During his presidential campaign, Joe Biden vowed to raise taxes on wealthier individuals and corporations to help pay for new governmental programs. If his proposed tax plan can get the support it needs to pass in congress, here’s how it could affect US companies.
The Senate Divide
Before getting into the details of Biden’s plan, it’s important to assess the likelihood of such a plan passing: because Biden’s promise to raise taxes on top earners is actually a decision that can only be finalized by the Senate.
For Biden’s tax plan to be enacted, he’ll need to reach a majority vote there. Currently, the Senate is divided as follows:
- 50 Republicans
- 48 Democrats
- 2 Independents (Democrat-leaning)
For Biden to get a majority vote he needs every Democrat, both Independents and at least one Republican to approve his plan. He could also get the necessary amount of votes without any Republicans on his side; if he receives 48 Democratic votes and 2 Independent votes there would be a tie, and the final vote would go to Vice President Kamala Harris.
If there’s any good news for businesses, it’s that there is a chance the plan won’t be approved. It’s not as though Biden needs a small percentage; he’ll need every single vote from his party, and quite possibly some votes from the opposing party.
And if Biden’s plan passes the Senate? The proposal would not impact the 2020 tax season. However, it would affect the next tax season, with high-earning US individuals and corporations paying the most.
The central target in Biden’s tax plan is corporations. US companies can expect an increase in the corporate tax rate from 21% to 28%, along with a 15% minimum book tax for companies that make over $100 million but do not pay federal income taxes. There will also be a 10% offshoring penalty surtax on earnings for US products that were manufactured overseas.
It’s not just big businesses that will be affected; small business owners can say goodbye to some of the perks they enjoyed under the former tax plan. Currently, many taxpayers deduct 20% of qualified business income from a partnership, S- corporation, or sole proprietorship. For example, a small business owner with a net income of $500k is eligible for a $100k tax deduction after filing their business as a sole proprietorship. Biden’s plan aims to eliminate this possibility.
The plan will also be putting an end to special qualifying rules, including those for real estate investors. Only taxpayers making $400k or less will be eligible for deductions.
Another tax impacted by Biden’s plan is social security. To ensure that employers are paying employment taxes, the plan will include a provision that prevents employers from misclassifying employees as independent contractors. Additional social security taxes will be implemented on those who earn over $400k.
Finally, corporations (and individuals) that make money off of selling investments can expect new capital gains taxes if their earnings go over $1 million.
International Business Taxes
Biden’s plan goes beyond the scope of the US. Any business that makes income through foreign affiliates can expect to pay higher taxes on those earnings.
Under Biden’s plan, the global intangible low-taxed income (GILTI) of US shareholders will increase from 10.5% to 21%. The GILTI refers to income that is earned by foreign branches of US companies from intangible assets, such as:
The plan also aims to end incentives that let companies lower taxes on income earned outside of the US. For example, his “claw-back” provision would compel companies to return both public investments and tax benefits if they shut down jobs in the US while creating jobs overseas.
As with most tax plans, businesses are offered incentives that can help minimize the impact of some of those taxes. One incentive involves working with the Opportunity Funds (which support economic growth). Companies can receive tax credits for partnering with non-profit organizations to create jobs for low-income residents.
Other tax incentives include credits for businesses that offer childcare facilities or create more jobs for American workers. Employers that construct spaces for childcare will receive 50% off of the first $1 million of costs, while employers creating jobs for Americans can expect a 10% tax credit.
The Biden plan also intends to expand the new markets tax program, offering $5 billion in support annually. This program brings private capital into low-income areas by having both individual and corporate entities make equity investments. In exchange, they receive a tax credit against their federal income tax.
The Common Denominator
At the end of the day, there’s one group that will be impacted the most by Biden’s tax plan: those earning over $400k.
Biden intends to make the highest earners pay the most in taxes, whether they are an individual, corporations, or both. Business owners that make over $400k after gross adjusted income will still end up paying high taxes as individuals. It doesn’t matter what the entity is; if they’re earning over $400k, they’re paying for it.
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