Under current tax law, the estate of a person who passes away in 2015 can be taxed at a rate up to 40 percent for gross assets exceeding $5.43 million. (Photo courtesy of Steve Corey)

On April 16, the U.S. House of Representatives voted to approve a bill that would repeal the federal estate tax, which taxes an individual’s gross assets above a certain amount at a rate as high as 40 percent upon his or her death. For small business owners, including many in the HVACR industry, repealing the estate tax — or “death tax,” as it is also called — could have a significant positive impact on those who hope to pass their family businesses onto their descendants.

The ‘Wrong Tax’

The U.S. has the fourth highest estate tax rate in the world, according to the Tax Foundation. Currently, the estate of a person who passes away in 2015 can be taxed up to 40 percent for assets exceeding $5.43 million — assets that include not only cash reserves but also land, property, inventory, and other assets. HR 1105, the Death Tax Repeal Act of 2015, which was introduced in February by U.S. Rep. Kevin Brady, R-Texas, would repeal that tax.

Brady pointed to a study by the Republican Joint Economic Committee, of which he is vice chairman, that concluded the estate tax “is an overwhelming cause of the dissolution of family businesses” and a “significant hindrance to entrepreneurial activity because many family businesses lack sufficient liquid assets to pay estate tax liabilities.”

“The death tax is still the No. 1 reason family-owned farms and businesses in America aren’t passed down to the next generation,” Brady said, in a press release. “It’s the wrong tax at the wrong time and it hurts the wrong people. After a family loses a loved one, why should Uncle Sam swoop in and take much of the nest egg they spent a lifetime building, especially when it forces the survivors to sell their land or businesses just to try to keep what they worked so hard to earn?”

A ‘Big Problem’ for HVAC

Jon Melchi, vice president of government affairs and business development, Heating, Air-conditioning, and Refrigeration Distributors International (HARDI), said the tax is consistently polled as one of the most unpopular taxes in America and has been one of their members’ top concerns for several years.

“It’s a huge issue for our members,” he said. “It’s not $5 million sitting in your bank account — that money can be your real estate that you hold, the trucks you own, the inventory you have, and so on. The running joke is you don’t want to die at the beginning of cooling season, when you have a warehouse full of air conditioners.”

Charlie McCrudden, senior vice president of government relations for ACCA, said the estate tax is less burdensome than it used to be, though it is still a major concern for family-owned contracting businesses.

“Reforms to the estate tax several years ago did increase the exempted amount, indexed it to inflation, and gave a bit more certainty to family-owned small businesses,” he said. “However, there are a number of family-owned small businesses that still face estate tax liability. If this bill is passed, it would remedy that problem. We’re hopeful it will pass.”

Under the current tax law, “There have been some family-owned businesses that have had to sell off part of their businesses to pay the tax,” McCrudden added. “That really shouldn’t happen.”

“These aren’t people who are über wealthy; they’ll often have to buy life insurance — a significant amount — to cover the tax,” Melchi said. “HARDI’s members say that can cost into the six figures annually. You can be forced to hold large cash reserves; that’s money that’s on the sidelines, and, while I’m sure the insurance companies like it, it’s not something that is benefitting the economy at large. That’s a big problem.”

HVACR Businesses Take a Stand

During a March 25 House Committee on Ways and Means hearing on the bill, Karen Madonia, CFO, ILLCO Inc., urged Congress to pass the Death Tax Repeal Act of 2015.

“I personally find it fundamentally wrong to place a tax on death,” said Madonia, who serves as co-chair of HARDI’s government relations committee. “If a person is able to accumulate wealth through hard work, and if that person pays his fair share of taxes on his income as it is earned, I do not understand how the government can justify taking a significant portion of what he has left simply because he opted to save and reinvest rather than consume.”

Madonia also spoke about how small businesses already pay taxes and contribute to the economy.

“In my opinion, it is a fundamentally flawed tax because it is, by definition, double taxation, and it discourages entrepreneurship,” she said. “The U.S. has already benefited from that person’s success because he has employed people who pay taxes, bought buildings on which he has paid property taxes, and bought inventory and supplies from other companies, which can then afford to employ more people who pay taxes.”

Another HARDI member, Johnstone Supply of Bloomington, Minnesota, has had to become “highly leveraged” in order to keep the business in the family, according to U.S. Rep. Erik Paulsen, R-Minnesota, who also spoke during the committee hearing. “They’ve been forced to spend about 20 percent of their net income on life insurance to fund their future estate obligations. This is money that could otherwise be reinvested in the company, the business, or the community. But, that money is locked up. … The tax code is literally forcing them, essentially, to consider breaking up the business.”

Steve Moon, owner of Moon Air Inc. in Elkton, Maryland, said the tax is unfair to more than just the business owner and should absolutely be repealed.

“Not only is it unfair that grieving families are put in a financial bind at the hardest times of their lives, but it costs America jobs,” Moon said. “Politicians seem to think we are a cash cow they can continue to milk from beyond the grave. When there is money to pay the tax, stripping reserve accounts clean leaves these companies very vulnerable at their worst hour. Family members and management get discouraged, frustrated, and just close it up, and, poof, jobs are gone. Why can’t our government change its attitude and support small business instead of instigating its death?”

Industry involvement like Madonia’s recent testimony on Capitol Hill has been, and will continue to be, a key part of pushing the bill forward through the Senate, Melchi said.

“Rep. Paulsen from Minnesota references Johnstone Supply in his district, and these are all issues we’ve been able to push at HARDI’s Congressional Fly-In event,” Melchi said. “People say, ‘I don’t know if I make a difference,’ but, during one congressional hearing, we had two HARDI members prominently displayed for the relationships they developed during the fly-in. So, we can make a difference, especially on issues like this. Just being able to tell your personal story, you can make things happen.”

Wait and See

Also on March 25, U.S. Sen. John Thune, R-South Dakota, introduced the Death Tax Repeal Act of 2015 in the Senate. The bill mirrors the House version and is cosponsored by 27 senators.

However, things in the Senate “are moving a lot slower, especially tax-related things,” Melchi said. “But, it’s our hope the Senate Finance Committee will follow the lead of the House and hold a vote. There has not been a vote on this in more than 10 years, and so many people have pledged support for repealing the tax that it’s time to put your money where your mouth is. So, let’s hold a vote on it, and let’s see.”

Melchi said there appears to be bipartisan support for the bill in the House. “Some of the Democratic representatives seemed to have an interest in trying to do some things with the estate tax. They seem to understand the tax is punitive, and there should maybe be some sort of solution — maybe not outright full repeal, but fixing the problem. It shows folks who were previously locked into the $1 million are interested in moving the ball a little further.”

For now, the industry is in wait-and-see mode as the bill begins to work its way through the Senate. Meanwhile, HARDI and other industry organizations will continue to advocate for the bill at the local, state, and federal levels.

“You shouldn’t have to think about government when you want to hire new employees or take on a new line, and you sure as heck shouldn’t have to think about government when you’re thinking about what will happen when you’re gone,” said Melchi.

For more information on the bill, visit http://bit.ly/DeathTaxRepealAct.

Publication date: 4/20/2015

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