Big tax changes are on the way! President Biden, the House and the Senate all seem to have their own agendas, but the proposal put forward by the House Ways and Means Committee (the âProposalâ) is a good starting point for predicting what might be our future.
Corporate and corporate tax reforms
Corporate tax rate: One of the most important provisions of the proposal is a graduated rate structure for the current flat-rate corporate income tax of 21%. The rate would start at 18% for the first $ 400,000 of income, followed by 21% for income up to $ 5 million, and finally a top tax rate of 26.5% on all subsequent income. , with the phasing out of the graduated rate for corporations over $ 10 million. Personal services companies are not eligible for graduated rates. It should be noted that the highest rate in the proposal is still lower than the 28% discussed by President Biden.
Business owners may want to reconsider the status of C corporation given the rate increase, while considering projected income levels and corresponding rate differentials. Intermediate entities, such as LLCs and partnerships, may be a more popular choice if this proposal is adopted. Perhaps, anticipating the potential reorganizations that could result, the proposal allows qualifying S companies, or companies that were S companies before the checkbox regulation (May 13, 1996), to reorganize as S companies. people without raising taxes. It may also be due to the net investment income tax, detailed below.
GILTI and FDII: The proposal reduces deductions for foreign source intangible income (FDII) and global low tax intangible income (GILTI) to 21.875% and 37.5% respectively, which, combined with the highest corporate tax rate , would give rates equal to 16.5625% and 20.7% respectively. In addition, GILTI’s candidacy would be country by country. However, if such deduction exceeds taxable income, the excess will be added to the net operating loss for the applicable tax year.
Interest charged: For partnerships beginning tax years beginning after December 31, 2021, the proposal extends the period of holding deferred interest from three years to five years in order to qualify for the capital gains treatment at long term. However, the three-year holding period would be maintained for real estate trades or businesses owned by taxpayers with a RAG of less than $ 400,000. The provision also adds details to measure the period of detention and strengthens regulatory authority to deal with waivers of porterage and provisions that avoid section objectives.
1202 Small business shares: The proposal provides that the special exclusion rates of 75% and 100% for gains made on certain eligible shares of small businesses do not apply to taxpayers with an AGI of at least $ 400,000.
TO BEAT: There are many changes to the Base Erosion Tax and Anti-Abuse Tax (BEAT) applicable to multinational companies with average gross revenues in excess of $ 500 million. The progressive BEAT rate would remain at 10% from December 31, 2021 and before January 1, 2024; with an earlier increased rate of 12.5% ââfor tax years beginning after December 31, 2023 and before January 1, 2026; and finally a rate of 15% for any tax year beginning after December 31, 2025. In addition, the determination of the minimum tax amount for base erosion would include tax credits.
Personal income tax and inheritance tax reforms
Income tax rate: The proposal increases the marginal personal income tax rate for tax years beginning after December 31, 2021 to 39.6% (a downgrade from the previous administration), applicable to single individuals whose taxable income is greater than $ 400,000, to heads of household with taxable income greater than $ 425,000, married persons filing jointly with taxable income greater than $ 450,000, married persons filing separate returns with higher taxable income to $ 225,000 and estates and trusts with taxable income greater than $ 12,500.
Capital gains: For tax years ending after the introduction of the Proposal, the maximum rate on capital gains would drop from 20% to 25% (lower than the 39.6% proposed by Biden). However, there must be a transitional rule that allows the previous 20% to remain applicable to gains and losses for the part of the tax year prior to the date of introduction.
Tax on net investment income: The proposal extends the Internal Revenue Code (IRC) Sec. 1411 3.8% net investment income tax to include all investment income earned in the ordinary course of business for taxpayers with taxable income over $ 400,000, for sole filers and $ 500,000 for individuals jointly declaring, and for trusts and estates. Currently, this tax only applies to individuals and passive income, with corporate profits exempt.
Eligible deductions from business income: The proposal sets the allowable business deduction under IRC Sec. 199A for tax years beginning after December 31, 2021 up to a maximum of $ 400,000 for individual returns, $ 500,000 for joint returns, $ 250,000 for married persons filing separate returns and $ 10,000 for a trust or an estate.
Limitation of excess business losses: The proposal amends IRC Sec. 461 (l) to permanently ban net business deductions that exceed business income. Taxpayers will be able to carry forward denied losses to the next tax year. This applies to tax years beginning after December 31, 2021.
High income supplement: The proposal adds an additional 3% tax for high-income individuals, trusts and estates with modified adjusted gross income exceeding $ 5 million or $ 2.5 million for married people filing separately. In this section, âmodified adjusted gross incomeâ means adjusted gross income less deductions allowed for investment interest under IRC Sec. 163 (d)). This will apply to tax years beginning after December 31, 2021. It is likely that this surcharge will apply to capital gains (or fixed assets), effectively increasing the capital gains rate for those taxpayers by. 20% to 28%. This is an important point to remember for people who plan to sell their business in the foreseeable future. It may well prove profitable to complete the transaction or at least enter into a binding contract before the date of December 31, 2021.
Unified credit: The proposal reinstates the unified tax credit which excludes $ 11.7 million in lifetime gifts from inheritance and gift taxes to the previous decade’s $ 5 million per person, adjusted for inflation. Thus, seen in combination with the increase in capital gains and the surtax, it may be advantageous for an individual to take advantage of the unified tax credit while it still exists. Of course, we should not forget either the advantages of an increased base which allows the unrealized capital gains on death to remain exempt from income tax.
Limitation of national and local tax deduction (SALT): The proposal was silent on this specific issue, which is surprising given that the SALT deduction is very important to some lawmakers. With all of the tax hikes being levied on the rich, this begs the question of whether a bill will retain its predecessor’s $ 10,000 cap on the SALT deduction or allow those deductions to be unlimited. It was a very controversial issue for both parties, even in the days of the Tax Cuts and Job Act, especially for Democrats in high tax states like California and New York. In the popularized remote world of the post-COVID era, it appears to be even more in the foreground, as more taxpayers flee heavily taxed jurisdictions as more businesses opt to work from home. At this time, it does not appear that the bill addresses the issue one way or the other. Hopefully more information on this will follow.
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