Will Estate Tax Be the Death of Your Small Business?

Will Estate Tax Be the Death of Your Small Business?

Calculator and penWhile estate tax isn’t necessarily the “death” of a small business, it could result in a significant burden for a handful of small businesses. The estate tax is sometimes levied on an estate upon the death of the decedent. An estate is a collection of assets and monies left behind by someone who passes away. The estate tax is decried by political opponents for causing double taxation because the assets composing the estate are post-tax dollars. Proponents of the tax argue that the estate tax isn’t double taxation because the decedent is gone and therefore cannot be taxed again. Additionally, the proponents of the tax argue that it is used to prevent the accumulation of dynastic wealth which stifles innovation and leads to endemic class systems.

The Estate Tax and Small Businesses

One of the rallying cries opposing the estate tax argues that it disproportionately affects small businesses and farms because of the value attached to the business and farm assets. Opponents argue that the tax unfairly targets small business (i.e., middle income) families because they are unable to access the tax-planning strategies of the uber-wealthy who mostly avoid estate tax issues. Supporters of the tax argue that the estate tax targets the uber-wealthy far more than individual farm owners and small businesses.

Speaker Paul Ryan (R-WI) penned an op-ed in which he argued small businesses are major employers and file income taxes with the Treasury Department. Therefore, via estate taxes, the government taxes income at the time it is earned (first taxation) and a second time once the assets transfer to the heirs of the estate (second taxation) resulting in double taxation.

However, a critique found that only 1 in 64 small business owners leave an estate that is taxable. Moreover, the federal threshold for the estate tax is $5.5 million for an individual and $11 million for a married couple. Estates must be valued above those figures to trigger the estate tax and only monies that exceed the threshold are taxable.

The practical effect is that the estate tax will not affect the vast majority of small business owners. Moreover, for the small amount that are affected, there are legal tools through which business owners can avoid having their heirs pay the estate tax.

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