As the new Biden government announces candidates for top government positions, there is a lot of speculation about what certain policy initiatives, including tax reform, will look like under the new president.
During the 2020 presidential campaign, President Biden's team made certain things clear: that they would work to reverse certain elements of the 2017 Tax Cuts and Jobs Act (TCJA), that he and other leading Democrats see as tax breaks and loopholes for businesses and individuals with high net worth; and that it would work to stimulate economic growth with incentives focused on promoting US production and supporting the clean energy sector.
Understanding that there is a big difference between political positions and the ability and desire of a chosen party to implement the proposed changes, here are some key elements of President Biden's proposed tax code reforms and how businesses and individuals should plan for these changes.
The changing landscape for corporate taxpayers
The most significant changes to the TCJA, celebrated by Republican supporters and ridiculed by critics, have been the changes that have dramatically reduced the tax burden on American businesses. It seems the first on the list of possible reforms in the president's era are efforts to reverse these tax cuts. President Biden's team said it intends to raise the standard corporate tax rate by seven points to the pre-TCJA level of 28%. Additionally, the TCJA eliminated the minimum replacement corporate tax, which President Biden could reinstate, requiring companies with revenues of $100 million or more to pay the standard rate or a 15% minimum tax, whichever is greater.
President Biden also proposed changes to deductions for qualifying business income (QBI). Under current legislation, which expires on December 31, 2025, taxpayers who are not C Corps can deduct 20% of the QBI from qualifying real estate investment funds or pass-through entities. President Biden could eliminate these QBI deductions for those earning more than $400,000.
While some of the president's fiscal policy positions may increase the tax burden on businesses, extensions of popular tax incentives are also offered. For example, President Biden intends to make changes to the new markets tax credits (NMTC). These qualifying capital investment loans in low-income communities are currently limited to $5 billion and cannot be granted after this year. President Biden could expand NMTC and make it a lifelong program, creating a win-win situation for all businesses and communities.
The president could also expand tax credits for renewable energy, including those for carbon capture, use, storage, residential energy efficiency, reinstatement of the energy investment tax credit (ITC), and the electric vehicle tax credit.
Individual tax planning
The most significant changes proposed to personal income tax rates target a higher level of high net income earners. For example, President Biden proposed a 2.6% rate hike, reverting to the pre-TCJA rate of 39.6%, for people earning more than $400,000.
Additionally, the TCJA has increased the property tax exemption to $11.58 million (in 2020) and allows transfers of assets valued at the time of death to achieve a base increase. The president could reinstate the exemptions before the TCJA and eliminate the incremental base. As a result, people may want to consider options to maximize lifetime capital exclusions. President Biden may also seek to eliminate long-term capital gains and dividend cuts for income over $1 million instead of implementing standard tax rates.
The new administration could also impose a 12.4% payroll tax on income over $400,000, shared equally between employers and employees.
The increase in benefits and exemptions may include extending the maximum tax credit for children and dependents to $8,000, increasing the child tax credit to $3,000 and adding credit of $600 for children under 6; and the reinstatement of the tax credit for up to $15,000 for first-time home buyers.
International tax planning
People engaged in international business transactions may have tax debt affected by a new administration, with President Biden proposing tax incentives and penalties related to overseas operations and income.
Specifically, three areas deserve a closer look at assessing how a Biden government can influence international tax planning. First, there may be changes to global intangible low-taxed income (GILTI). Currently, US multinationals pay a foreign tax rate of 10.5% to 13.125% for GILTI, with an increase to 16.406% scheduled for 2026. However, under a Biden government, the rate could double to 21% and a minimum tax assessed country by country.
Another area that could be affected is offshoring. Currently, there are tax deductions for companies that manufacture in the country and sell abroad. A Biden government could create a 10% fine for imported goods and a 10% tax credit for goods created in the United States to create jobs in the industry.
Finally, the Biden administration could influence the repatriation. The current approach is that domestic companies can defer paying US tax on foreign branch profits until those profits are repatriated. That deadline will expire on December 25, 2025. However, President Biden could create provisions that would require companies to repay tax benefits if they send jobs overseas.
Final Words
Finally, the new government's plans to make changes are constrained by bipartisan concerns. The Republican Party has fought hard to implement changes to the TCJA and will need the full support of Democrats in both houses of Congress to push for tax reform. Democrats held a small majority in the House of Representatives. With the Senate second-round vote for Vice President Harris, the Biden government will likely have the ability to make some changes. The biggest remaining question will be how far tax reform is on their priority list.
Finally, what happens to an individual, corporate and international taxes remains to be seen. However, it is never too early to start planning for the new government's potential impact.
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