Democrats Jon Ossoff and Raphael Warnock have now won the January 5, 2021, Senate runoff elections in Georgia, so the Democrats will have control of the Presidency, House of Representatives and Senate, giving them a governing mandate (the Georgia runoff election results have not yet been officially certified but this will take place before January 20, 2021).
While President-elect Joe Biden expressed interest in raising taxes on corporations and wealthy individuals during his campaign, it is best to think of that as a framework for where the new administration intends to go, rather than a set-in-stone inevitability. We know the new administration is likely to favor a paring back of some of the tax cuts made by the 2017 Tax Cuts and Jobs Act (TCJA). Biden has indicated that his administration may consider changes to the corporate tax rate, capital gains rate, individual income tax rates, and the estate and gift tax exemption amount.
Procedurally, it is unclear how tax legislation would be formulated under the Biden administration. A tax package could be included as part of another COVID-19 relief bill. The TCJA could be modified, repealed or replaced. It is also unclear how any package would proceed through Congress. Under current Senate rules, the legislative filibuster can limit the Senate’s ability to pass standalone tax legislation, thus leaving any such legislation to the budget reconciliation process, as was the case in 2017. It also remains unclear if the two parties will come together to work on any bill. Finally, it will be important to note who fills key Treasury tax positions in the Biden administration, as these individuals will have a strategic role in the development of administration priorities and the negotiation with Congress of any tax bill.
How Tax Changes Could Take Shape:
Part of a COVID-19 Relief Package
With the new administration eager to provide immediate relief to individuals and small and medium-sized businesses affected by the coronavirus pandemic, some tax changes could be included as part of an additional relief bill on which the new administration is likely to seek bipartisan support. Such changes could take the form of tax cuts for some businesses and individuals, tax credits, expanded retirement contributions and/or other measures. If attached to a COVID-19 relief bill, these changes would likely go into effect immediately and would provide rapid relief to businesses and individuals that have been particularly hard hit during the pandemic and economic downturn.
Repeal and Replace TCJA
Another possibility is for Biden to pursue a full rollback of the TCJA and replace it with his own tax bill. This would be a challenge since the Democrats only have a slim majority in the Senate, meaning that Republicans could filibuster the bill unless Senate Democrats take steps to repeal the filibuster.
Given that the Biden administration’s immediate priorities will be delivering financial assistance to individuals and businesses, ensuring the rollout of COVID-19 vaccines and flattening the curve of cases, a repeal and replacement of the TCJA might not be voted on until at least late 2021 and likely would not go into effect until 2022 at the earliest.
Pare Back or Modify the TCJA
An overall theme of Biden’s campaign was not sweeping, radical change but making incremental shifts that he views as improvements. We may see this theme come into play in Biden’s approach to tax legislation. He may choose not to repeal the TCJA completely (prompting a return to 2016 taxation levels), but instead to pare back some of the tax changes enacted in 2017. In practice, this could be in the form of raising the corporate tax rate by a few percentage points, which could garner bipartisan support. Again, this likely would not be a legislative priority until after the country has passed through the worst of the COVID-19 pandemic.
Unknowns: Factors That Will Influence Potential Tax Changes
Senate Legislative Filibuster
Currently, the minority party in the Senate can delay a vote on an issue if fewer than 60 senators support bringing a measure to a vote. Thus, Republicans would be likely to filibuster any bill that contains more ambitious tax rate increases. The uptick in the use of the filibuster in recent decades is perhaps a symptom of congressional deadlock, and there are calls from many Democrats to eliminate the filibuster in order to pass more ambitious legislation without bipartisan support (in fact, in recent years, the filibuster has been removed for appointments and confirmations). While President-elect Biden and incoming Senate Majority Leader Chuck Schumer may be open to ending or further limiting the filibuster, with the current composition of the Senate, every Democratic senator would have to agree. Last fall, West Virginia Senator Joe Manchin indicated he would oppose ending the legislative filibuster.
If the Democrats are successful in removing the filibuster, it would be easier for Congress to pass more permanent tax legislation. However, if the filibuster remains in place, tax legislation would likely be passed as part of the budget reconciliation process, which only requires a simple majority to pass. However, the tradeoff is that any changes generally would have to expire at the end of the budget window, which typically is 10 years. This is how both the 2001 Economic Growth and Tax Relief Reconciliation Act and the TCJA were passed.
Another factor that will influence Biden’s tax policies is who will fill key tax appointments at the Department of Treasury. Three positions that will have a major effect on any tax plan are Assistant Secretary for Tax Policy, Deputy Assistant Secretary for Tax Policy and Tax Legislation Council, each of whom typically steer the administration’s voice on tax legislation.
These appointments may take several weeks or longer to get in place, so it is possible that there will not be any tax legislative activity until the positions are filled.
Appetite for Bipartisanship
President-elect Biden has signaled that he wants to be a president for all Americans and seek to heal the partisan divides in the country. He may be looking to reach across the aisle on certain legislation and seek bipartisan support, even if such support is not necessary to pass a bill. Biden stated during his campaign that he wants to increase the corporate tax rate—not to the 2017 rate of 35%—but to 28%. Achieving this middle ground rate might be viewed as a compromise approach.
As the new government takes office, it remains to be seen how much bipartisanship is desired, or even possible.
What These Factors Mean for Your Business
It is important to note that sweeping tax changes probably are not an immediate priority for the incoming Biden administration. With the escalating health and economic crises resulting from the COVID-19 pandemic, the new administration’s immediate focus likely will be on addressing the current fragmented approach to COVID-19 vaccinations, accelerating the distribution of the vaccines, taking steps to bring the spread of COVID-19 under control and providing much needed economic relief. As noted above, there could be some tax changes and impacts resulting from future COVID-19 relief bills. Those will be the bills to watch for any early tax changes, including cuts or credits, that businesses may be able to take advantage of. Larger scale tax changes, particularly any tax increases, may not go into effect until 2022 at the earliest. Moreover, factors such as the continuation of the legislative filibuster, the appetite for bipartisanship and the filling of key tax appointments at Treasury will help determine the path and details of those changes.
Regardless of your current tax position, it is important to remain informed on potential policy changes, how these will play out and how they will affect your organization. As more details come to light, we will provide additional insights on how new policies will affect the tax position of middle market businesses.
The following table sets out the current rules and how Biden is proposing to deal with these rules:
|Current Tax Law (TCJA–present)
|Corporate Tax Rates and AMT
|Corporations are subject to a flat 21% tax rate and the corporate alternative minimum tax (AMT) was repealed for corporations (changes made by the TCJA).
These do not expire.
|Biden would raise the corporate rate to 28%, which is still below the pre-TCJA level of 35%. He would reinstate the corporate AMT, requiring corporations to pay the greater of their regular corporate income tax or the 15% minimum tax (while still allowing for net operating losses (NOL) and foreign tax credits).
|International Taxes (GILTI, Offshoring)
|GILTI (global intangible low-tax income): Enacted as part of the TCJA, GILTI rules require U.S. shareholders of controlled foreign corporations to include in income under the CFC anti-deferral rules certain income earned by those CFCs. For taxable years beginning after December 31, 2017, and before January 1, 2026, the effective U.S. tax rate on GILTI for domestic corporations is 10.5% (taking into account the 50% deduction under Section 250 and before Section 960(d) foreign tax credits). The effective U.S. tax rate (before Section 960(d) foreign tax credits) on GILTI for domestic corporations rises to 13.125% for taxable years beginning after December 31, 2025.
Offshoring taxes: The TCJA includes a tax deduction for corporations that manufacture in the U.S. and sell overseas.
|GILTI: Biden would double the GILTI tax rate to 21% and assess a minimum tax on a country-by-country basis. His proposal would eliminate the reduction for qualified business asset investment in the GILTI calculation.
Offshoring taxes: Biden would penalize companies that offshore manufacturing and service jobs in order to sell goods or provide services back to the U.S. market by imposing a 10% penalty surtax on such profits. Biden would also close offshoring tax loopholes in the TCJA.
A 10% “Made in America” tax credit would be granted to encourage businesses to bring manufacturing jobs back to the U.S. and help with the recovery of the economy.
|The 12.4% payroll tax is divided evenly between the employer (6.2%) and the employee (6.2%) and applies to the first $137,700 of an individual’s income (scheduled to go up to $142,800 for 2021). A 2.9% Medicare Tax is split equally between the employer and the employee with no income limit.
|Biden would maintain the 12.4% tax split between the employer and the employee, retain the $142,800 cap and would impose the payroll tax on earned income exceeding $400,000. The gap between the two wage levels would gradually close with annual inflationary increases.
|Individual Income Tax Rates
|The top marginal rate is 37% for income over $518,400 for individuals and $622,050 for married persons filing jointly.
This was lowered from 39.6% pre-TCJA.
|Biden would restore the top 39.6% rate for taxable income exceeding $400,000.
|Individual Tax Credits
|Individuals can claim a maximum $2,000 child tax credit, plus a $500 dependent credit (for dependents who do not qualify for the child tax credit).
Individuals can claim a maximum dependent care credit of $600 ($1,200 for two or more children).
The child tax credit is scheduled to revert to pre-TCJA levels ($1,000) after 2025.
|Biden would expand the child tax credit to $3,000 for children age 17 and under and offer a $600 bonus for children age six and under. The credit would be fully refundable.
He has also proposed increasing the child and dependent care tax credit to $8,000 ($16,000 for two or more children), and a new tax credit of up to $5,000 for informal caregivers.
Separately, Biden has proposed a refundable $15,000 tax credit for first-time homebuyers.
|For 2020, the standard deduction is $12,400 for single/married persons filing separately and $24,800 for married persons filing jointly.
After 2025, the standard deduction is scheduled to revert to pre-TCJA amounts, or $6,350 for single /married filing separately and $12,700 for married filing jointly.
The TCJA suspended the personal exemption and most individual deductions through 2025.
It also capped the state and local tax (SALT) deduction at $10,000, which will remain in place until 2025, unless repealed.
|Biden would enact a provision that would cap the tax benefit of itemized deductions at the 28% rate.
Incoming Senate majority leader Charles Schumer has pledged to repeal the SALT cap (the House of Representatives has already passed legislation to repeal to the cap).
|Capital Gains and Qualified Dividend Income
|The top capital gains tax rate is 20% for income over $441,450 for individuals and $496,600 for married persons filing jointly. There is also an additional net investment income tax of 3.8% that is imposed on high income taxpayers.
|Biden would eliminate tax breaks for long-term capital gains and dividends for income above $1 million; instead, such income would be taxed at ordinary rates.
|Forgiven student loan debt is included in taxable income.
There is no tax credit for contributions to state-authorized organizations that sponsor scholarships.
|Biden would exclude forgiven student loan debt from taxable income.
|Estate and Gift Taxes
|The estate and gift tax exemption for 2020 is $11,580,000. Estate beneficiaries receive appreciated property with a basis equal to the property’s fair market value, meaning that the beneficiary can dispose of the property immediately without the appreciation being taxed.
The exemption is scheduled to revert to pre-TCJA levels in 2026.
|Biden would return the estate and gift tax to 2009 levels and eliminate the step-up in the basis on inherited assets, as well as the step-up at death provision for inherited property passed along by the decedent.
|Qualified Business Income Deduction
|Many businesses qualify for a 20% qualified business income tax deduction, lowering the effective tax rate for S corporation shareholders and partners in partnerships to 29.6% for qualifying businesses.
|Biden would phase out the tax benefits associated with the qualified business income deduction for business owners whose annual income is more than $400,000.
|Tax credits are available for some of the costs to start a retirement plan.
|Biden would offer tax credits for businesses that adopt a retirement savings plan and offer most employees without a pension or 401(k) access to an “automatic 401(k)”.
|The opportunity zone program provides incentives for long-term investment in underserved communities. Investors can defer taxes on capital gains by keeping those funds in a Qualified Opportunity Fund.
|Biden has proposed incentivizing opportunity zone funds to partner with community organizations and have the Treasury Department review the regulations under the program to ensure the program is operating as intended. Biden would also increase reporting and public disclosure requirements for developers in opportunity zones.
|The renewable energy tax credits have gradually dropped to 22% (from 30%) for 2021.
|Biden would expand renewable energy tax credits and credits for residential energy efficiency, and restore the Energy Investment Tax Credit and the Electric Vehicle Tax Credit.
This article originally appeared in BDO USA, LLP’s “Federal Tax Alert” newsletter (Fall 2018). Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com