While initial presidential debates leading up to the 2020 election contained brief discussions centered around both Trump and Biden’s tax plans, both the candidates and the moderators were focused on other national issues- leaving listeners with little and sometimes inaccurate information regarding proposed tax plans.
As we enter into a new term with President Biden, we are likely to see swift changes in regards to corporate taxes. Evolution Tax and Legal is breaking down what Biden’s new tax plan could look like and what this will mean for your business.
Corporate Tax Rates
Throughout the 2016 presidential race, President Trump promised major corporate tax changes, that he hoped would ultimately trickle down to the individual. In 2017, he passed the Tax Cuts and Jobs Act, which made large changes to corporate taxes. The rate was dropped from 35% to 21%, and the rate has stayed consistent throughout the end of his presidency.
While Biden has plans to raise the corporate tax rate, it is unlikely he will be making the jump back up to 35%, as we had previously seen under the Corporate Alternative Minimum Tax Act. Biden aims to raise the corporate tax rate to 28%, with a tax on book income in excess that exceeds $100 million. This excess income rate will be a minimum of 15% for businesses that meet this income level.
Qualified Business Income Deduction (QBID)
Under the umbrella of the Tax Cuts and Jobs Act (TCJA) passed in 2017, the QBID was put in place in an effort to ease the burden on small businesses, similar to the reduction of the corporate tax rate. Currently, QBID allows business owners a 20% business income deduction, with many limitations and exceptions based on the business type and income level.
This 20% deduction is available to non-corporate taxpayers, and the goal is to allow them to be taxed on 80% of their business income instead of their full income level. Most pass-through entities qualify for QBI, this includes: sole-proprietorships, partnerships, S corporations, and limited liability corporations (LLCs).
While there is an income limit on the QBID, $213,300 if you’re filing individually and $426,600 if you’re filing jointly with a partner, there are special services that can still qualify above this limited amount in certain situations. These include doctors, lawyers, and consultants who run their own business or practice. QBID also provides a safe harbor for real estate and rental enterprises, and they qualify for the deduction and are represented as a small business.
Biden plans to keep QBID in place, with some changes being implemented. He plans to change the phase-out of QBID for business owners with a taxable income greater than $400,000, resulting in greater taxes for members of qualifying groups. He also has plans to change the special qualifying rules put in place in regards to real estate and rental enterprises. This could take away the safe harbor provided for these businesses, as well as cause changes in the Real Estate Investment Trust (REIT) rules that are currently in place.
Since its implementation, QBID has been an intricate system, one that causes many difficulties for individuals and requires an experienced attorney with a vast knowledge of taxes and legal experience to dissect and ensure your business is receiving all the benefits available to it. As a small business owner, a deduction in your taxes of 20% of your income is a large sum, one that could change the way your business is run from year to year. Any decrease in this deduction could cause huge changes in your taxes, especially if you lie on the threshold between receiving this deduction and not qualifying for it. Any changes implemented to QBID under President Biden could greatly impact a tax deduction and your business moving forward, and you should seek advice from an experienced attorney as soon as these changes are implemented.
1031 Exchanges (Like-Kind Exchanges)
Under President Trump, under Section 1031 of the IRS Code, capital gains can be deferred by exchanging property for like-kind property. Trump implemented changes to 1031 so intangibles such as licenses and personal property such as collectibles and machinery were unable to be exchanged for tax purposes. Only real estate assets can be exchanged for the deferral of capital gains, and the real property must be held for business or investment purposes and exchanged with property held for similar reasons, hence the label “like-kind.”
Biden has mentioned throughout his campaign that he plans to end the like-kind exchanges as a means of deferring capital gains available under 1031. This could mean big changes for real estate investors who have seen many tax exemptions due to these like-kind property exchanges. If the elimination of like-kind exchanges will cause issues for your investment growth, there are other options to consider.
Many are unaware that real estate is an allowed investment inside retirement accounts, which will allow your investment to grow tax-free for a long time. With a tax-deferred IRA or 401k, your property investment will be streamlined, allowing for rapid growth that can turn into new investments, while deferring taxes for many years.
In situations where you will be using the property for personal use, even for a short period, or working on the property on your own, placing the investment in a retirement account would violate the rules of an IRA. This could cause penalties, and result in large fees to pay for your investment property. There are other intricate options to continue investing in real estate with minimal taxes, should 1031 cease to exist. These options are on a case-by-case basis and should be discussed with an experienced tax attorney, who can work through your investments and find a personalized solution.
Global Intangible Low-Taxed Income (GILTI)
The Global Intangible Low-Taxed Income is a category of foreign income that is added to corporate taxes each year. It is ultimately a tax on earnings that exceed a 10% return on the value of the company’s foreign investments. Under the Trump administration, corporations receive a 10.5% corporate tax rate on these foreign investments, which encourages foreign investments and moving property out of the United States. Biden proposes that the tax rate be increased to 21%, doubling the tax rate. This will greatly discourage corporations from shifting their assets offshore, and encourage companies with high-earning foreign investments to reevaluate their strategies and consider moving back to the United States.
Contact a Tax Attorney at Evolution Tax and Legal
Under the new administration, there are many proposed changes that will potentially increase taxes and encourage your business to shift strategies to save money and minimize taxes. Keeping these proposed changes in mind, it is beneficial to speak with an experienced tax professional to get ahead of the changes and make a proactive plan.
The team at Evolution Tax and Legal is well-equipped to help your company plan for a tax minimizing strategy. Our team of accountants and attorneys understand just how important every dollar is to your business, and we can use our understanding of the intricacies of tax regulations to help your company continue to thrive. Contact our experienced tax attorneys today to hear more about our proven tax minimizing strategies.