What is the STEP Act and How Does it Affect a Business?
STEP stands for Sensible Taxation and Equity Promotion. As tax law is written today, if an owner dies, the cost basis for the asset resets to the death date.
In other words, if the asset is immediately sold for the adjusted cost basis, the heirs wouldn’t owe any taxes. If the heirs hold on to the asset and sell later, the capital gains would be calculated based on the cost basis amount that was reset on the death date. The adjusted cost basis is known as the Step Up in Basis.
The proposed change to the STEP Act would eliminate the Step Up in Basis. The basis would not be reset upon the owner’s death. The cost basis would be calculated from the date the owner launched or purchased the business.
The proposed change would allow a one-time exclusion of up to $1 million of inherited capital gains. If there is more than $1 million in capital gains (which can include a business plus real estate), families must pay the capital gains tax.
The proposal would allow the taxes to be paid over 15 years. However, until the taxes were paid a lien would be placed on the property – which could impact the heirs ability to refinance until the debt is paid.
This proposal would greatly impact family-owned businesses such as farms and ranches.
“Family businesses would have to pay taxes on their appreciated value even if that value is still locked up in the business,” said former Democratic Sen. Max Baucus, who previously served as Chair of the Senate Finance Committee. “Eliminating the step-up would force family businesses and ranchers to liquidate when an owner dies and to lay off employees while bringing in little revenue for Uncle Sam.”
If the Step Up in Basis is eliminated and a person owning a business currently worth $10 million dies, with a cost basis of $1 million when the business started or was purchased, heirs would owe 23.8% on $9 million of capital gains. The heirs would not be able to reset the business value at $10 million. Under the existing STEP Act with the Step Up in Basis, the tax bill for the heirs could potentially be zero, if they sold the business for $10 million.
SOURCE: Small Business Trends