As Tax Changes Loom, Farmers Worried About Next Generation | News, Sports, Jobs
HARPSVILLE (AP) – Michael Kovach got into farming 13 years ago with the purchase of a 107-acre farm in Mercer County after retiring from the oil and gas industry at 39 years.
“I have worked too hard in this field to really contemplate the idea that it transforms into something other than what it is and improves from what it is,” said Kovach, 52, owner of Walnut Hill Farm in Sharpsville.
He has two full-time employees who help him raise grass-fed cattle, such as Angus cattle, lambs and chickens, which are sold directly to consumers on the farm. His wife, Karen, runs the farm stand.
Kovach bought the farm in the hope that one day he would pass the mantle of the property on to his 17-year-old daughter. Now he and other family farmers across the state are worried about the impact of changes in tax laws on their plans to transfer their farms from one generation to the next. following.
President Joe Biden has proposed tax changes to pay for the U.S. Family Plan, which provides government benefits and tax breaks to middle and low-income people.
The proposal that has generated the most interest in the business world is Biden’s plan to increase the corporate tax rate by 21% in place since 2018. He has proposed changing it to 28%, which targets the biggest companies, some of which actually no income tax on billions of revenues.
Small business owners are most concerned about increasing taxes on capital gains – profits on the sale of assets – and on inherited wealth. Biden’s plan calls for nearly doubling the top capital gains tax rate and eliminating a significant tax advantage on appreciated assets known as “Increase the base. “ The increase in the combined tax rate could add up to 61% on inherited wealth.
For example, if someone died after starting a business decades ago that is now worth $ 100 million, under current tax law, the business would pass to family members without capital gains tax. because the base cost of the business is increased to its current level. value at death.
As part of Biden’s plan, heirs should immediately have a capital gains tax of $ 42.96 million based on the capital gains rate of 39.6%, plus tax on investment income net 3.8%, less the estate tax exemption of $ 1 million. The proposal would reduce the inheritance tax exemption from $ 11.7 million to $ 1 million.
If the estate tax remains unchanged, the family would also pay an estate tax of 40% on $ 57.04 million of the remaining assets. Including the exemptions, estate tax would amount to $ 18.13 million.
Federal inheritance tax and capital gains tax combined would total $ 61.1 million on the original $ 100 million inheritance from heirs. This is without including state capital gains and inheritance taxes.
“It’s a really important thing if I’m the daughter of a business owner and want to inherit the shares of the business from my family.” said Elisabeth “Li” Connolly, partner at the accounting firm Connolly Steel in Avalon. âI, as an ordinary person, could theoretically not be targeted by this, but it will affect everyone in a negative way. “
Dividend payments and share buybacks
The tax proposal most closely linked to the broader economic recovery is the corporate tax hike which could rise from 21% to 28%, although negotiations are underway and media sources have reported that Biden had launched the idea of ââa minimum corporate tax of 15%. %.
Before the corporate rate was reduced in 2018 by the Tax Cuts and Jobs Act, corporations paid a tax rate of up to 35%.
Pennsylvania State Treasurer Stacy Garrity said she had met with executives of small businesses across the state who wanted to grow their businesses but were holding back due to uncertainty over tax changes.
Pennsylvania has 1.1 million small businesses, which Garrity says represents 99.6% of all businesses in the state.
She said farm owners in rural Pennsylvania are particularly worried about a capital gains tax increase.
More than 8% of American adults have at least $ 1 million in assets, according to Credit Suisse’s Global Wealth Report 2020. That’s just over 20 million Americans.
The Pennsylvania Farmers Union has 300 members, all of whom are family farms. The national farmers’ organization has 200,000 members.
âSome of these farmers have had these farms in their families for generations, and now, if they pass the farm on to the next generation, anything over $ 1 million, they would have to pay this capital gains tax. “ Garrity said.
Farm households tend to have more wealth than the average American household because they own significant capital assets, such as farmland and the equipment needed to operate a farm. In 2019, the average farm household had $ 1,042,855 in wealth, according to the US Department of Agriculture.
Gus Faucher, chief economist of the Pittsburgh-based PNC Financial Services Group, said the bank is waiting to have a better idea of ââwhat is likely to go through Congress before incorporating the tax increases into its forecast .
But at first glance, he said, this is unlikely to have a significant impact on economic growth.
“We saw very little change in growth when corporate income tax cuts were passed under the Trump administration in 2017” said Faucher. âThere was a modest recovery in the growth of fixed business investment after the tax cuts were adopted, but it faded in 2019.
âThe impact of the corporate tax cut has been primarily to increase dividend payments to shareholders and drive up stock prices, with little impact on the real economy. Therefore, I would expect very little negative economic impact from Biden’s proposed tax cuts. “
“Tax is a price”
A tax increase of a few percentage points can be absorbed by most profitable businesses.
“If they know the tax rate, they will adjust to it over a period of several months”, said Robert Fragasso, President and CEO of Fragasso Financial Advisors, Downtown. âThey will adapt like we do in our homes and our personal finances. We adapt to price changes. Tax is a price. It’s part of what companies pay to do business.
“You could argue that companies spend too much money on this or that or overpay people at the top,” he said. âIt’s just financial management. But taxes by themselves are neither good nor bad. This is how they are applied to the business. I am not arguing for higher taxes. But we have to pay for what we spend.
Fragasso, whose company manages nearly $ 2 billion for its clients, said lawmakers could get the wrong impression of what companies earn regardless of how profitability varies from year to year, and that responsible business leaders put money aside for unforeseen events that will impact their future.
“This is what we do,” he said. âA lawmaker might look at us and say, ‘Tax them more because they’re a wealthy business’ when in fact we are putting it aside for the future to cover the unexpected or use to expand the business. business and create more jobs. “
Connolly noted that nothing is set in stone yet.
“Over the years, I don’t get mad about anything until I see it signed into law because there are going to be a lot of changes,” she said.
“Everything at the moment is still just speculation because there are going to be a lot of negotiations in this context.”