A Phony Repeal
Small-business owners who fought for repeal of the estate tax might now be wondering if the illness wasn't preferable to the cure.
It was bad enough that the $1.3 trillion tax package ignored changes long sought by small companies, such as bigger deductions for health-care and meal expenses. Now, on closer inspection, it turns out the estate-tax "victory" provides little benefit to any entrepreneur whose business plan doesn't include dying before the decade is over.
The problem lies in the bewildering time-table for the phaseout. It takes eight years, for example, for the top rate to fall to 45% from 55%, and nine years for the exemption to rise to $3.5 million from $675,000. When outright repeal does take effect in 2010, it will last just 12 months. Current rates come back in 2011.
In such an environment, you might as well forget about long-term planning. Unless Congress makes the repeal more permanent, many lawyers and accountants are telling small-biz clients to behave as though nothing has changed.
Just ask Lavetta Willis, president of ll International Shoe Co., a Los Angeles footwear manufacturer with 37 employees. Six months ago, following the birth of her first child, Willis spent $80,000 on drafting a will and buying life insurance to protect her estate against taxes. When the repeal was announced, the 35-year-old entrepreneur figured she didn't need the policy anymore. But because of the law's 2010 expiration, her lawyers told her to keep it. "In 10 years, what if I'm not in good health?" she asks. "I don't want to buy insurance then."
Nonetheless, the National Federation of Independent Business, which fought hard for the repeal, says its 600,000 members are pleased. "It's a step in the right direction," says Dan Blankenburg, a lobbyist for the group. "Repeal is going to happen. It's just a matter of time."
Maybe not. Senate Majority Leader Thomas A. Daschle has warned that Congress may revisit the tax law. The changes may not be favorable, and may be attached to a hike in the minimum wage. What's more, the next decade will see two Presidential elections and five congressional elections. If the country runs a budget deficit, you can expect economics, as well as politics, to trigger a rollback of the repeal. That uncertainty frustrates accountants like Grant Thornton LLP's Thomas P. Ochsenschlager, who jokingly advises clients to "stay alive as long as possible. Then have a fatal heart attack in 2010."
O.K., it may not be that bad. The tax package does include some goodies for entrepreneurs. Many will benefit from the reduction in the top individual tax rate on July 1 to 38.6%, from 39.6%, and to 35% in 2006. AMI Partners Inc., a New York research firm, estimates that 1.25 million businesses will save an average of $36,000 this year. Some might put that back into their businesses. Not a bad idea, considering you still can't take it with you.
By Naween A. Mangi