President Joe Biden's recently released $6 trillion 2022 federal budget puts capital gains taxes in the spotlight again, says the Tire Industry Association (TIA).
The proposed budget "would not change the gift or estate tax thresholds," according to TIA officials.
"Unfortunately, the same cannot be said of the capital gains tax system. The president has proposed taxing capital gains on assets going through an estate. In other words, death would become an event that would trigger capital gains.
"Presently, not only are assets going through an estate not subject to a capital gains tax, but they get a new, 'stepped-up' basis to the assets then fair market value. Upon a careful review of the somewhat sketchy guidance on the proposal that has come out thus far, it even appears that contributing property to a partnership would trigger capital gains as would removing property from a partnership.
"Even though this change is billed as only affecting the ultra-wealthy, it has the potential to wreak havoc on many small businesses, farms and ranches by requiring the payment of substantial taxes upon the death of the owner. For the first time in our nation’s history, death could cause the same asset to be taxed by estate taxes and by income taxes.
"While it may make sense to tax these gains for the wealthiest of all Americans, it certainly should not apply to small business owners, farmers and ranchers who year in and year out pay their fair share of taxes and then would get hit with an additional new capital gains tax at death or when removing assets from a partnership. At a minimum, there should be a step-up in basis of assets equal to the then-current estate tax exemption.
"TIA will be working hard to educate members about the impact that new capital gains taxes would have on small businesses and advocating that small business owners, farmers and ranchers not be swept up in an effort to tax the ultra-wealthy.
"Despite pressure, the proposed budget does not eliminate the $10,000 cap on deductions for state and local taxes. A number of Democrats, particularly from those states with high state and local tax rates, have been placing serious pressure on the White House to include the elimination of the SALT cap in any proposal as a condition of garnering their support."
Biden's budget proposal also includes "significant investments in non-defense spending. The Departments of Commerce, Education, and Health and Human Services and the Environmental Protection Agency would each see their budgets increase by more than 20%, with the Department of Education seeing the highest bump at 40%.
"The budgets for the Department of Defense and Homeland Security would be kept essentially the same" from fiscal year 2021.
No agency would see notable reductions to their budgets.
"In turn, the president’s budget proposes to bring in $3.6 trillion in new tax revenue over the next 10 years through a number of tax changes, many of which would be highly contentious.
"If it were enacted as proposed, which simply will not happen, the proposal would result in a net tax revenue increase of $2.4 trillion, due to the extension and expansion of a number of tax credits such as the child tax credit. Even with this increase, it is estimated that the proposed budget would add $1 trillion to the federal deficit over the next decade.
"The bottom line to all this is that even if Congress were inclined to incorporate just some of the President’s proposed spending increases, the focus will be on where to come up with the money to at least partially pay for these increases.
"On the strictly corporate side, the president’s budget proposes to increase the corporate tax rate to 28%."
TIA calls this "a non-starter, even amongst the president’s own party. Senator Joe Machin (D-WV), whose vote will be essential to passing any legislation, has indicated that he is not comfortable with a 28% corporate tax rate, though he could support a 25% rate.
"The proposal would also raise revenue through a number of changes to the way that businesses with international earnings are taxed."
TIA adds that the proposal "is silent on Section 199A deduction for owners of closely held businesses. While it is a good thing that Section 199A is not being targeted for immediate elimination, the provision is set to expire in 2026 – at which time, depending on where the corporate tax rate stands, these closely held businesses would be placed at a severe disadvantage to their corporate counterparts.
TIA says it will continue to push for making Section 199A permanent.
"Even though the budget proposal does not specifically mention limiting Section 199A, there is some thought that this option may still surface as a 'pay-for' by limiting this valuable deduction only to individuals who make less than $400,000."
While TIA cautions that "a president's budget proposal is just that - a proposal. Congress is free to entirely disregard it and go their own direction.
"However, particularly when the same party is in control of Congress and the White House, Congress is typically more inclined to pick and choose portions of the President’s budget to incorporate into the appropriations bills that will emerge in the coming months," say TIA officials.
"Again, the President’s budget is just an initial shot across the bow when it comes to what ultimately might end up in the appropriations and related bills. However, now that these options have been laid on the table, it would be a mistake not to take them seriously. With the same party in control of both sides of Pennsylvania Avenue, there is a much greater chance of things moving - and quickly - than there has been in prior years."
