Effects of Biden's Executive Orders on Healthcare, Taxes & The Economy
Biden’s Executive Orders
We gathered some questions that were asked to our panelists from our small business town hall on the potential implications of Biden’s Executive Orders and how it might affect The Economy, Taxes, and the Healthcare system. Our panelists are experienced entrepreneurs in areas such as Taxes, Legal Implications, and Business Valuation.
Here are some of the common questions the panelists answered during the session:
1.What is an Executive Order vs. Law?
David Acosta: An executive order has to do with the executive power of the President. An executive order is a signed, written, and published directive from the President of the United States that manages operations of the federal government. With an executive order, he has the power to sign create, the directives however he can’t pass laws. If he wants to pass a law he must ask Congress to pass a bill. Through the executive orders, he is showing where he is going and what he plans to accomplish in the future.
Healthcare
2.What is your understanding of the impact these healthcare policies will have on employers? & a general overview on the healthcare system
David Acosta: The pandemic exposed things we were not thinking about. For instance, in Employer-sponsored healthcare when an employee loses their job, they no longer have health insurance. They end up going to get care for emergencies or bigger causes and this creates more overall cost. This affects everyone - those at the top and bottom -as well as 80% of the middle class or “Middle America”. It affects all the economy and businesses that may be mandated to provide coverage.
Gary Cooper: Hospitals have thin margins as it is right now, If Medicaid is established, there will certainly be a cut in profits to the medical institutions, which can turn out to be higher if they work with third-party insurance. This might also put remote and rural locations out of business. The overall cost could expand for all businesses and increase regulation, which will ultimately affect jobs.
Aaron Ball: The idea of healthcare for all is intended to make it more accessible and more affordable. The data shows that coverage did increase but the outcome in businesses that are covered by the act, made them cut hours for employees because of the high costs.
Taxes
3.Where are taxes going? How will it look like for Capital Gains? How does it relate or translate to M&A Activity?
Al Danto: It is important to assess how all of these potential changes will impact you or your business. It will impact everyone in different ways -- some positive and some negative. . For Individual Income Tax rates, there will be an increase to the top marginal rate to 39.6% and this also impacts S-Corps and LLCs as income from these entities “pass-through” and are taxed at individual rates. . Something to think about is how much this could impact a growing business when they may face increases taxes based on “accrued net income’ but may have a lot of cash tied up in inventory, capital expenses, working capital and other items that reduce cash but not net income.
As it relates to M & A activity, we have seen a significant uptick in business owners reaching out to discuss selling their company before these increased rates kick in. If capital gains rates increase to approximately 40% this could double the potential tax burden on the proceeds from the sale of a business.
4. How do you see Taxes affecting business valuation?
Al Danto: Taxes to a business are just like any other expense Businesses are valued based on their cash flow and potential future cash flows. When it comes to valuation, any increase in taxes is just another increase in expenses which decreases the cash flow from the business and thus results in a decrease in the value of the business.
Gary Cooper: The liquidity event for business owners: If they double the taxes on a liquidity event, some people will not be able to sell their businesses they will not be able to sustain due to the tax change.
5. Can you talk about estate taxes, lifetime exemptions, basis step-up, and lack-of-control discounts?
Gary Cooper: For lifetime exemptions, you have portability. Portability is the name for a concept that allows the surviving spouse of a decedent to inherit his or her estate and gift tax exemption Not having this ability would significantly lower the exemption for estate taxes.
The step-up to basis is when you inherit something and can step up the basis to market value when you receive it. If this is repealed, the basis would revert to the original cost basis and create the potential for a significant increase in taxes.
Lack of control and marketability discounts are significant discounts to business and equity value when leaving these assets to a beneficiary who did not own the majority interest in the business. Not having these discounts would result in significant increases for business and equity values that are inherited or gifted and a corresponding increase in the taxes.
Aaron Ball: For small and mid-size companies it can cause problems when they are looking to sell their business. It adds costs and complexity to evaluating the value of your business or when you got to exit.
6.Is there a timeline of the capital gains and how will it look?
David Acosta: There is no specific timeline or changes any time soon, but most likely by next year, but it is important to name what could potentially happen to prepare your business for these changes.
7.If our debt has gone up from 8 to 28 trillion over the prior administration’s time in office. How do we reduce this?
Al Danto: While an increase in debt is always a cause for concern, I have become a little more comfortable with the national debt, when you look at all the factors.
The stimulus put dollars into the economy to avoid a complete financial meltdown. It enabled businesses to stay open, laid-off employees to pay their bills, and kept the country going during the unprecedented lockdown. It was simply something we had to do.
It is important to take a broad look at all the factors and see what impacts the increased debt had and is having on GDP growth, household net worth, jobs, the economy, and other factors. In other words, are we getting a return on the investment for taking on the additional debt? By all indications, we are as household net worth rose to a record $123 trillion, we had record unemployment and strong GDP growth.
The concept is like owning a house worth $75,000 and having a $60,000 mortgage. You are “in debt” $60,000 and have $15,000 in equity. If you compare that to someone who has a $200,000 mortgage and a house worth $500,000, that person is “in debt” $200,000 but has $300,000 in equity. The second person has much more debt but is in a much better financial position.
Economy
8. How will the minimum wage increase affect employment?
Aaron Ball: Any increase will have a potential impact on the job numbers. With the opening of businesses, a mandated wage might have a negative impact. Especially those companies who are dependent on new entry workers.
David Acosta: Raising wages is still something that needs to be approved as a law, however, different states can do this and have already started this regulation in the minimum wage.
9.Where do you see unemployment going and how will that get intertwined with the stimulus packages that have continued to come through the government?
David Acosta: Most of the money has gone to unemployment. And since the economy is not going to where it needs to be, they have implemented the stimulus package to help boost the economy and help protect the businesses during the covid economic crisis.
10.Can you talk about inflation and resource costs across the country?
Al Danto: Inflation is a Toss Up right now. There are many traditional factors that contribute to higher inflation such as an increase in money supply through government stimulus, increase in household wealth, looser central bank (lower interest rates), increase in supply costs like energy and raw materials among other things. Theoretically, these should all result in higher inflation. What is holding it back is the record low velocity of money ( people are not spending their money very quickly), aging population of savers, high unemployment, and not using all available resources. Typically Inflation happens when there is full utilization of resources and supply can’t keep up with demand.
Inflation has been held in check but some are now concerned that we could see “Stagflation” which is when we have a stagnant economy and inflation. There was a good article on this in Kiplinger’s Magazine a couple of months ago: America’s Next Economic Hurdle
This happened in the early 1970s when oil prices went up 400%. Some fear that if we see a continued increase in energy and other raw material costs but continued high unemployment, we could see Stagflation. As I said earlier, we just encourage you to read and learn more about this and how it could impact you and your business. With the unprecedented Covid-19 disruption we are simply in unchartered waters.
11. Can you talk about buying all American and giving credits to businesses that build All American?
David Acosta: The Top 15 companies had revenues from 50-60% come from other countries. It will be a challenge to build an economy of buying All American when most of the revenues and partnerships come from abroad.
Gary Cooper: It can become difficult to provide credits to businesses and buy All American if the minimum wage is increased. It is important to evaluate how this will become possible and developed.
Check out the recording and presentation of the panel to hear the panel discussion in more detail
