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FEI Daily spoke with Todd Simmens, former legal advisor to the United States Congressional Joint Tax Committee and national managing partner for tax risk management at BDO, about President Biden's plans for corporate tax changes, what companies should know about policy changes in 2021, and how to tax strategies accordingly adapt.
FEI Daily: During the campaign, President Biden called for the corporate income tax rate to be increased from its current 21% to 28%, including using the income from the increase to fund an ambitious infrastructure plan. What is the likelihood that the corporate rate will increase in 2021 and is it realistic to expect the tax rate to go up to 28%, or should corporate taxpayers expect anything below 28?
Todd Simmens: I believe that when a larger tax package is worked out, an increase in the company rate will be included. Whether it is 28% or some other number can depend on a few variables. First, it may depend on the extent to which the negotiation of a package is bipartisan. It may take less than 28% to get more bilateral support.
Second, there can be revenue. To the extent that 28% is required to fund other priorities, there may be less flexibility. Regarding a 2021 increase, our 2021 tax outlook survey found 92% of respondents expect the federal corporate tax rate to increase this year. However, I suspect an increase won't take effect until January 1, 2022. Retroactive tax increases are generally not favored, and as we get closer to this year it might look more like the 2022 effective date.
FEI Daily: A large number of FEI members are affiliated with private companies – many pass-through companies and family businesses – and most applauded the creation of a tax deduction on income for certain pass-throughs through the Tax Reduction and Jobs Act. President Biden has called for the Section 199A allowance to expire for taxpayers with incomes over $ 400,000. What is the probability of this?
Simmens: President (then candidate) Biden and his campaign stated that they would seek tax increases for those with incomes above $ 400,000 – the tax rate table would increase for those with incomes above $ 400,000, and so would the 199A deduction run out the same level. With the composition of today's House and Senate, it is very likely that an individual tax increase will take effect. Whether it's exactly at the $ 400,000 level is unclear. For example, there may be some Senators pushing up the $ 400,000 figure for either the general pricing table, the 199A deduction, or both. In turn, depending on the administration's desire for a more bipartisan package, individual tax increases may reflect bipartisan contributions.
FEI Daily: As mentioned earlier, many FEI members work for family businesses and are expected to be always concerned about changes in inheritance tax law. Biden's tax plan includes a proposal to reduce the inheritance tax exemption by 50% and eliminate the increase in the base at the time of death. How likely are these changes to take effect and what can family businesses do to prepare?
Simmens: During my time on the Joint Tax Committee, the 2001 Economic Growth and Tax Relief Act was passed, which abolished estate and generational transfer taxes for one year. This year the base increase was canceled in favor of the transfer base. Using a carryover regime is complex to implement and difficult to adhere to. I think the removal of an increase in the base would be less likely as it would change estate tax policy significantly.
In terms of increasing the exemption, implementation is less complex and would bring the exemption amounts back to pre-2017 TCJA levels. I think it is likely that the amount of the exemption will change.
FEI Daily: It seems clear that the current priorities for the Biden government are an additional COVID-19 relief bill and a comprehensive infrastructure bill in 2021. Do you see the White House pursuing a major tax bill like the Tax Cuts and Jobs Act sometime this year or in the future? Tax changes tend to come piecemeal? If there is a large tax burden, do you expect it to have to go through the budget reconciliation process just like the TCJA was?
Simmens: I expect every COVID bill will have some tax rules that make it to the president's desk, but I also expect a more comprehensive tax package in the future. Given the uncertain composition of Congress in January 2023, I would expect the government to push for a package before the end of this Congress. Unless the legislative filibuster is repealed or a tax package is largely non-partisan, which both seem unlikely today, I believe the only option will be reconciliation.