15 Jan 2021 President Biden’s Tax Plan
Authored by RSM US LLP |
Ambitious agenda could face challenges despite unified government
With unified Democratic control, the Biden administration can pursue its agenda and ambitious spending plan on a clearer path than it would have if Republicans had maintained a Senate majority. That increases the likelihood of tax changes, although the extent, nature and timing of them remain uncertain due to continuing public health and economic crises as well as moderates’ influence in a Senate that is split 50-50. (Vice President Kamala Harris is positioned to cast a tiebreaking vote.)
Despite lingering uncertainty at the onset of Biden’s term, his tax plan warrants in-depth consideration now that his party is positioned to control the legislative agenda and support it with Congressional majorities. Here is a breakdown of what we know about Biden’s tax plan from what his campaign and administration have expressed.
Broad overview of the Biden tax plan
|Item||Present Law||Biden’s Proposal|
|Corporate income tax rate|
Alternative minimum tax (AMT)
|21%||Increase to 28%|
|TCJA repealed alternative minimum tax||15% minimum tax on global book income of $100 million or more|
|Section 199A deduction||20% pass-through deduction for qualified business income (QBI)||Phase out the section 199A deduction for those making more than $400,000|
|Individuals and owners of pass-through entities||37% individual top rate||Reinstitute the top individual income tax rate to 39.6%|
|Capital gains rate of up to 20%||Tax capital gains as ordinary income for taxpayers with over $1 million in income|
|Social Security tax for employer and employee applied to first $137,700 of wages or self-employment income||Imposes additional social security taxes on wages or self-employment income over $400,000|
|Deduction limited through 2025 to medical and dental, limited state taxes, limited real estate taxes, limited home mortgage interest, mortgage insurance premiums, gifts to charity and casualty or theft losses||Reduce the benefit of itemized deductions to a tax benefit of no more than 28%|
|Estate tax exemption for the first $11.58 million per individual and decedents have a FMV basis in the assets||The Biden proposal could expand the estate and gift tax by reducing the exemption amount to $3.5 million and increasing the top rate for the estate tax to 45%. Biden would consider eliminating step-up in basis for inherited property.|
|Exchange of real property held for productive use in a trade or business or for investment for real property of like kind to be held for productive use in a trade or business or for investment without recognition of gain or loss||Retain the current like-kind exchange rules for taxpayers earning less than $400,000. Taxpayers with income greater than $400,000 will be ineligible for capital gains deferral|
|Global intangible low-taxed income (GILTI)||10.5% tax on un-repatriated amounts||Increase rate to 21% applied on a country basis|
Increase corporate tax rates
Biden proposes to increase the corporate income tax rate from 21%, as enacted through the passage of the Tax Cuts and Jobs Act (TCJA), to 28%. He stated in a September TV interview: “I’d make the changes on the corporate taxes on day one.” However, his transition team has since downplayed that as a priority.
Biden’s proposal also includes a 15% minimum tax on corporations with global book income of $100 million or more. In essence, this would reinstate AMT repealed with the passage of TCJA for those qualifying businesses. Under the proposal, corporations may claim deductions for net operating loss carryforwards and foreign taxes paid. When determining corporate tax liability, corporations would pay the greater of their regular corporate income tax liability or the 15% minimum tax.
Section 199A deduction
TCJA introduced the section 199A deduction, which is a below-the-line deduction available to owners of sole proprietorships, partnerships, S corporations, and some trusts and estates engaged in qualified trades or businesses. Under the current guidance, the deduction is limited to the lesser of 20% of qualified business income plus 20% of the combined real estate investment trust dividends and qualified publicly traded partnership income, or 20% of the taxpayer’s taxable income minus net capital gains.
While the section 199A deduction is set to expire at the end of 2025, the Biden proposal would maintain the current deduction for those making under $400,000 per year and phase out the deduction completely for those making $400,000 or more. That is on top of Biden’s proposed tax plan to restore the top marginal tax rate for non-corporate taxpayers to the pre-TCJA rate of 39.6%.
Tax proposals affecting individuals’ returns for flow-through entity consideration
Under Biden’s proposal, the top individual income tax rate of 39.6% would be restored. The current top individual income tax rate is 37%. The Biden proposal would also tax capital gains as ordinary income for taxpayers with over $1 million in income.
The Biden proposal increases social security taxes by imposing social security taxes on earnings over $400,000. Currently, social security taxes of 12.4% are imposed on wages or self-employment income up to $137,700 for 2020 (this is indexed for inflation). The proposal would create a donut where the social security tax would stop on income over the normal threshold (i.e., $137,700 for 2020) and then apply to amounts above $400,000. This increased tax would apply only to the employee at a rate of 12.4%.
The Biden proposal would reintroduce the Pease limitation on income that exceeds $400,000. That limitation reduces itemized deductions by 3% for every dollar that income exceeds $400,000. In addition, the plan could cap the benefit of itemized deductions to a tax benefit of no more than 28%. So if a taxpayer was in the 39.6% bracket, a dollar deducted would reduce taxes owed only by 28% instead of 39.6%. In 2019, Biden indicated that he would eliminate the $10,000 cap on the deduction for state and local tax. This item has not been officially included in his proposals.
Biden’s proposal could affect the tax-free transfer of property on death in two ways. Under current law, the first $11.58 million of an estate is not taxed, and estate beneficiaries or heirs receive the property with a basis equal to the fair market value of the property. That means an estate’s beneficiary could immediately sell the property with appreciation never being taxed. Biden’s proposal could reduce the estate tax exemption to $3.5 million, the exemption that was in effect in 2009. He has further suggested that he would consider eliminating the so-called “step-up in basis” or tax unrealized gains. These potential changes could lead to a substantial increase in taxes on estate beneficiaries, complicating business transfers on death.
Under section 1031, taxpayers may exchange real property held for productive use in a trade or business or for investment for real property of like kind to be held for productive use in a trade or business or for investment without recognition of gain or loss. The TCJA amended section 1031 to exclude exchanges of personal or intangible property from like-kind treatment. Biden’s proposal allows for taxpayers with income under $400,000 to make a tax-free exchange of real property held for productive use in a trade or business or for investment for property of like kind. However, taxpayers with income greater than $400,000 must recognize in taxable income the capital gains from the sales of real property.
Global intangible low-taxed income (GILTI)
Companies headquartered in the United States currently pay a 10.5% minimum tax on the unrepatriated low-tax profits earned by their foreign subsidiaries from intangible assets such as patents, trademarks, and copyrights. The TCJA introduced the GILTI tax in an attempt to discourage corporations from shifting intangible assets and related profits to low-tax jurisdictions. Biden’s proposal doubles the GILTI tax rate to 21% and applies it on a country-by-country basis.
Additional Biden proposals
Much of Biden’s proposal focuses on moving the United States towards more reliance on renewable energy and away from fossil fuels, as well as encouraging investment in the United States. In order to achieve these objectives, Biden released limited details regarding the establishment or expansion of certain tax incentives including, but not limited to, the Manufacturing Communities Tax Credit, New Markets Tax Credit and Solar Investment Tax Credit.
The Manufacturing Communities Tax Credit, originally proposed during the Obama administration, targets communities that have suffered economic disruption due to manufacturing plant closures or government office closures that provided the community with significant employment opportunities.
The New Markets Tax Credit currently provides investors with a federal tax credit in exchange for investment in low-income communities.
The Solar Investment Tax Credit rewards businesses that invest in solar facility construction. Congress extended the credit in 2015; however, the deduction in 2019 was 30% and will be further reduced in 2020, 2021 and 2022, without additional action.
In addition to the like-kind exchange limitations, Biden has also proposed to eliminate certain tax incentives for the real estate industry, including eliminating the passive loss rules for $25,000 of rental losses and accelerated depreciation on rental housing.
President Biden’s campaign promoted a $5.4 trillion spending plan over the next decade and a framework to generate $3.4 trillion in new tax revenue, according to an analysis by the University of Pennsylvania’s Wharton School of Business Budget Model. It remains to be seen how successful the Biden administration will be in pursuing its agenda, but having the support of a Democratic-controlled Congress will certainly help.
While numerous uncertainties shape the environment at the dawn of this new era in American policy, taxpayers should familiarize themselves with Biden’s plan, remain vigilant for developments and position themselves to act at the appropriate times.
For the latest developments, visit RSM’s Tax Policy Resource Center and subscribe to our tax alerts and Tax Insights newsletter.
DO YOU HAVE QUESTIONS OR WANT TO TALK?
Fill out the form below and we’ll contact you to discuss your specific situation.
This article was written by Christian Wood and originally appeared on 2021-01-15.
2020 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Haynie & Company is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.