The global pandemic has had sweeping ramifications for small businesses around the United States, and the 2020 Election is certain to have a significant impact on small businesses. A majority of America’s small businesses rank the economy as one of the top two issues influencing who they will vote for this fall according to data from the Q3 2020 MetLife & U.S. Chamber of Commerce Small Business Index.
As Tuesday, November 3 inches closer, questions arising about what a change in administration, or incumbent politicians’ evolving priorities might mean for the small business landscape. Small business owners should continue to pay close attention to campaign promises, issues particularly focusing on tax reform, minimum wage and health care.
No matter what November 3rd brings in terms of outcomes, its almost a certainty that nearly half of the country will be disappointed, if not horrified. The possibilities of civil unrest, COVID resurgence, and economic distress will all impact consumer behavior and business stability.
Below are a few things to take into account when outlining a game plan for your small business after the 2020 election and in the years to follow.
If former Vice President Joe Biden is elected president in November, his inauguration into office would take place approximately three years after one of the most significant revisions to the federal tax laws in generations went into effect. The Tax Cut Jobs Act reduced the federal corporate income tax from 35% to 21%. That rate reduction, and the Tax Cut Jobs Act elimination of the corporate alternative minimum tax, results in a broad reduction of corporate taxes. The bill also contained provisions intended to spur investment in the U.S and deter investment offshore.
If Vice President Joe Biden is elected, his corporate tax proposals would reduce the impact of some of the TCJA’s changes. His administration would pursue an increase in the federal corporate income tax rate from the current 21% to 28%, which was the same rate proposed by the Obama administration in both 2012 and 2016.
Any corporate income tax change has the potential to influence corporate actions in numerous ways. Raising the corporate tax rate increases the cost of making investments in the United States. Under a higher tax rate, some investments wouldn’t be made, which leads to less capital formation, and fewer jobs with lower wages.
For Trump, making the tax cuts passed in 2017 permanent in a second term is likely the most significant issue for business owners, as some key provisions will expire in 2025 based on current law.
For small business owners that are focused on tax issues, if they are happy with the current tax situation, it is likely they would support President Trump’s tax and economic vision.
Stimulation of the Economy
As numerous small businesses were forced to shut down during the COVID-19 pandemic, small business loans and lines of credit were, and still may be, the only source of revenue available right now. Although the Paycheck Protection Program offered relief to many businesses around the United States, the program closed in August and the SBA is no longer accepting applications from participating lenders. The two presidential candidates certainly have differing views on the next steps to helping small businesses, and which industries the government should strengthen.
The Trump administration has proposed the Main Street Lending Program, which supports lending to small and medium-sized for-profit businesses and nonprofit organizations that were in sound financial condition before the onset of the pandemic. Loans originated under the program have several features that will help borrowers facing challenges. The program offers 5-year loans, with floating rates, and principal and interest payments deferred as indicated in the charts below to assist those experiencing temporary cash flow interruptions. To support a broad set of employers, loan size starts at $250,000 and ranges up to $300 million for some loan types. Additionally, President Trump has expressed interest in possible future bailout packages for the cruise and airline industries.
Former Vice President Joe Biden has singled out industries including clean energy, construction and infrastructure, and 5G telecommunications as key sectors to his economic recovery plan. Additionally, Biden supports increasing the minimum wage in America to $15/hour, which would generate $120 billion in higher wages for workers by 2024, but at a time where businesses are struggling to remain above water, such a move could widely impact unemployment rates as business would need to rebound more robustly to achieve a similar level of employment. He believes the injection of wages will help stimulate the economy and spur greater business activity and job growth.
Although the idea of raising the minimum wage is noble and commendable, some argue that raising it could have serious and negative unintended consequences, disproportionately harming those it was intended to help.
Capital Gains Taxes
Both presidential candidates have suggested changes to the way capital gains get taxed.
Biden’s tax plan would take away the preferential 20% maximum capital gains rate for those with income levels about $1 million. Instead, investors would have to pay their ordinary income tax rate even on long-term capital gains. With the plan reinstating a 39.6% top tax bracket, the net impact would be to nearly double long-term capital gains liability.
On the other hand, President Trump has talked about lowering the top capital gains tax rate to 15%, which for business owners looking to exit in the next few years, could be significant.
These differences are important for small business owners holding valuable assets that they may be potentially selling in the future. Many entrepreneurs are worried about how fast the tax change could become law, and whether they should be selling their business sooner rather than later.
As older owners plan their exit strategies, they do want to know that they have the option to pass on the wealth they have created to heirs on favorable tax terms in the event of death. Many small business owners could be effected in the event of former Vice President Joe Biden taking office.
Trump’s Tax Cuts and Jobs Act nearly doubled the amount of money that families can pass on free of taxes either in a bequeath or in lifetime gifts. This is known as the gift and estate tax exclusion.
In 2020, an individual can pass on up to $11.58 million to an heir without facing federal estate or gift taxes of 40%.
Biden’s plan would bump the top tax rate on these transfers to 45%, limit the amount people can pass on at death free of taxes to $3.5 million and limit the exclusion to $1 million for gift taxes, according to the Tax Policy Center.
He is also proposing to eliminate the step-up in basis, a provision in the tax code that allows heirs to receive assets valued as of the date of death. This means, an heir who sells the holding right away would pay little to no capital gains taxes on it. Instead, Biden’s proposal would tax unrealized capital gains at death.
Healthcare coverage costs have been skyrocketing for small businesses, and were a major concern for business owners well before COVID-19 arrived. Although both President Trump and former Vice President Biden want to lower health care costs, their approaches differ significantly.
In a second term, much of President Donald Trump’s healthcare platform plans to build upon the administration’s first term efforts, which included an ongoing effort to repeal the Affordable Care Act. According to the Trump 2020 campaign website, the administration has worked to expand access to healthcare in rural communities, which is an issue that impacts 1 in 5 Americans. Another key market for small businesses is the expanded access to Association Health Plans (AHPs) allowing small business to pool risk across states.
In contrast to the president’s platform, former Vice President Joe Biden has committed to protecting the ACA, which was shepherded by President Obama and signed into law in 2010. According to the Biden campaign website, the candidate plans to build on the foundation laid by Obamacare and expand access to healthcare for millions of Americans so that approximately 97% of Americans are insured.
Only time will tell what employers should expect with health care moving forward, which makes it important for small business owners and Human Resources departments to pay critical attention for the foreseeable future.
Exemplar’s Professional Team Can Help Your Business Navigate Change
Exemplar’s team of over 50 professionals nationwide is equipped to help your small business with potential tax and legal changes that may result from the 2020 election. Chat will us here to discuss how this might impact you today!
Managing Director, Exemplar Tax & Accounting
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