February 2015: Government Affairs

February 2015

Here We Go Again – Attacks on Capital Gains

By Stephen A. Borg 

President Obama gave his State of the Union speech in mid-January to a joint Session of Congress and the American people. While usually a mainly political speech, Presidents throughout our nation’s history have used this speech to lay out their priorities and to put political pressure on Congress to act on issues related to the President’s agenda.

President Obama took this opportunity to lay out legislative markers on one of the biggest issues to arise during his last two years in office: tax reform. Washington, D.C., has been abuzz since the Senate flipped to control by the Republican Party, and broad based tax reform may finally be possible in 2015. House Ways and Means Chairman Paul Ryan (R-WI), Senate Finance Chairman Orrin Hatch (R-UT), and President Obama have all stated at various times that tax reform will be a major priority this year, and most people expect them to make a gallant effort toward finding a bipartisan solution.

With that being said, Congress and President Obama remain apart in large ways, and one of the biggest areas of that gulf remains in how our government taxes bequests and gifts. President Obama is proposing to eliminate the “stepped-up basis” value that is a part of the current tax law that was last changed in 2011. As you may know, “basis” is the assigned value of an investment in property for tax purposes and is used to determine both a gain or loss when property is sold, and the potential resulting capital gains taxes.

“Stepped-up basis” assigns the value for inherited or gifted property at its value at the time of the property owner’s death.  If the property is sold by the heirs, capital gains taxes are due on the increase in value, since the property was inherited. If President Obama got his way, the basis for inherited property would revert to a “carryover basis,” where the value of the property would be the value at the original point of purchase. As you can imagine, this could have an enormous impact on small business owners, where the value of their family-owned businesses and property have risen dramatically over the years. But the President doesn’t stop there; he is proposing to increase the capital gains rate back to 28 percent for bequests and gifts.

For years, the MCAA, along with numerous other family business-centric organizations, has been fighting for stepped-up basis and for the lowest possible capital gains rates to ensure that our members are able to pass along their family businesses to their heirs, confident that their businesses may be able to live on for years to come. While the President has mentioned that he is proposing to protect small, family-owned businesses in the process, we all are well aware that the devil is in the details.

As tax reform moves through Congress in 2015, the MCAA and our partners in the Family Business Estate Tax Coalition (FBETC) will continue to play an active role in this debate and continue to push for the continued use of the stepped-up basis.

As always, it is great to be able to approach Congress with personal stories of how our nation’s tax structure, and – in particular – the estate tax and the capital gains tax affects our nation’s small businesses. So if you have a story to share, please do not hesitate to let the MCAA know your story. What better way to counter the argument that these taxes only hit the wealthiest in our country, than to show the ways the tax system in America ties the hands of our nation’s job creators – you, our small business owners.