What Biden’s proposed tax plan means for businesses
By Angela Bao
June 17, 2021
(Photo credit): Gettyimages.com/Warunya Pamee / EyeEm
A breakdown of President Biden’s proposed changes to the tax law to help fund the Build Back Better plan.
As part of his three-part Build Back Better plan, President Joe Biden drafted a number of tax proposals to help pay for proposed infrastructure improvements and at least four additional years of free public education for children. The proposed changes would raise taxes for corporations and wealthy Americans, as well as expand certain tax benefits that will expire by the end of 2021.
Here are the main changes Biden offered to business owners and individuals.
What is the Build Back Better plan?
President Biden’s Build Back Better plan has three parts: the US bailout (which has already passed), the US jobs plan, and the US family plan.
The US bailout has provided direct relief to people by sending stimulus checks of $ 1,400 per person, extending unemployment benefits until September 6, 2020, and increasing the child tax credit, credit earned income tax; and child and dependent care tax credit.
The American Jobs Plan is Biden’s proposal to invest nearly $ 2.3 trillion in infrastructure and jobs over eight years, which will be primarily funded by increasing corporate taxes over 15 years. The jobs plan allocates $ 1.3 trillion for spending on transportation and community infrastructure, which includes areas such as roads and highways, mass transit, electric vehicles, clean water, housing , broadband internet, etc. An additional $ 580 billion will also be allocated for workforce development, R&D and manufacturing, with a focus on investment in semiconductor manufacturing, medical manufacturing, small business and clean energy.
The American Families Plan will provide $ 1.8 trillion to help families and working people, and will be primarily funded by tax increases on high-income Americans. The Families plan provides for at least four additional years of free public education for children; provide 12 weeks of guaranteed paid parental, family, health / safety staff leave for workers; and perpetuate certain tax credits put in place in the American Rescue Plan.
Breakdown of proposed corporate taxes
In 2019, the Institute on Taxation and Economic Policy found that 379 Fortune 500 companies that were profitable in 2018 paid an average effective federal tax rate of 11.3% on corporate income that year, or about half of the current statutory corporate tax rate of 21%. . Of those companies, 91 (including big names like Amazon, Chevron, and IBM) actually paid no federal tax on their 2018 U.S. income.
Peter Hong, senior vice president of wealth management in the eastern West Bank, said the biggest tax change proposed in the US jobs plan is to raise the federal corporate tax rate to 28 %. This tax rate will always be lower than the 35% corporate tax rate that was in effect from 1994 to 2017, until the Trump administration implements the Tax Cuts and Jobs Act. The American Jobs Plan will also repeal the current exemption for the first 10% of return on foreign investment, end the preferential tax rate on the rest of the profits from foreign investments, and levy a minimum tax of 21% on the income of foreign investors. multinational companies (applied on a country by country basis).
Hong adds that recently Biden also indicated that he would instead focus on a minimum tax rate of 15% on the company’s accounting income in an effort to gain more GOP support for his plan.
The biggest concern for businesses, Hong says, is the impact that higher taxes could have on their cash flow. “So let’s say a small business made a net profit of $ 10 million before taxes,” Hong gives as an example. “Right now they only have to pay 21%, so they have to pay $ 2.1 million. But at the proposed rate of 28%, then you need to prepare $ 2.8 million. Raise that up to $ 100 million, and it’s a difference between $ 21 million and $ 28 million, it’s huge.
Even with high certificate of deposit (CD) rates, businesses could still lose purchasing power after the tax increase. “Therefore, we need to better manage this cash flow, given this working capital,” says Hong. Some solutions might include fixed annuities, which get higher interest rates that might help cover the difference.
“Fixed annuities generally pay much higher interest rates than CDs, with no interest rate risk or market risk,” says Hong. “For individuals, fixed annuities have additional advantages such as tax deferral. Fixed annuities owned by corporations would benefit from higher interest rates, but would not have the added benefit of tax deferral. Thus, fixed annuities held by corporations are taxed in the same way as a DC – interest earned is taxable.
Breakdown of proposed individual taxes
Hong says Biden’s proposal has many benefits for some families, “such as families looking after children, elderly parents, first-time buyers and people buying electric vehicles, as well as taxpayers. low to middle income “.
For example, the American Families Plan would extend the child tax credit, which had been increased to $ 3,600 per child under age 6 and $ 3,000 per child age 6 to 17. It would also make permanent the child and dependent tax credit, which had increased to a total of $ 4,000 for one qualifying child or $ 8,000 for two or more qualifying children under the American Rescue Plan. Experts estimate that these measures could help reduce child poverty by 50%.
Perhaps some of the most significant changes proposed by Biden relate to the way high net worth individuals will be taxed. For the richest 1% of taxpayers, the top tax rate would drop from 37% to 39.6%. Additionally, Hong notes that people earning more than $ 400,000 a year will see tax increases. “Right now, the maximum taxable Social Security income is set at $ 142,800. So if you earn more than that amount, after that there is no more Social Security tax withholding, ”says Hong. “But it appears they are imposing an additional 12.4% Social Security tax on those with higher incomes.”
In the proposed plan, Biden would also eliminate the Section 199A deduction for these people and cap the itemized deduction at 28%, Hong says. For individuals earning more than $ 1 million per year, the federal capital gains tax rate could drop from the current maximum rate of 23.8% to 43.4%.
Another big change concerns Biden’s plans for federal property taxes. “Currently, an individual is exempt from inheritance tax [for the first] $ 11.7 million; for a couple, you double that to $ 23.4 million, ”says Hong. “It is expected that there is a good probability that the individual exemption amount can be reset to $ 5 million or even less than $ 3 million.” The proposal would also close some tax loopholes, such as the tax base increase rule, which allows families to pass on property without having to pay tax on any increase in property value over time.
How to prepare for upcoming tax changes
Biden’s tax plans are always subject to change, but business owners and individuals should prepare as best they can. Hong recommends contacting a wealth management advisor to receive “personalized financial planning and advice” to help you plan for the future.
“One thing I learned during the pandemic is that some business owners assume their business is going to go on forever. They weren’t prepared for the unexpected – they didn’t have enough money set aside, ”Hong shares. “They didn’t have a separate portfolio set aside for their retirement, no matter how well their business was doing. This pandemic will change the world in different ways. Certain industries are going to be completely disrupted, and that will change the way we prepare, do our business, put our money aside, set up a separate retirement fund.
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