Biden Archives - Page 2 of 2

Tax Reform Details Remain Unclear Within New Administration

Posted on January 2021 by info

Democrats Jon Ossoff and Raphael Warnock have now won the January 5, 2021, Senate runoff elections in Georgia, so the Democrats will have control of the Presidency, House of Representatives and Senate, giving them a governing mandate (the Georgia runoff election results have not yet been officially certified but this will take place before January 20, 2021).

While President-elect Joe Biden expressed interest in raising taxes on corporations and wealthy individuals during his campaign, it is best to think of that as a framework for where the new administration intends to go, rather than a set-in-stone inevitability. We know the new administration is likely to favor a paring back of some of the tax cuts made by the 2017 Tax Cuts and Jobs Act (TCJA). Biden has indicated that his administration may consider changes to the corporate tax rate, capital gains rate, individual income tax rates, and the estate and gift tax exemption amount.

Procedurally, it is unclear how tax legislation would be formulated under the Biden administration. A tax package could be included as part of another COVID-19 relief bill. The TCJA could be modified, repealed or replaced. It is also unclear how any package would proceed through Congress. Under current Senate rules, the legislative filibuster can limit the Senate’s ability to pass standalone tax legislation, thus leaving any such legislation to the budget reconciliation process, as was the case in 2017. It also remains unclear if the two parties will come together to work on any bill. Finally, it will be important to note who fills key Treasury tax positions in the Biden administration, as these individuals will have a strategic role in the development of administration priorities and the negotiation with Congress of any tax bill.

How Tax Changes Could Take Shape:

Part of a COVID-19 Relief Package

With the new administration eager to provide immediate relief to individuals and small and medium-sized businesses affected by the coronavirus pandemic, some tax changes could be included as part of an additional relief bill on which the new administration is likely to seek bipartisan support. Such changes could take the form of tax cuts for some businesses and individuals, tax credits, expanded retirement contributions and/or other measures. If attached to a COVID-19 relief bill, these changes would likely go into effect immediately and would provide rapid relief to businesses and individuals that have been particularly hard hit during the pandemic and economic downturn.

Repeal and Replace TCJA

Another possibility is for Biden to pursue a full rollback of the TCJA and replace it with his own tax bill. This would be a challenge since the Democrats only have a slim majority in the Senate, meaning that Republicans could filibuster the bill unless Senate Democrats take steps to repeal the filibuster.

Given that the Biden administration’s immediate priorities will be delivering financial assistance to individuals and businesses, ensuring the rollout of COVID-19 vaccines and flattening the curve of cases, a repeal and replacement of the TCJA might not be voted on until at least late 2021 and likely would not go into effect until 2022 at the earliest.

Pare Back or Modify the TCJA

An overall theme of Biden’s campaign was not sweeping, radical change but making incremental shifts that he views as improvements. We may see this theme come into play in Biden’s approach to tax legislation. He may choose not to repeal the TCJA completely (prompting a return to 2016 taxation levels), but instead to pare back some of the tax changes enacted in 2017. In practice, this could be in the form of raising the corporate tax rate by a few percentage points, which could garner bipartisan support. Again, this likely would not be a legislative priority until after the country has passed through the worst of the COVID-19 pandemic.

Unknowns: Factors That Will Influence Potential Tax Changes

Senate Legislative Filibuster

Currently, the minority party in the Senate can delay a vote on an issue if fewer than 60 senators support bringing a measure to a vote. Thus, Republicans would be likely to filibuster any bill that contains more ambitious tax rate increases. The uptick in the use of the filibuster in recent decades is perhaps a symptom of congressional deadlock, and there are calls from many Democrats to eliminate the filibuster in order to pass more ambitious legislation without bipartisan support (in fact, in recent years, the filibuster has been removed for appointments and confirmations). While President-elect Biden and incoming Senate Majority Leader Chuck Schumer may be open to ending or further limiting the filibuster, with the current composition of the Senate, every Democratic senator would have to agree. Last fall, West Virginia Senator Joe Manchin indicated he would oppose ending the legislative filibuster.

If the Democrats are successful in removing the filibuster, it would be easier for Congress to pass more permanent tax legislation. However, if the filibuster remains in place, tax legislation would likely be passed as part of the budget reconciliation process, which only requires a simple majority to pass. However, the tradeoff is that any changes generally would have to expire at the end of the budget window, which typically is 10 years. This is how both the 2001 Economic Growth and Tax Relief Reconciliation Act and the TCJA were passed.

Treasury Appointments

Another factor that will influence Biden’s tax policies is who will fill key tax appointments at the Department of Treasury. Three positions that will have a major effect on any tax plan are Assistant Secretary for Tax Policy, Deputy Assistant Secretary for Tax Policy and Tax Legislation Council, each of whom typically steer the administration’s voice on tax legislation.

These appointments may take several weeks or longer to get in place, so it is possible that there will not be any tax legislative activity until the positions are filled.

Appetite for Bipartisanship

President-elect Biden has signaled that he wants to be a president for all Americans and seek to heal the partisan divides in the country. He may be looking to reach across the aisle on certain legislation and seek bipartisan support, even if such support is not necessary to pass a bill. Biden stated during his campaign that he wants to increase the corporate tax rate—not to the 2017 rate of 35%—but to 28%. Achieving this middle ground rate might be viewed as a compromise approach.

As the new government takes office, it remains to be seen how much bipartisanship is desired, or even possible.

What These Factors Mean for Your Business

It is important to note that sweeping tax changes probably are not an immediate priority for the incoming Biden administration. With the escalating health and economic crises resulting from the COVID-19 pandemic, the new administration’s immediate focus likely will be on addressing the current fragmented approach to COVID-19 vaccinations, accelerating the distribution of the vaccines, taking steps to bring the spread of COVID-19 under control and providing much needed economic relief. As noted above, there could be some tax changes and impacts resulting from future COVID-19 relief bills. Those will be the bills to watch for any early tax changes, including cuts or credits, that businesses may be able to take advantage of. Larger scale tax changes, particularly any tax increases, may not go into effect until 2022 at the earliest. Moreover, factors such as the continuation of the legislative filibuster, the appetite for bipartisanship and the filling of key tax appointments at Treasury will help determine the path and details of those changes.

Regardless of your current tax position, it is important to remain informed on potential policy changes, how these will play out and how they will affect your organization. As more details come to light, we will provide additional insights on how new policies will affect the tax position of middle market businesses.

The following table sets out the current rules and how Biden is proposing to deal with these rules:

	Current Tax Law (TCJA–present)	Biden’s Proposals
Corporate Tax Rates and AMT	Corporations are subject to a flat 21% tax rate and the corporate alternative minimum tax (AMT) was repealed for corporations (changes made by the TCJA). These do not expire.	Biden would raise the corporate rate to 28%, which is still below the pre-TCJA level of 35%. He would reinstate the corporate AMT, requiring corporations to pay the greater of their regular corporate income tax or the 15% minimum tax (while still allowing for net operating losses (NOL) and foreign tax credits).
International Taxes (GILTI, Offshoring)	GILTI (global intangible low-tax income): Enacted as part of the TCJA, GILTI rules require U.S. shareholders of controlled foreign corporations to include in income under the CFC anti-deferral rules certain income earned by those CFCs. For taxable years beginning after December 31, 2017, and before January 1, 2026, the effective U.S. tax rate on GILTI for domestic corporations is 10.5% (taking into account the 50% deduction under Section 250 and before Section 960(d) foreign tax credits). The effective U.S. tax rate (before Section 960(d) foreign tax credits) on GILTI for domestic corporations rises to 13.125% for taxable years beginning after December 31, 2025. Offshoring taxes: The TCJA includes a tax deduction for corporations that manufacture in the U.S. and sell overseas.	GILTI: Biden would double the GILTI tax rate to 21% and assess a minimum tax on a country-by-country basis. His proposal would eliminate the reduction for qualified business asset investment in the GILTI calculation. Offshoring taxes: Biden would penalize companies that offshore manufacturing and service jobs in order to sell goods or provide services back to the U.S. market by imposing a 10% penalty surtax on such profits. Biden would also close offshoring tax loopholes in the TCJA. A 10% “Made in America” tax credit would be granted to encourage businesses to bring manufacturing jobs back to the U.S. and help with the recovery of the economy.
Payroll Taxes	The 12.4% payroll tax is divided evenly between the employer (6.2%) and the employee (6.2%) and applies to the first $137,700 of an individual’s income (scheduled to go up to $142,800 for 2021). A 2.9% Medicare Tax is split equally between the employer and the employee with no income limit.	Biden would maintain the 12.4% tax split between the employer and the employee, retain the $142,800 cap and would impose the payroll tax on earned income exceeding $400,000. The gap between the two wage levels would gradually close with annual inflationary increases.
Individual Income Tax Rates	The top marginal rate is 37% for income over $518,400 for individuals and $622,050 for married persons filing jointly. This was lowered from 39.6% pre-TCJA.	Biden would restore the top 39.6% rate for taxable income exceeding $400,000.
Individual Tax Credits	Individuals can claim a maximum $2,000 child tax credit, plus a $500 dependent credit (for dependents who do not qualify for the child tax credit). Individuals can claim a maximum dependent care credit of $600 ($1,200 for two or more children). The child tax credit is scheduled to revert to pre-TCJA levels ($1,000) after 2025.	Biden would expand the child tax credit to $3,000 for children age 17 and under and offer a $600 bonus for children age six and under. The credit would be fully refundable. He has also proposed increasing the child and dependent care tax credit to $8,000 ($16,000 for two or more children), and a new tax credit of up to $5,000 for informal caregivers. Separately, Biden has proposed a refundable $15,000 tax credit for first-time homebuyers.
Itemized Deductions	For 2020, the standard deduction is $12,400 for single/married persons filing separately and $24,800 for married persons filing jointly. After 2025, the standard deduction is scheduled to revert to pre-TCJA amounts, or $6,350 for single /married filing separately and $12,700 for married filing jointly. The TCJA suspended the personal exemption and most individual deductions through 2025. It also capped the state and local tax (SALT) deduction at $10,000, which will remain in place until 2025, unless repealed.	Biden would enact a provision that would cap the tax benefit of itemized deductions at the 28% rate. Incoming Senate majority leader Charles Schumer has pledged to repeal the SALT cap (the House of Representatives has already passed legislation to repeal to the cap).
Capital Gains and Qualified Dividend Income	The top capital gains tax rate is 20% for income over $441,450 for individuals and $496,600 for married persons filing jointly. There is also an additional net investment income tax of 3.8% that is imposed on high income taxpayers.	Biden would eliminate tax breaks for long-term capital gains and dividends for income above $1 million; instead, such income would be taxed at ordinary rates.
Education	Forgiven student loan debt is included in taxable income. There is no tax credit for contributions to state-authorized organizations that sponsor scholarships.	Biden would exclude forgiven student loan debt from taxable income.
Estate and Gift Taxes	The estate and gift tax exemption for 2020 is $11,580,000. Estate beneficiaries receive appreciated property with a basis equal to the property’s fair market value, meaning that the beneficiary can dispose of the property immediately without the appreciation being taxed. The exemption is scheduled to revert to pre-TCJA levels in 2026.	Biden would return the estate and gift tax to 2009 levels and eliminate the step-up in the basis on inherited assets, as well as the step-up at death provision for inherited property passed along by the decedent.
Qualified Business Income Deduction	Many businesses qualify for a 20% qualified business income tax deduction, lowering the effective tax rate for S corporation shareholders and partners in partnerships to 29.6% for qualifying businesses.	Biden would phase out the tax benefits associated with the qualified business income deduction for business owners whose annual income is more than $400,000.
Small Businesses	Tax credits are available for some of the costs to start a retirement plan.	Biden would offer tax credits for businesses that adopt a retirement savings plan and offer most employees without a pension or 401(k) access to an “automatic 401(k)”.
Opportunity Zones	The opportunity zone program provides incentives for long-term investment in underserved communities. Investors can defer taxes on capital gains by keeping those funds in a Qualified Opportunity Fund.	Biden has proposed incentivizing opportunity zone funds to partner with community organizations and have the Treasury Department review the regulations under the program to ensure the program is operating as intended. Biden would also increase reporting and public disclosure requirements for developers in opportunity zones.
Alternative Energy	The renewable energy tax credits have gradually dropped to 22% (from 30%) for 2021.	Biden would expand renewable energy tax credits and credits for residential energy efficiency, and restore the Energy Investment Tax Credit and the Electric Vehicle Tax Credit.

What Year-End Tax Planning Could Look Like Under Biden Presidency

Posted on November 2020November 2020 by info

On November 7, the Associated Press called the presidential election for former Vice President Joe Biden. The House of Representatives will remain under Democratic control, but control of the Senate is somewhat less certain since the balance of power will be determined in January 2021 following a run-off election for two open Senate seats in Georgia. The run-off is necessary because neither of the candidates in either of the races obtained more than 50% of the total vote count as required by the state’s election law. A win by the two Democratic candidates would shift the balance of power in the Senate from one of GOP control to one where neither party has a majority. In that case, if all Senators vote along party lines (including independent senators who typically vote with Democrats), any deadlock on legislation would be broken by Vice President-elect Harris casting the deciding vote. This tiebreaking potential would also determine the Senate leadership, the ratio of committee memberships between the parties and the leadership of each committee.

Under a Biden administration and if the Democrats assume control of both the House and the Senate, taxpayers are likely to see increases to the corporate tax rate and to the top tax rate for individuals. However, should the Republicans retain control of the Senate, it would be difficult to effect any tax rate changes and most provisions in the Tax Cuts and Jobs Act (TCJA) (as passed during the Trump administration) would continue until they generally expire after 2025.[1]

What does this mean for taxpayers planning for year-end?

Assuming taxable income is consistent from year to year, but tax rates are expected to increase, a taxpayer may wish to accelerate income and defer deductions to higher income tax rate years. Assuming the same, but with a constant or declining income tax rate, then taxpayers may wish to take the tried-and-true approach to year-end tax planning by accelerating deductions and deferring income.

President-elect Biden has indicated that he would like to see the reduction or elimination of the tax cuts made by the TCJA. He believes that the tax system should be changed to ensure that large corporations and high-net-worth individuals pay their “fair share” of taxes. For individuals, President-elect Biden has proposed increasing the top income tax rates and expanding the Social Security tax base, as well as curtailing or eliminating various incentives that are currently available to high income taxpayers. If these plans are implemented, roughly $4 trillion would be raised over the next 10 years, as reflected in estimates obtainable through the Tax Policy Center and the Tax Foundation. The additional tax revenue would be used to pay for spending initiatives to improve the nation’s infrastructure, developing alternative energy sources and building up the U.S. manufacturing sector.

To be successful in implementing proposed changes, the timing of any future tax increases will be balanced against the need to keep the economy strong and resilient at a time when the country is trying to address the economic slump that was brought about by the coronavirus pandemic.

Despite all of the uncertainty, significant tax law changes are possible over the next few years, so it is important for taxpayers to understand both current tax law and changes that may be on the horizon. The following summarizes President-elect Biden’s planned initiatives for both corporate and individual income taxes, Social Security and Medicare taxes and the estate tax, as well as various tax incentives.

Individual Income Tax Rates

Current law provides for a progressive income tax rate system, which means that tax rates increase as taxable income increases. Under the seven-bracket system, tax rates for ordinary income start at 10% and increase to 37% for taxable income of $622,050 for individuals filing joint income tax returns in 2020, and $518,400 for individuals filing as single taxpayers.

Under President-elect Biden’s plan, the TCJA tax cuts likely would be repealed and the top federal income tax rate of 39.6% would be reinstated.

Capital Gains and Qualified Dividend Income

Under current law, individuals are subject to progressive income tax rates on capital gains and qualified dividend income. The long-term capital gains rates are 0%, 15% or 20%, depending on a taxpayer’s ordinary income tax bracket. Moreover, a net investment income tax (enacted during the Obama administration) is imposed on high income taxpayers at a rate of 3.8%, which brings the total maximum tax rate on long-term capital gains up to 23.8%.

Under President-elect Biden’s tax plan, the tax rate on capital gains would increase to 39.6% for taxpayers with taxable income of $1 million or more, plus the 3.8% net investment income tax. As a result, taxpayers whose taxable income exceeds $1 million would be subject to an effective tax rate of 43.4%.

Business Income from Pass Through Entities (Partnerships, S Corporations and Sole Proprietorships)

Under current tax law, many businesses qualify for a qualified business income deduction of up to 20%, which can lower the effective tax rate on the business income of individuals from a high of 37% to as low as 29.6% for qualifying businesses.

President-elect Biden would phase out the tax benefits associated with the qualified business income deduction for individuals making more than $400,000 a year, thus effectively raising the business income tax rate from 29.6% to 39.6%.

Corporate Tax

The TCJA reduced the corporate income tax rate to a flat 21% rate from a progressive rate of up to 35% before 2018 and abolished the corporate alternative minimum tax.

President-elect Biden would raise the corporate tax rate from 21% to 28%, a middle ground between the top rate of 35% under the Obama administration and the current 21% rate. He also would put in place a new form of corporate alternative minimum tax that essentially would require corporations to pay the greater of their regular corporate income tax or a new 15% minimum tax on worldwide book income.

Payroll Taxes

A 6.2% Social Security tax and a 1.45% Medicare tax currently are imposed on both the employer and the employee. While the wage base for the Medicare tax is unlimited, there is a cap on the Social Security tax base equal to the first $137,700 of employee wages (increasing to $142,800 for 2021).

In addition to the Medicare tax rate, which totals 2.9% for the employer and the employee, an additional 0.9% Medicare tax is levied on employees with wage and self-employment income above the same thresholds that are applicable in the case of the net investment income tax ($250,000 or more for joint returns or a surviving spouse, $125,000 or more for a married taxpayer filing a separate return and $200,000 in all other cases). This effectively increases the collective employer/employee rate or self-employed rate to 3.8% (1.45% twice + 0.9%), which would raise the Social Security and Medicare tax rate for self-employed individuals to 16.2% (12.4% + 3.8%).

President-elect Biden has indicated that he would remove the cap on the wage base for the Social Security tax for high earners, defined as those making more than $400,000. These changes to the Social Security and Medicare taxes would apply to employees and self-employed individuals that have sole proprietorships or are partners in a partnership.

It is uncertain whether wages between $142,800 and $400,000 would be subject to the additional income tax, or whether there would be a so-called “donut hole” before the higher rate kicks in for individuals with taxable earnings in excess of $400,000. This would raise the overall income tax rate on some businesses to as high as 55.8% (39.6% + 16.2%) before taking into account state income taxes.

Estate Tax

The estate tax rate currently is subject to a progressive rate scale up to 40%. The estate tax is imposed upon the death of a taxpayer after an exemption allowance of up to $10 million per taxpayer, as indexed for inflation (currently $11,580,000 per taxpayer ($23,160,000 per married couple for 2020)). In addition, beneficiaries are entitled to a step-up in the tax basis of all inherited assets based on the date of death valuation or the alternative valuation date.

President-elect Biden would reduce the exemption amount to pre-Obama levels of $3.5 million per taxpayer, while increasing the top estate tax rate to 45%. He has also suggested eliminating the regime that allows for a step-up in tax basis on the date of death or alternative valuation date.

Investments into Distressed Areas

The TCJA introduced significant incentives for investments in qualified opportunity zones (QOZs). These rules allow taxpayers to defer recognition of capital gains where the proceeds are reinvested in a property directly or a QOZ fund property within 180 days.

The capital gains deferral exists until the earlier of the time the QOZ property is sold or December 31, 2026. In addition to the deferral, there is a 10% tax reduction if the fund is held for five or more years, a 15% reduction in tax if the property is held for seven or more years, and if the investment is held for 10 or more years, the appreciation of the QOZ fund investment (not the original gain but the post-acquisition gain) qualifies for a step-up in tax basis, essentially excluding the appreciation from gross income.

In addition to QOZs, a new markets tax credit is available to investors that inject capital into community development entities. The credits are progressive and vest with each year of expenditures and can equal up to 39% of the cost of the new markets tax credit project.

President-elect Biden has indicated that he would like to continue both programs and may be willing to expand and make the new markets tax credit program permanent.

Manufacturing and Business Incentives

Tax incentives currently are available for low-income housing, reducing fossil fuels and using alternative energy, as well as employer incentives for hiring individuals that qualify for the work opportunity tax credit and for hiring individuals with disabilities. Tax credits also are available to employers for providing child-care facilities on their premises so that working parents can continue working.

President-elect Biden supports these programs but would like to add a tax credit for manufacturing goods in the United States. He also has proposed imposing a tax penalty on corporations that ship jobs overseas in order to sell products back to the United States.

Conclusion

There is much riding on the outcome of the 2020 presidential and congressional election process. The direction of any year-end tax planning involves knowing which direction future tax rates will go.

Year-end planning decisions typically consider the tax consequences of both the current year and the next year. If marginal tax rates are expected to remain unchanged or to drop, taxpayers should consider ways defer income to the next year and accelerate deductions into the current year. Conversely, if marginal tax rates are expected to increase in 2021, taxpayers may wish to consider strategies to accelerate income into 2020 and defer deductions to 2021.

Despite the economic and financial turmoil many taxpayers have experienced in 2020, as well as the coronavirus pandemic, this year is no exception in terms of tax planning. Understanding the possible consequence of the presidential election and Senate race results may be useful in helping taxpayers make informed decisions about their taxes before year-end.

[1] It should be noted that the passage of legislation also may be affected by the Senate “legislative filibuster rules” and whether these rules are maintained, revised or abolished.