Correction: This blog has been updated to more accurately describe changing estate tax law over the past ten years.
Karen Madonia, CFO, says her family’s Aurora, IL-based heating, air conditioning and refrigeration distribution company Illco has a history like many other family businesses. Her father bought the company for $340,000 in 1973 when it was only seven employees strong. He worked every job, met with customers, pulled orders and built the business up to the $40 million in revenues it is today, with eight branches in three states and 92 employees. Now, nine members of her family work there and several employees’ family members do, as well.
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“There are thousands of families that have similar histories – families who have decided to put everything on the line to pursue the American dream,” she testified before the House Small Business Subcommittee on Economic Growth, Tax and Capital Access at the end of May. “… While I am speaking today about my own family’s experience, I know that all family business owners have the same issue: How do I pass this business onto future generations without losing some or all of it to the IRS in the form of estate taxes?”
The estate tax debate is heating up this year again, as the tax rate is set to jump in 2013 to 55 percent with the exemption falling to $1 million. Distributor associations have been vocal about repealing the tax because they say it has an unfair effect on family-owned businesses.
One of the common misconceptions distributors speaking in Washington come up against when discussing the topic is that money made in businesses is distributed directly to owners rather than back into the business. But as Madonia outlined in her testimony, Illco has $10 million invested in inventory, one of a distribution company’s largest assets.
“We wanted to drive home the point that any income at the end of the day is not simply distributed to shareholders or placed in a savings account,” Madonia told MDM in an interview. “It all goes back into the business. This is an industry where we have to carry a heavy inventory. The things we sell are integral to basic life functions – it’s all necessary. When refrigeration, heating and air-conditioning equipment breaks down it has to be repaired immediately. That requires a lot of money being filtered back into the company.”
When a business is hit with the estate tax after an owner dies, the concern is that the business has to sell part of its assets, if not all, to pay the bill, Madonia says. Or if the business does have liquid assets to pay the tax bill, that may hinder its investment plans for growth.
“People in family businesses get this,” Madonia says. “Being hit with an estate tax means you’re dismantling your company.”
The good news? Madonia says that small businesses seem to be making headway in Washington when it comes to both educating lawmakers on the impacts of the estate tax on business and in pushing for the repeal of the estate tax.
Madonia hopes there is a permanent solution to the estate tax debate soon – even if the ideal solution, repeal, doesn’t happen. The estate tax has changed every year from 2000-2010; it was phased out between 2001 and 2009, with no estate tax in 2010. In 2011, Congress set temporary rates that continued into 2012, and in 2013, rates are scheduled to revert back to 2000 levels. “There’s so much uncertainty,” says Bill Bergamini, president of Illco. “How can you plan for something that changes constantly? It’s tough.”
“There needs to be a permanent solution to the estate tax issue so that business owners can spend more time growing businesses, instead of spending time tax planning,” Madonia says.
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