Council, stresses the importance of small business owners staying informed about proposed tax changes, as they could resurface at a later time.

Five key provisions in Biden’s budget that business owners should be aware of include:

  1. Higher capital gains tax rate: The proposed increase in the top marginal rate on long-term capital gains and qualified dividends to 44.6% for income over $1 million could negatively affect small business owners looking to sell, especially Baby Boomers approaching retirement.
  2. Elimination of the “step-up in basis” rule: The proposed change would impact family businesses passing assets to the next generation, as few exceptions exist for capital gains tax consequences. However, Biden’s budget does partially address these concerns by exempting $5 million of unrealized gains per individual and $10 million per married couple.
  3. Loss of leverage in real estate transactions: The proposed elimination of 1031 like-kind exchanges over $500,000 for individual taxpayers and $1 million for married couples filing jointly could affect small businesses’ ability to leverage their capital in real estate transactions.
  4. Higher corporate tax rate: While most small businesses are pass-through entities not subject to corporate income tax, Biden’s proposal to raise the corporate tax rate from 21% to 28% would impact those that are. Congress will need to consider the implications for the U.S. compared to other developed countries.
  5. Potential increase in net investment income tax: The proposed increase of the 3.8% net investment income tax rate on small business income over $400,000 to 5% could lead to more small businesses paying this tax and at a higher rate than currently in place.