Congress is in the midst of debates over the estate tax. Within the mean time, smaller businesses are left to hope that the tax is manageable.
The small company tax
Smaller businesses are having difficulty managing in today's economic climate. The recession was difficult to them and most are nevertheless searching for ways of returning to old ways of operations. The real estate tax debate is not making it easier to manage. Currently, this tax is caught up in the Senate. That makes things difficult for small businesses because they don't know what is going to happen in coming years. Studies are projecting that as numerous as eight times as several businesses could be taxed next year with the estate issue. That elevates concerns for businesses and owners are wondering how they are going to cope.
The key elements from the tax
There are two things affecting the real estate tax. First, the limit on assets that are transferable to the future at tax-free status and second, the rate in the tax are both up for debate. In 2001, Congress increased the exemption from $675,000 to $3.5 million and decreased the tax rate from 55% to 45%. There is a loophole however that rescinds the tax for the coming year and causes it to revert ago to pre-2001 rates. That rate is set at $1 million in exemptions and a tax rate of 55%. In 2009, over 5,500 estates paid death taxes, according to Tax Policy Center in Washington. Of that number, about 10% might be taxed again this year if Congress doesn't make moves to change the tax laws in time. That could put an added stress on small businesses that are already suffering as a result of recession.
Strategies to handle the tax
If the law changes, business owners could be able to rest, but until that happens, the majority are taking pains to prepare for the huge cost. They are already strategizing ways to handle the issue. Some owners are taking out hefty life insurance policies. The goal is to bring enough cash into the company after the owner passes away so the remaining owners won't have to sell the company to afford the estate taxes. Another strategy is for business owners to transfer some assets to their children. There is a gift tax that has a $1 million exclusion and that means married couples can hand down $2 million to their children tax-free. Anything over $1 million per person has a gift-tax rate of 35%. Though that sounds high, it's nevertheless considerably lower than facing the estate tax.
Finally, some business owners are establishing trusts that let them pass tax-free cash to heirs. This would allow business owners to deposit assets into the trust and then pay earlier the owner for a certain number of years. The assets would earn interest and eventually pass tax-free down to children named on the trust. The problem with the strategies though is that they apply to companies with millions of dollars in assets to move around. Most smaller businesses don't qualify for the possibilities above and are left hanging on what Congress is going to do.
Managing the estate tax
Managing the estate tax is proving to be difficult. Small company owners see it as a threat to render their businesses bankrupt if they die. Though there are some ways to handle the issue, it still is causing much concern in the business world. Everyone is hanging on Congress, waiting to see what it will do to help business owners, or hinder them.