Estate Tax Uncertainty Unsettles Small Businesses

The estate tax has been a part of the United States revenue system since 1916, and has soared as high as 77 percent.

Over the years, it’s become a complicated issue for many small, family-owned businesses. That’s because when an individual dies, what he or she leaves behind is subject to significant taxation, even if it’s primarily invested in a family business.

“The business is your savings, your legacy for your kids,” says Dan Danner of the National Federation of Independent Businesses, the nation’s leading group for small businesses. “In most cases, it’s everything you own.”

But if a family-owned business doesn’t have enough cash on hand to meet the estate tax obligation, heirs are often forced to sell the business in order to raise enough money to satisfy the tax bill.

“In a lot of cases, it means the business gets shut down to be able to pay the estate tax – which we think is a terrible thing,” Danner said.

David Logan, an economist with the nonpartisan Tax Foundation, calls it a “real fear” for many small business owners.

“There's strong evidence to suggest that higher estate taxes lose jobs – just to put it bluntly,” Logan said.

But beyond just the rates themselves, small business owners face the additional challenge of uncertainty as they prepare their estates and make provisions to keep their businesses running after they are gone. Because of an ongoing fight over rates, business owners can’t be sure how much cash their heirs will need when the time comes.

Currently, the estate tax kicks in for an individual at $5 million, at a rate of 35 percent. That’s the result of a deal worked out between the White House and Republicans in late 2010, just as a number of key tax rates were set to expire.

But that was only a temporary fix, and small business owners have no idea what may happen when the current tax rates expire at the end of 2012. Will the rates jump to 55 percent and kick in at the $1 million mark, or will lawmakers reach another 11th hour compromise?

Experts say many family-owned businesses are hesitant to invest or hire until they’re certain Capitol Hill will come up with a solution to the estate tax puzzle.

Logan says even a five or ten year fix won’t be enough to dispel uncertainty over the estate tax, and that comprehensive, permanent tax reform is what small businesses need to see. Logan says that kind of certainty allows business owners to invest and acquire capital.

“These are the things we need to spur economic growth,” he said.

This story is the latest in Fox News' series '10 Ways to Save the Economy.'