Article Courtesy of Jason Bovell CPA :
President-Elect Joe Biden’s inauguration on January 20th will mark many new tax proposals that will have an effect on business owners. These widely reported tax proposals from the incoming Biden administration will present consequences as well as opportunities for businesses. As a business owner, it is important to stay abreast of any upcoming changes to plan out your tax year. Here are a few changes that have the potential to become law.
Corporate Tax Rate Increase
One tax proposal that has the highest chance of passing is an increase to the corporate tax rate from 21% to 28%, even though the GOP will likely fight this increase. However, tax professionals believe that this change very well could pass, with action on the proposal beginning mid-to-late 2021 and becoming effective January 1, 2022 or later.
Change to the Global Intangible Low-Taxed Income (GILTI)
Three years ago, the Global Intangible Low-Taxed Income (GILTI) was introduced into the Tax Cuts and Jobs Act (TCJA). GILTI is the income earned by foreign affiliates of US companies from intangible assets such as patents, trademarks, and copyrights. Although business owners voiced concerns with its complex reporting requirements, the GILTI has a special 50% deduction allowed to U.S. corporations (IRC Sec. 250 deduction). The Biden administration proposes to keep the GILTI regime intact with a repeal of IRC Sec. 250 deduction and other reductions to the gross of GILTI. This could potentially double the GILTI taxes at the U.S. corporate tax rates.
The Return of the Corporate Minimum Tax
In 2017, the corporate alternative minimum tax (AMT) was repealed by the Tax Cuts & Jobs Act (TCJA). Now, the Biden administration proposes a new corporate minimum tax that assesses a 15% minimum tax on corporate book income. Business tax credits and special benefits such as NOL carryovers would still be used. The compliance for a new corporate minimum tax would be a laborious task for tax professionals, as well as a charge for businesses to get under the $100 million threshold. According to professionals and political experts, a new corporate minimum tax under the Biden tax plan has only a slight chance of coming into law. Still, it is worth noting.
Pass-Through Entities Over Businesses
In addition to the above proposed tax changes, there are also some changes that will impact business owners of S corps and LLCs. First, President-Elect Biden has advocated for a potential reversion of the personal tax rate of 39.6% from 37%. In addition, there is a call to repeal the 20% qualified business income (QBI) deduction for taxpayers that make over $400,000 per year. If the QBI deduction is loss, this would cause a 7-8% effective tax rate increase to the federal personal tax rate. However, the IRS provided state tax loopholes to circumvent the $10,000 cap on the state and local tax (SALT) deduction.
How Can I Stay Ahead?
With the new potential tax changes, it is important to plan ahead to make sure you are making the correct tax decisions for your business. Yet, this is not the time to make quick and premature decisions, since it is not clear if these tax proposals will change, pass, or become effective in future dates. It is never too early to start thinking about how these proposals will affect your business. Contact Bovell Financial to discuss your tax plans and concerns with our expert tax professionals.
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