Post-Election Business Tax – What’s on the Horizon?
December 11, 2020
By Thomas Cardinale
With the dust settling on the 2020 election, business owners are already planning out their tax situations, both the opportunities and consequences.
Keeping aside the special Georgia Senate run-off in early January which will determine either a split congress or a Democratic sweep, many tax proposals from the incoming Biden administration are already widely reported. Historically speaking, any significant tax hikes will likely be met with resistance in the Senate in any post-election scenario, whether through a filibuster motion, GOP control, or even centrist Democrats in red states showing opposition. Below we take a look at some of the more talked about business tax proposals which may have a reasonable chance at becoming law -
Corporate Tax Rates
A widely disclosed proposal by President-Elect Biden is an increase to the corporate tax rate from the existing 21% to 28%, which would be middle ground between the current rate and the prior 35% top rate. While the GOP would likely be turned off by such an increase, some fiscally conservative portions of the base may find it palatable enough to curb the exploding national deficit. As such, tax professionals believe that out of all the Biden tax proposals, this one has the highest likelihood of passing, but do not expect any action on the proposal until mid-to-late 2021, when the pandemic hopefully subsides. If enacted next year, chances are it would be effective January 1, 2022 or later rather than a retroactive change to allow business owners to plan accordingly.
Corporate Minimum Tax Making a Comeback?
The corporate alternative minimum tax (or AMT) was repealed in 2017 by the Tax Cuts & Jobs Act (TCJA). Under the Biden tax plan, a new corporate minimum tax is introduced that assesses a 15% minimum tax on corporate book income. Special benefits like NOL carryovers and business tax credits can still be used. This minimum tax measure will only apply to companies that have over $100 million of net book income with notably lower taxable income than book income. Some experts have equated this proposal to an “Amazon” tax, as the online retail juggernaut usually reports significant book income in their public earnings reports, but pays a much smaller amount of U.S. corporate income tax due to a vast array of tax-only deductions and special timing incentives. Compliance on this minimum tax framework would likely be a nightmare for tax professionals, and the notion of forced spending by companies to get under the $100 million threshold comes into play. Based on feedback among professionals and political pundits, the odds of this unique minimum tax becoming law is probably remote.
Double Down on GILTI
Nearly three years after its introduction in the TCJA, the Global Intangible Low-Tax Income (GILTI) regime is still experiencing growing pains as business owners grapple with the deemed pass-through tax impact from certain profitable foreign affiliates and tax practitioners deal with its complex reporting requirements. However, one of the silver linings of GILTI is a special 50% deduction allowable to U.S. corporations (the IRC Sec. 250 deduction). The Biden proposal keeps the GILTI regime intact, but also calls for repealing the IRC Sec. 250 deduction and other reductions to the gross GILTI, thereby taxing as much as double the GILTI at U.S. corporate tax rates. Since the underlying premise of GILTI is a populist theme of encouraging more U.S. business and job creation, this proposal could have some legs in Congress.
Pass-Through Entity Business Proposals
Considering the above, the immediate thought process seems like a no-brainer to favor pass-through entities over C corps. However, there are also some tax proposals that impact owners of S corps and LLCs. One, a potential reversion back to the top 39.6% personal tax rate (from 37%) that President-Elect Biden has been advocating. Secondly, a call to repeal the very popular 20% qualified business income (QBI) deduction for taxpayers making over $400,000 per year. Losing the QBI deduction would cause a 7-8% effective tax rate hike to the federal personal tax rate. On a positive note, the IRS has generally blessed state tax workarounds to avoid the $10,000 cap on the state and local tax (SALT) deduction.
What Should Business Owners Do Now?
With taxation such a big part of business decision-making, the common sense inclination is to take steps now to stay ahead of the curve for potential changes. We would caution making hasty decisions when some or all the above proposals may change, fail at passing, or be pushed to future effective dates to nullify the need for immediate action. However, proper tax planning or scenario-based projections can never be done too early and may be a good starting point to initiate with your tax advisor.
In This Issue
- Post-Election Business Tax – What’s on the Horizon?
- Key Considerations of GILTI High Tax Exclusion Final Regulations
- Campaign 2020: Highlights and Comparison of Current Tax Law and Biden Tax Plans
- R&D Tax Credit Considerations in the Wake of New Legislation and COVID-19
- Big Changes to 1099 Forms in 2020: Are You Prepared?