In late March, the Biden Administration unveiled a jobs and infrastructure plan called the American Jobs Plan. The plan, which calls for about $2 trillion in spending over eight years, also includes a proposed overhaul of the corporate tax system.
After reading through the proposed changes, which we’ve summarized below, business owners and individuals may want to reach out to their tax professionals or wealth management advisors to prepare. For example, it may be wise to explore accelerating your capital gains income, as we don’t expect the tax rate increases to be retroactive. If you have questions about how these proposed changes might affect you or your business, reach out to us at info@sbfcpa.com.
Here are the most important changes proposed by the Biden Administration. If passed as proposed, the plan would:
- Increase the corporate tax rate. The Biden plan would increase the corporate tax rate from 21% to 28%. The Trump administration had decreased the rate from 35% to the current rate of 21%.
- Step up tax enforcement of the wealthy. The plan would require financial institutions to report information on account flows so that earnings from investments and business activities are tracked more easily. It would also provide additional resources to the IRS to allow the agency to do more to enforce tax laws relating to large corporations, businesses, estates, and higher-income individuals.
- Increase the top federal income tax rate to 39.6 percent. Biden has emphasized that this increase would only affect those making more than $400,000 per year, but it is not clear at which level of taxable income this rate would apply. Bloomberg reports that the increase would affect individuals earning more than $452,700 and married couples earning more than $509,300, affecting less than 1% of taxpayers.
- Increase the tax rate for long-term capital gains and dividends to 39.6% for households making over $1 million (presumably in gross income of any kind) for the taxable year.
- Eliminate ability for the wealthy to pass stocks or properties to heirs without paying capital gains tax. This change impacts what’s called a step up in basis, which means that if you buy a property or stock and then pass it to your heirs when you die, and they sell the property or stock, they currently do not pay taxes based on the amount the property was worth when you bought it, and likely do not pay any tax at all. The new plan would tax such property if the gain inherent in the property at the time of death exceeds $1 million (or $2.5 million per couple) when combined with certain unidentified real estate exemptions. The plan also states that even if the heirs do not sell the stock or property, a tax would be charged on what the gain could be expected to be if it had been sold, unless the property is donated to charity. (Note that this rule would not apply to family-owned businesses that are passed to the owner’s heirs, provided the heirs continue to run the business.)
- Eliminate the tax benefits of a like-kind exchange for real estate property where the gain realized exceeds $500,000. Also called a 1031 exchange, a like-kind exchange allows you to change out your investment property for another with no tax or limited tax due at the time of the exchange.
- End company deductions for offshoring operations. The new proposal aims to eliminate loopholes in the tax code that allow companies to avoid taxes by making it appear that profits are earned offshore. It also proposes the creation of a tax credit to support having workers in the U.S.
- Create a minimum tax on book income. Institute a 15% minimum tax on U.S. corporations’ book income – the amount of income reported publicly in financial statements to shareholders. This would apply only “to the very largest corporations,” according to the Administration’s fact sheet on the plan.
- End tax advantages for fossil fuels. The plan would eliminate all subsidies, loopholes, and special foreign tax credits for the fossil fuel industry and would instead incentivize the development of clean energy.
For more information, see the full fact sheet from the Biden Administration detailing the American Jobs Act and the accompanying tax plan.