President-Elect Biden’s Business Tax Proposal

Ahead of Inauguration Day next month, businesses are preparing for a wide-ranging possibility of tax changes and increases under the new Administration. He campaigned on a platform of tax increases for those earning more than $40,000 per year and rolling back select business tax cuts made in the Tax Cuts and Jobs Act of 2017 (tax reform). This includes an increase in the corporate tax rate to 28%, phase-out of the Section 199a deduction, 15% tax on corporate book income, and more. While these are only proposals and would need the approval of Congress before any changes become enacted, it does provide important insight into the type of changes the incoming Administration may pursue. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key tax proposals below.

Business Tax Proposals

The most noteworthy item on Biden’s agenda is the desire to increase the corporate tax rate from its current 21 percent to 28 percent. Before the Tax Cuts and Jobs Act, corporate income taxes topped out at 35 percent.

In addition to a potentially higher income tax rate, Biden has also proposed implementing a 15 percent tax on corporate book income of $100 million and greater. The goal is to eliminate the loophole that some large corporations use to pay little or no federal tax.

Finally, U.S. corporations with foreign income could see a tax of 21 percent on revenue earned overseas, which is double the current rate. Biden has also proposed assessing foreign earned income tax, or GILTI, on a per-country basis and instituting a ten percent surtax on goods or services produced overseas but sold in the U.S. The change is meant to provide a financial incentive to bring production onshore.

However, corporations are not the only businesses that may see changes in taxation. In fact, corporations only make up about five percent of all businesses. The overwhelming majority are pass-through entities like S-Corps, partnerships, and sole proprietors. Recall that TCJA added a new tax provision for pass-throughs called Section 199A, or the Qualified Business Income Deduction. The deduction allows shareholders and partners of pass-through entities to claim up to a 20 percent deduction on qualified business income, with some limitations.

Biden has proposed phasing out Sec. 199A for taxpayers with more than $400,000 in income. While some partners and shareholders would see little to no difference – like doctors or lawyers who are in service-based businesses and already subjected to income limitations – others would experience a reduction in the benefit of the deduction, or no benefit at all. For high-income shareholders or partners not currently limited by Section 199A business exceptions, losing this benefit might lead to a different entity structure.

It’s not all tax increases, though. Biden has also proposed enacting tax credits and incentives for manufacturing, green energy, workforce layoffs, establishing qualified retirement accounts for small businesses, and expanding the incentive to invest in low-income communities and infrastructure. 

Probable Outcomes

There can be a big difference in proposed versus actual tax changes. Much depends on whether Congress remains split between Democratic and Republican leadership or if Democrats regain control of the Senate in January. There is also the ongoing coronavirus pandemic that has pushed many small businesses to their breaking point.

A post-election CNBC survey of multinational CFOs revealed that most corporate finance executives don’t think a 28 percent corporate tax rate is likely within the first two years of Biden’s presidency. Instead, they expect that with a Republican-controlled Senate and the ongoing coronavirus pandemic, Biden is more likely to focus on COVID-19 relief than sweeping tax changes.

Yet, out of all the business tax proposals, the overall increase in corporate income is the most likely to pass, even with a Republican Senate. Analysts point to the growing national debt and the need to raise revenue as common ground, provided there are enough incentives to offset the higher tax. Also remember that prior to TCJA, the top corporate income tax was 35 percent. In other words, there is wiggle room for Congress to raise the tax from its 21 percent low to something higher, and still be under what it was before.

The other factor that not many businesses are looking at yet is the IRS. Due to budget cuts and the added workload of implementing various tax changes, the IRS has struggled to maintain typical operations in recent years. This includes reviews of tax returns and possible audits, which are at the lowest point in recent history. It is probable that the Biden Administration and Congress could work together to restore funding to the IRS, which would increase enforcement actions.

Impact of TCJA

Unrelated to Biden’s plan, some TCJA tax benefits are set to expire on their own as early as 2022.

The more immediate TCJA benefits that are set to phase out include:

• Immediate deduction of R&D expenses; changing to a five-year deduction in 2022
• Bonus depreciation, which is currently 100 percent but will reduce to 80 percent in 2023 and 20 percent in 2026
• Limitation of business net interest expense deduction from 30 percent of EBITDA to 30 percent of EBIT in 2022

The rest of TCJA will sunset on December 31, 2025, absent further Congressional action.

Contact Us

It is clear the Biden Administration will pursue changes that will likely result in a tax increase for many Atlanta businesses. That is why it is important to carefully review your company’s tax position before year-end to not only take advantage of saving opportunities for 2020, but to be in the best position possible for 2021 and beyond. If you have questions about the information outlined above or need assistance with an accounting or tax issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.

Disclaimer – It is important to note Wilson Lewis is not expressing a position about the proposed changes rather is sharing the available details to keep clients, prospects and others updated on relevant tax issues.