By Pat Soldano, President, Family Enterprise USA, Founder & President,
Policy and Taxation Group
There’s a “tax cliff” ahead with the Tax Cuts and Jobs Act (TCJA) set to expire at the end of 2025 and legislators on Capitol Hill are searching for ways to avoid going over the edge.
Without action by Congress and the next Administration, TCJA’s expiration will have major impacts on family office clients and on America’s largest private employer, family businesses.
House Ways and Means Committee Chairman Rep. Jason Smith (R-MO) and Tax Subcommittee Chairman Rep. Mike Kelly (R-PA) have formed Tax Teams on American Manufacturing, Working Families, American Workforce, Main Street, New Economy, Rural America, Community Development, Supply Chains, U.S. Innovation, and Global Competitiveness.
The teams are studying key tax provisions set to expire at the end of 2025 and holding public feedback sessions. Agenda items include avoiding increased income taxes, stopping a decrease in estate tax lifetime exemptions, no increases in capital gains taxes, and restoring research and development expensing.
Clients of family offices may be more especially anxious as the TCJA’s $13 million-plus estate tax exemption may get rolled back to between $5 million and $8 million, including gifts to estate, skipping taxes, and other provisions.
Unfortunately, increases often fall on the shoulders of America’s “pass-through” structured family businesses, which account for 83.3 million jobs. Pass-through family businesses are already disadvantaged against corporations. Corporations pay 21% in federal taxes. Pass through entities, on the other hand, pay up to 37%. According to research conducted earlier this year by Family Enterprise USA, over 80% of family businesses are pass-through entities.
Extending the expiring TCJA tax cuts, according to the Congressional Budget Office, will dig a $3.4 trillion hole in the Federal budget over a decade, or more than $4 trillion at existing corporate tax rates.
As a result, lawmakers are looking for new money and expenditure cuts, should they keep the Trump-era tax rates.
The Senate sees billionaires as a big target. Senator Ron Wyden’s (D-OR) “Billionaire Tax Act” is aimed at overhauling carried interest, creating a minimum corporate income tax on foreign profits, raising taxes on stock buybacks, enacting minimum taxes on the richest Americans, and increasing estate and gift tax exemption amounts, among a few proposals.
The Republican Senate tax leaders are focused on Individual Taxes, Business Taxes, International Taxes, Retirement, Community Development, and Energy Taxes.
The White House has introduced its own measures aimed at billionaires and corporations with a proposal to raise corporate tax rates to 28% from the current 21%. The White House budget would also raise the Inflation Reduction Act’s corporate minimum tax rate on billion-dollar corporations from 15% to 21%.
Another proposed White House measure requires ultra-high net worth individuals to pay a minimum 25% tax on income. Other increases would be a hiked rate to 39.6% on the wealthiest Americans. The proposal brings the top marginal tax rate to 39.6% for single filers earning over $400,000 a year and married couples making more than $450,000 per year.
Of course, the outcome of the presidential and congressional elections will shift momentum, since the winning House committees will be the ones writing the next tax bill.
If Democrats take the House, it’s predicted the current TCJA provisions will be extended to those taxpayers earning $400,000 or less. Those earning more will likely see tax rules revert to pre-2018 levels. If Republicans stay in control, it’s likely TCJA provisions will be extended, but it will create that $3 trillion-plus budget hole.
On September 18, the Congressional Family Business Caucus Meeting held its last meeting of the year. The meeting addressed pass-through taxes, enterprise structure, and possible wealth tax legislation. There will be three more Caucus meetings next year, in March, May, and September, and those will be the last time family offices, clients of family offices, and successful individuals will be able to voice their concerns on these critical issues in this important Capitol Hill forum.
Don’t let the opportunity pass.
Pat Soldano is the President of Family Enterprise USA and the Policy and Taxation Group, both nonpartisan organizations advocating for family enterprises of all sizes. They are the organizers of the Family Enterprise USA Annual Family Business Survey 2024 and assist in organizing the Congressional Family Business Caucus. For more information go to www.policyandtaxationgroup.com or email pmsoldano@family-enterpriseusa.com