Crains: If a company applies for credit under the Paycheck Protection Program, will it affect its tax liability for 2021?
Bublé: The Consolidated Appropriations Act of 2021 overturned an earlier IRS ruling and now clarifies that expenses paid with the proceeds of a PPP loan issued are deductible. This is a great victory for taxpayers.
Tobey: At the federal level, we know that PPP funds are not treated as taxable income, nor are PPP funds allocated as debt relief. We also now know that expenses paid with issued PPP funds are fully deductible on the borrower's tax return. What we don't know is how individual states will treat loan funds for tax purposes, which will be a matter of great concern and uncertainty this tax season. Nonprofits and corporations should also ensure that expenses paid for with issued PPP funds are not also reimbursed by other federal grant funds, which would trigger a double dip.
Crains: Are there any new or upcoming issues for people looking to start a new business this year to consider when choosing a business structure?
Sussman: Entrepreneurs deciding which corporate structure to use should carefully consider the upcoming tax law changes introduced by President Biden. In 2017, when the Tax Cut and Jobs Act cut the corporate tax rate to a historically low 21%, corporate structure became an attractive choice for businesses. Some of the tax changes proposed by Biden, such as increasing the corporate tax rate and the qualified dividend tax rate for taxpayers earning more than $ 1 million, could change the analysis and make the corporate structure less attractive to new entrepreneurs.
Tobey: The ability for President Biden to achieve many of his tax goals in his first term should play a role in all major tax decisions that have long-term implications. During the campaign, the president proposed increasing the tax rate for C companies from 21% to 28%. If pass-through companies lose the 199A withholding, as the president has also suggested, C Corporation still has the greater tax advantage. Choosing a corporate structure for maximum tax benefit depends to a large extent on the individual situation and the business owner's tax reduction goals and should be carefully considered and verified by a CPA specializing in corporate tax matters.
Bublé: Due to the Tax Cut and Jobs Act and the Cares Act, there are a number of points that entrepreneurs need to consider when determining the most beneficial way to structure a new business venture. The law on tax cuts and employment led to a reduction in corporate tax rates from a maximum of 35% to a flat rate of 21%. However, the issue of double taxation of dividends continues to have a significant impact on shareholders as the dividend rate is typically 20% plus an additional net withholding tax of 3.8%. However, non-profit companies can benefit from this reduced rate.
With respect to pass-through businesses, Qualifying Business Income Deduction allows certain business owners to deduct up to 20% of the income taxed at the individual level. For example, a person who is taxed at a marginal tax rate of 37% has an effective tax rate of 29.6% with the QBI deduction. Although this rate is higher than the company rate of 21%, the problem of double taxation is minimized. In addition, the Biden government has stated that the corporate tax rate can rise to 28%, along with other additional tax rate increases at the individual level.
Crains: What is the small business tax landscape in a global market after the Georgia Senate runoff election?
Bublé: Now that the runoff has been passed and the Democratic Party controls the Oval Office and both houses of Congress, small cross-border businesses could face another tumultuous tax ride. The 2017 Law on Tax Reductions and Employment introduced a uniform set of international federal tax regulations that apparently do not take into account the practical effects on small cross-border businesses. President Biden's tax proposals appear to change or remove some of these provisions, potentially adding to the current tax burden on the US cross-border small business community. Without targeted spin-offs or revisions to these rules for such companies as part of a future tax reform, the US tax burden is likely to increase. This includes US companies with overseas subsidiaries and US persons living overseas with overseas companies. You should expect your US tax burden to increase.
Crains: Given the Georgia runoff results, what are some of the planning considerations people should be considering when it comes to income taxes and estate and gift taxes?
Bublé: The results of the Georgia Senate runoff election make it more likely, in the opinion of many, that estate and gift taxes will change significantly. The lifelong exemption could be reduced, the estate and gift tax rate increased and the increase in the basic rules lifted. We believe that uncertainty is likely to affect the decisions customers make about planning. However, the approach at the beginning should still be the same. We believe the best place to start talking to clients is to gather their financial information and current legal documents, and then talk to clients about their goals.
Sussman: While we don't know exactly what President Biden will do with the current tax bill, his proposed tax changes include increasing the corporate tax rate and the maximum individual tax rate, eliminating the preferred tax rate for long-term capital gains for taxpayers earning more than US $ 1 million -Dollars and reduction of inheritance tax exemptions to 2009 levels. Congress may even pass a retrospective tax increase this year. When such changes occur, taxpayers should be ready to work with their accountant to re-evaluate and, if necessary, adjust any tax planning strategies to mitigate additional tax implications.
Tobey: President Biden's victory and the unexpected democratic turn in the special elections in Georgia may not bode well for the longevity of some aspects of the 2017 Tax Cut and Employment Act. Still, I believe Biden will find it difficult to implement major tax reform early on put into effect in his presidency. The number of moderate Democrats in Congress makes this unlikely until at least after the 2022 midterm elections (i.e. 2023). However, taxing corporations and those perceived as wealthy are often some of the first targets when the federal government seeks to increase revenue. Due to the pandemic, the federal deficit and debt are growing rapidly. At some point, additional federal revenue will be required to offset these expenses. Until the Democrats put in place the income legislation, we don't know which reduction or deferral strategies to use. My point of view: go ahead and be ready to spin if necessary.