How The Death Tax Squeezes Small Businesses Out Of The Market

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Rachel Stoltzfoos Staff Reporter
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It’s better to die in the dead of Winter if you’re a small business owner in the air conditioning repair industry.

An off-season death means you’ll have a smaller inventory, which means the government will have to settle for a smaller percentage of your property when you die, and your family will have a better chance of keeping the company.

That’s the bizarre reality for many members of HARDI, a trade association composed of about 500 heating, air-conditioning and refrigeration distributors. Many of those family-owned distributors provide the parts and supplies people need to fix air-conditioners and refrigerators — often on short notice — so by nature they need to maintain large inventories.

The physical inventories often make it exceedingly difficult for families to come up with cash to pay the tax required to inherit the company. The U.S. taxes inheritance at a rate of up to 40 percent — the fourth highest rate in the world.

“We don’t have a big stash of money somewhere,” Karen Madonia, whose father owns one of those distributors, told The Daily Caller News Foundation. “Our money is tied up in our inventory, our accounts receivable, our trucks.”

Her father’s company, Ilco Inc., currently carries an inventory worth $12,000,000 and accounts receivable of about $5,000,000. It also has five buildings and a fleet of 24 trucks, some of which cost more than a quarter million dollars. Much of the income left after taxes and employee benefits is invested right back into the company.

If something happened to Madonia’s father, she and her family would be forced to liquidate inventory and downsize staff in order to pay the tax. In a worst case scenario, they’d be better off selling the whole business, and it would likely consolidate into a larger business. (RELATED: Obama Proposes Second Death Tax)

“The tax has had a reverse impact of what the proponents of the law would like,” Jon Melchi, government relations chief for HARDI, told TheDCNF. “The smaller companies are forced to sell their company, and typically end up getting bought by larger companies.”

Since fewer air-conditioning units and refrigerators break down in the Winter, they can maintain a smaller inventory, so an off-season death of Madonia’s father could literally save her family business.

“It’s sad families have to think that way,” she told TheDCNF.

Her father and his dad bought Ilco in 1973 with their combined assets and a vendor guarantee as collateral for a $340,000 loan. Forty years later he has a business with eight branches in three states, 97 employees and $42,000,000 in revenue.

“His whole life, he has worked seven days a week, ten or twelve hours a day, to build a great company which we now have,” Madonia told TheDNCF. But “the thing that he struggles with the most is trying to figure out how to pass the company on to us.”

To prepare for the tax, her father has set aside money that could otherwise be invested into the business. Other business owners have to carry massive life insurance policies that would help cover the cost of the tax.

Effectively, the death tax penalizes Madonia’s father for investing money to grow Ilco, instead of holding onto it or spending it. “We’ve already paid taxes on it when we earned it, and then we choose to reinvest it and create more wealth,” Madonia told TheDCNF. “How many times are you going to tax that dollar?”

Madonia testified before a House Ways and Means committee this week, which is considering legislation introduced by Republican Rep. Kevin Brady that would repeal the death tax. (RELATED: Dem Says Kids Should Be Drug Tested Before They Can Inherit From Their Parents)

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