2021 tax reform anticipated to be substantial and far-reaching | BakerHostler

After the White House and Treasury Department released initial details of the Biden Administration's proposed tax reform for 2021, changes to tax law are expected in Washington, DC, for the next seven months. The tax changes will be significant and far-reaching, including tax increases on corporate, individual and capital income. international tax changes; as well as estate and gift tax changes.

Estimated time for changes to the Biden administration tax

Congress committees in the House and Senate are already working on tax and budget proposals that will become part of the next budget equalization law. The House, and then the Senate, will prepare and approve a budget resolution that will serve as a vehicle for the reconciliation process. Most expect the committee's actions to start in early May and a comprehensive individual package to be adopted in the autumn. Only 51 votes are required to pass the Senate Budget Voting Act. The date of entry into force of the newly enacted provisions is generally expected to be January 1, 2022. However, certain provisions may have proposed an Effective Date tied to or tied to the actions of the Committee (e.g., it may be proposed to increase the tax rate on capital gains on sales made after the Date of Actions by the Committee Beginning of October or the date of entry into force of the legislation later in autumn). The entry into force of certain provisions may be gradual over time and certain provisions may be temporarily enacted in order to keep the assessed costs of the legislation within acceptable parameters.

Depending on a taxpayer's specific circumstances, those who anticipate the expected changes and take action now to take advantage of existing tax rules and rates can see significant tax savings. This warning only covers a fraction of the tax changes expected to come into effect this fall. Further details will be released over time, including when the Treasury will publish its so-called Green Paper (“General Explanation of the Administration's Proposed Revenue for Fiscal Year 2022”) in the coming weeks.

Expected increase in corporate tax rate and related changes

Corporate tax rates are proposed by the Biden Administration to increase from 21 percent to 28 percent. Most believe the corporate rate will not rise to more than 25 percent. Section 199A pass-through withholding is expected to no longer be available to taxpayers earning more than $ 400,000. NOL transfers are expected to be prohibited for tax returns not filed at the Effective Date. The Biden government also suggests:

  • A so-called minimum tax of 15 percent on companies with a "book income" of more than 2 billion US dollars.
  • Doubling the global low intangible tax income (GILTI) tax rate on income from foreign sources from 10.5 percent to 21 percent and imposing country by country and no exclusion (or less exclusion) for an assumed return on property, plant and equipment.
  • Abolition of the FDII regime (immaterial income from abroad).
  • Replacing the basic erosion and anti-abuse tax (BEAT) with what is known as stopping harmful inversions and ending the proposal for low tax developments (SHIELD). SHIELD would generally refuse to withhold tax on certain related party payments if the recipient is in a low-tax area.
  • The introduction of an "offshoring penalty" on US companies' offshore production profits for sales back to the US (10 percent surcharge, resulting in an effective tax rate of 30.8 percent; would also apply to offshore services or call centers, for example serving the United States).
  • Rejection of all deductions and write-offs for moving jobs or manufacturing overseas.
  • Established a 10 percent "Made in America" ​​tax credit for certain service or call center jobs that have been returned to the United States.
  • Provision or expansion of tax credits and incentives for manufacturing, renewable energy, carbon capture and small business.
  • Abolition of tax preferences for fossil fuels.
  • Elimination of deductions for advertising consumer drugs.
  • Cancellation of bonus depreciation, including cancellation of the increase in bonus depreciation from 50 percent to 100 percent.

Some of these suggestions are not yet well defined and can be difficult to design and manage. Others can only be partially reached. All of the proposals are relevant in that they shed some light on what to try with the 2021 Law of Atonement. Changes in social security taxes, the minimum wage, and many other proposals by the Biden government or Congress cannot be considered under budgetary vote legislation. The Treasury Department's Green Book is expected to include many of the corporate tax changes proposed in the Obama administration's 2017 budget, released on February 9, 2016. That Obama administration budget contained more than 140 tax proposals, including one lifting of the last-in. First-out method (LIFO) for accounting for inventories. A copy of this Treasury Green Book can be found here.

Expected changes to the existing schedule for certain tax cuts and provisions of the Employment Act

Many of the provisions of the Tax Reduction and Employment Act (TCJA) 2017, which are currently being amended or scheduled to expire in the coming years, will be covered in the budget reconciliation package in the fall and therefore may change or expire earlier than before, subject to.

Expected capital gains and increase in dividend tax rate for those with higher incomes

The capital gains and dividend tax rates for certain higher income taxpayers are expected to increase from currently 23.8 percent (a tax rate of 20 percent plus the tax of 3.8 percent on investment income) to 43.4 percent (the expected higher ordinary value ) increase the income tax rate of 39.6 percent plus the tax of 3.8 percent on the investment result). Taxpayers with adjusted gross income greater than $ 1 million are likely to have higher tax rates, although this threshold could be as low as an income greater than $ 400,000. The Biden administration's proposal would tax higher-income individual taxpayers on their long-term capital gains and qualifying dividends at the same rate as short-term capital gains and ordinary dividends. It appears that a number of senators are uncomfortable with capital gain rates greater than 28 percent (31.8 percent if you add the 3.8 percent tax on net investment income). Currently, taxpayers should expect a nominal increase of 8 percentage points (8/20 = 40%; 8 / 23.8 = 33.6%) or an effective increase in capital gain rates of 33.6 percent. Most expect higher capital gains rates to apply to sales made on or after the effective date of the legislation, which we expect to be sometime in the final calendar quarter of 2021.

Expected changes in interest income and similar exchanges

It is expected that gains on interest income will continue to be sought (possibly on a modest scale) for taxation at normal income tax rates. It is expected that the similar exchange rules will be completely repealed. The entry into force date of the repeal of a similar substitution is expected to be the entry into force date of the legislation in the autumn.

Expected increases and changes in the individual income tax rate

For individuals (including households of joint applicants) who earn more than $ 400,000 in a calendar year, the highest marginal tax rate is expected to return from its current 37 percent to 39.6 percent prior to 2018. Section 199A pass-through deduction, which allows certain pass-through business owners to deduct up to 20 percent of their qualifying business income (resulting in an applicable 29.6 percent margin), may be waived or no longer for taxpayers be available with an income greater than $ 400,000.

The $ 10,000 State and Local Tax Withholding (SALT) cap may be lifted and replaced by individual deduction restrictions (i.e., exit, a 28 percent cap on the value of individual deductions, etc.) for taxpayers earning more than $ 400,000, be replaced. The total removal of the SALT cap is expected to cost the government more than $ 600 billion over 10 years. Congress is looking for ways to see the abolition of SALT as a revenue-neutral “adjustment” to the original cap. This type of change may have a retrospective effect on certain taxpayers dating back to the 2018 calendar year.

Expected increases and changes in estate and gift taxes

Inheritance tax and lifelong gift tax exemptions (which were temporarily doubled by 2025) are currently $ 11.7 million per person ($ 23.4 million for married couples). In addition, there is a $ 15,000 tax exclusion per gift given ($ 30,000 if spouses agree). The current estate tax rate for amounts in excess of the exemption amounts is a flat 40 percent, and the tax base for inherited assets is "raised" to fair value after the death of the deceased. The Biden government is expected to seek to raise the estate tax rate to 45 percent and reduce the exemption amounts to pre-TCJA levels ($ 5.3 million per person, $ 10.6 million for married couples). Some have suggested an even higher tax rate and lower exemption amount. The tax base for inherited assets is expected to be carried over rather than increased. There are also proposals in both the House and Senate to tax capital gains when a gift is given and when a person dies, although any of these proposals are not expected to take effect. The portability of exemptions between spouses is expected to continue, but many of the planning techniques (including valuation discounts currently available on related party transactions) currently in use by taxpayers can be limited or eliminated entirely. While it is worth noting that (i) the Tax Reform Act of 1976 would have imposed a transfer base for inherited assets, the provision was repealed before it could ever come into effect, and (ii) the Economic Growth and Tax Relief Act of 2001 repealed the estate tax and base increase cut, but only for one year (2010), Treasury Secretary Janet Yellen has stated that eliminating asset base increase upon death is a priority for the Biden administration. Most believe the repeal will be in laws that are expected to go into effect this fall.

Expected additional clarifications, details and changes

As the Administrative and Congressional Committees continue to work on tax and budget proposals, clarifications and details of the various proposals will emerge. Some of the original proposals may be abandoned and revised, and additional proposals may be created. As noted above, depending on the specific facts and circumstances of a taxpayer, significant tax savings can be achieved by taxpayers who anticipate expected tax changes and take action on their business plans, transaction pipelines, reorganizations, operational affairs and estate plans in a manner that takes advantage of the benefits current tax regulations and tax rates.

As soon as the Biden Treasury publishes its Green Book, BakerHostler will prepare additional analyzes.