In the words of the great Benjamin Franklin, only two things are guaranteed in this world — death and taxes. However, for small business owners, it’s the mix of both that has proven especially problematic.

According to the U.S. Small Business Administration, small businesses provide 55 percent of all jobs and 66 percent of all net new jobs since the 1970s in the U.S.

The HVAC industry, which is comprised primarily of small, family-owned businesses, fits very comfortably in this mold. As these businesses mature, they’re commonly passed down from one generation to the next. However, one roadblock — the Estate Tax — has complicated this generational transaction. Based on current law, business owners are mandated to pay a 40 percent tax when ownership is transferred from one generation to the next.

While many in the HVAC industry have fought against this tax for several years, change may finally be on the way in the form of president-elect Donald Trump, who has said from the beginning that he intends to completely repeal the estate tax.


Per the IRS, the Estate Tax is a tax on an individual’s right to transfer property at his or her death. It consists of everything an individual owns or has certain interests in at the date of death. The gross estate value is determined upon fair market value, which may include cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets.

Minus deductions, a taxable value is created. This tax is then reduced by the available unified credit.

Currently, there is a $5.45 million estate tax exemption taxed for inflation. Anything over that amount is taxed at 40 percent.

In Congress’s eyes, this reduces the concentration of wealth. Many in the HVAC industry contend this is not a tax that mainly impacts the wealthy; rather, the estate tax hits small business owners the hardest.

Karen Madonia, CFO, Illco Inc., Aurora, Illinois, has been working tirelessly on Capitol Hill as the co-chair of Heating, Air-conditioning, and Refrigeration Distributors International’s (HARDI) Government and Trade Relations Committee to voice how the estate tax is negatively impacting small businesses and why it needs to be repealed.

“Outside of the fundamental issue of fairness, the concern is the same for all of us — having cash on hand to pay the estate tax,” said Madonia. “For distributors, most of our capital is tied up in inventory and receivables. For contractors, it’s mostly in receivables because distributors carry their inventories. For manufacturers, their biggest assets are fixed, or their money is tied in the raw materials needed to make their end products. But the problem is the same for all of us in the HVAC industry — none of us are cash-heavy. We’d all have to liquidate something, or everything, to pay the tax. And, remember, it’s a tax that only occurs because an owner dies. Death should not be a taxable event.”


The estate tax puts a real strain on an owner’s ability to hand his or her business over to an heir. And, for many HVAC contracting owners, that is indeed the plan from inception.

“I think [the overtime rule] will drastically affect HVAC businesses and the industry,” said Barton James, senior vice president for government relations, ACCA. “Many of our members are second-, third-, and fourth-generation family businesses, so their ability to pass on their businesses is drastically impacted by this. The rule goes against what an American business model prides itself on. The heart of the matter is that people want to look out for others, especially their family members. This is something that is going to impact them.”

Butch Welsch, owner of Welsch Heating & Cooling in St. Louis, feels a complete repeal of the tax would be particularly good for the HVAC industry, since the trade so commonly passes ownership from one generation to the next. Welsch’s business is an example of this, as his business has been passed down for generations, starting with his great-grandfather more than a century ago.

“Why should you be taxed as you go along [in life], and then, just because you want to pass along  your business to someone else, be taxed yet again?” said Welsch. “It’s double taxation. We worked hard to have what we have.”

According to the Heritage Foundation, “Many small businesses start out as family-owned operations. The idea behind many of these businesses is to provide a thriving enterprise for the owner’s descendants. However, studies have shown that more than two-thirds of family businesses do not pass into the next generation, while fewer than 15 percent make it into the third generation” (American Bar Association).

This is a pressing matter for family-owned HVAC businesses. There is not an open market to sell HVAC companies to various types of buyers. Often, big companies in the HVAC industry buy smaller HVAC businesses up. These entities tend to love the estate tax because buying up smaller companies allows them to grow even bigger —the rich continue to get richer.

“Buying up the little guys is exactly how they plan to grow,” said Madonia. “That’s the kind of thing Washington should be thinking about. We have a policy that doesn’t even raise that much money relative to the entire U.S. budget but can absolutely crush small businesses. Most Americans work for small businesses. Shouldn’t we stop throwing roadblocks like the estate tax in their way?”

Typically, those looking to buy or take over HVAC businesses are employees or family members. And due to the tax needing to be paid quickly, it doesn’t provide enough time for buyers to pay the estate tax on time, which complicates the ownership transition. Therefore, many family-owned businesses end up being sold at inopportune times to inopportune buyers. The family business that may have been built up for generations is gone in a flash due to a tax. This doesn’t sit well with HVAC business owners.

Steven Gamst, owner of Las Vegas Air Conditioning Inc., would like to see a repeal so he can continue in the tradition of passing off ownership to family.

“It punishes the next of kin. Our business was inherited by our father, and I have a 12 year old who loves to go to work with me,” said Gamst. “He is next, and he knows it. We [in this industry] don’t remember learning this trade. The industry comes natural, and it’s just something we know — it’s our lives. It’s unfair that if a relative wants to leave you something they paid a lot for, that there is a huge tax on it.”

And, Donald Trump agrees. During interviews conducted with ABC This Week, Trump said, “The estate tax is a horrible weapon that has destroyed many families. Let’s say it’s a business that’s not very liquid, and people have to go out and borrow against the business, you are having travesty. And the other thing is, it’s a double taxation. The tax has already been paid. I mean, you’ve been hearing this argument for many years.”


In order to prepare for transition of ownership, many HVAC business owners are forced to take on even more costs by preparing an estate plan or purchasing large life insurance policies.

According to the Family Business Coalition, “The estate tax forces family businesses to waste money on expensive insurance policies and estate planning. These burdensome compliance costs make it even harder for business owners to expand their businesses and create more jobs.”

Estate planning is extremely costly for small and family-owned businesses. “[If repealed], folks who are spending hundreds of thousands of dollars on estate planning techniques can immediately put that capital in their businesses,” said Jon Melchi, vice president, government affairs and business development, HARDI. “You would no longer have to navigate transitions and exits based upon the tax code, you could then do it when it was right for your business.”

Steve Ohl, president, R.F. Ohl, feels the estate tax places an unnecessary burden on business success.

“It definitely makes planning more complicated and expensive,” said Ohl. “Why work hard to build up a company if a large majority will be taken from your family when you’re gone? My biggest fear [with the tax] is that families will be forced to sell their businesses just to satisfy the tax.”

Unfortunately, HVAC owners may feel reluctant to grow their businesses and reinvest in them with the estate tax looming ahead. Often, money that could be reinvested in the company is spent on hefty life insurance policies and estate planning. As a result, small businesses aren’t able to reach their full potentials and rather spend unnecessary energy and funds on this tax.

“Permanent repeal of the estate tax would allow family businesses to focus on what we do best — grow our companies,” said Madonia. “In our case, we’d consider opening new branches or getting into new inventory lines. But, with the estate tax hanging over us, we’re reluctant to create an even bigger problem for our first generation as it prepares to transition out. That’s so sad to me — to contemplate not trying to grow and expand because of tax policy is just so counter-productive to the American Dream.”

Matt Hadley, president, Bruce Thornton Air Conditioning in Lubbock, Texas, feels a repeal of the estate tax would allow him more freedom in the decisions he makes regarding the future of his business.

“If I know when I die that the value of my company is slashed as far as what I am passing on to my family, I am doing everything I can beforehand to get money out of the company to pass on to my family members,” he said. “However, if it is totally repealed, I’ll have more options in reaching my ultimate goal.”

So, the general consensus from manufacturers, distributors, and contractors alike is largely the same: A permanent repeal of the estate tax would be a blessing for the entire HVAC industry.


For opponents of the estate tax, Trump’s election was largely considered a triumph. While a Clinton presidency would have potentially increased the estate tax to 65 percent while lowering the exemption for estates to $3.5 million, Trump has said he intends to completely eliminate the tax.

According to The Washington Post, “Mr. Trump plans to eliminate the estate tax. As a partial offset, he would end step-up in basis — which currently excuses unrealized gains in an estate from capital gains tax — for estates exceeding $10 million. Our models suggest that these changes would raise GDP by 0.7 percent over 10 years and create 142,000 full-time equivalent jobs … both the public and the government would be net winners.”

HVAC business owners and associations that were biting their nails, curious if the estate tax would be further increased, celebrated the Republican presidential candidate’s victory.

“Now that the presidential election is behind us, and we’ll have President Trump in the White House, we can hopefully move toward full repeal of the estate tax,” said Madonia. “Mr. Trump has indicated that he would include repeal in his tax reform plan, and we know from past attempts by Republicans in the House and Senate that they would like to put it on the President’s desk. That would be a great day not just for the many Americans who own small businesses, but for all of their employees, as well.”

“It would make sense that [Trump] repeals the estate tax as he mentioned since he is a business person and should understand the importance,” said Ohl. “This repeal would allow family businesses to grow and have a better understanding of how the next generation can continue these businesses forward for years to come.”

Publication date: 11/28/2016

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