Transactional tax planning in 2021

As expected, President Biden's tax plan will have an impact on tax planning for businesses and high net worth individuals. In general, for most taxpayers, deferral has been the income tax planning approach. Although taxes are generally expected to increase, the proposed changes to tax law bring this issue to the fore. Is tax deferral still the planning tool or is it better for taxpayers to record income now than postpone transactions or income tax recording?

The corporate tax rate is currently at 21%, with President Biden proposing that the income tax rate be increased to 28%. Additionally, the long-term capital gain rate would no longer apply to sales transactions for individuals earning $ 1,000,000.

Therefore, given this possible change in tax law, C firms and their shareholders considering transactions should consider moving up the schedule for their transaction to complete. In particular, when selling shares, a corporation taxpayer is only taxed at the shareholder level. However, these shareholders could be adversely affected if they are unable to use long-term capital gains tax rates on their profits. In the event of a sale of a company's assets, tax is levied at both corporate and shareholder level, and therefore a higher tax will apply due to the increase in the corporate tax rate. If individual shareholders in the income bracket are above $ 1,000,000, the taxpayer could also be affected by normal income tax rates.

For taxpayers selling real estate, the long-term capital gain rate would not apply to gains recognized by taxpayers earning more than $ 1,000,000. Therefore, prior to the amendments to the tax law, selling real estate could have significant tax implications for certain real estate investors who are also high income individuals considering sales transactions.

For intra-family transactions, the above tax considerations apply when considering sales transactions. If the family members wish to inherit a stock or real estate, they may consider the fact that the benefit of a strengthened base of the stock or real estate may be lost. Hence, lifelong gifts can become more attractive to these taxpayers.

For taxpayers earning more than $ 400,000, the top tax rate of 39.6% would apply. This is currently the top tax rate for joint applicants earning $ 622,050 in 2020 and $ 518,400 for singles in 2020. This increases the incentive to complete transactions now rather than later. Applicable income tax rates will be higher in the near future.

Of course, there is always the possibility that changes in tax law will be retroactive (although this is not likely) and / or changes in tax law may not be permanent – these factors should be considered. In addition, tax deferral instruments such as tax-free restructuring may not have the same appeal.

While the tax tail shouldn't wag the dog, customers considering the trigger for a transaction should keep in mind the looming changes in tax law.