www.taxprofessionals.com - TaxProfessionals.com
Posted by Tiffany Gaskin

The 2021 Tax Reform is Expected to be Substantial & Far-Reaching

The 2021 Tax Reform is Expected to be Substantial & Far-Reaching

The White House and Treasury released the first details of the Biden administration's 2021 tax reform proposal, a major focus in Washington, DC. Tax code changes are expected in the next seven months or so. The tax changes will be substantial and far-reaching and will include:

  • Increases in corporate, personal, and capital gains tax rates.

  • International tax changes.

  • Changes in inheritance and gift taxes.

Estimated time for Biden administration tax changes

Congressional House and Senate committees are already working on tax and budget proposals that will be part of the next budget reconciliation project. The House and then the Senate will draft and approve a budget resolution that will serve as a vehicle for the reconciliation process. It only takes 51 votes to pass the budget reconciliation bill in the Senate. The actual dates for newly enacted provisions are usually January 1, 2022. Still, some provisions could have offered actual data related to committee action or the actual date of enactment (e.g., increases in the capital tax rate values on sales could be offered after the commission action date at the beginning of October or the date of enactment of the legislation later in the fall). The effective dates of certain provisions may be phased in overtime, and certain provisions may be adopted temporarily to help keep the scored cost of the legislation within acceptable parameters.

Depending on the taxpayer's particular circumstances, those who anticipate the planned changes and now work to take advantage of existing tax rules and rates can achieve significant tax savings. This notification covers only a fraction of the tax changes expected to be implemented this fall; More details will be released from time to time, including when the Treasury releases the so-called Green Book ("General Explanations of the Management's Fiscal Year 2022 Revenue Proposals") in the coming weeks.

Expected increases in corporate tax rate and related changes

The Biden administration is proposing to increase corporate tax rates from 21% to 28%. Most believe the corporate rate will not exceed 25%. The section 199A pass-through deduction should not be available to taxpayers earning more than $400,000. NOL carrybacks should be prohibited for tax returns that have not been filed before the effective date. The Biden administration is also proposing:

  • A minimum tax of 15% for companies with more than $2 billion in "book income."

  • Abolition of the foreign-derived intangible income (FDII).

  • Denying all deductions and expensing write-offs for moving jobs or production overseas.

  • Double the global intangible low-tax income (GILTI) on foreign source income from 10.5% to 21% and impose it country by country and without exclusion (or non-exclusion) for estimated profitability of tangible assets.

  • Eliminate advertising deductions on drugs.

  • Introduce a 10% advanceable "Made in America" tax credit for certain call center services or jobs brought to the United States.

  • Offer or extend tax credits and incentives for production, renewables, carbon capture, and small businesses.

  • Repeal of tax preferences for fossil fuels.

  • Replace the Basic Erosion and Abuse Tax (BEAT) with a proposal called stopping harmful inversions and ending low-tax developments (SHIELD). SHIELD typically denies tax deductions for certain related-party payments when the recipient is in a tax-reduced jurisdiction.

  • Revocation of additional depreciation, including cancellation of the increase in additional depreciation from 50% to 100%.

  • To impose an "offshoring penalty" surtax on profits from foreign production of US companies for sales to the US (a 10% surtax leading to an effective tax rate of 30.8%; for example, to call centers or offshore services serving the United States)

Some of these proposals are not yet well defined and can be difficult to draft and manage. Others can only be partially achieved. All of the proposals are relevant because they provide information on what the 2021 reconciliation bill can seek to achieve. The Treasury Green Paper is expected to include many of the proposed corporate tax changes in the Obama administration's 2017 fiscal budget, released on February 9, 2016. The Obama administration's budget included more than 140 tax proposals, including the repeal of the last-in, last-out (LIFO) inventory accounting method.

Expected changes to the existing schedule for certain TCJA (Tax Cuts and Jobs Act) provisions.

Many provisions of the 2017 TCJA that are currently planned to change wages over the next few years will be addressed in the budget reconciliation package that it would adopt this fall and could therefore change or expire earlier than previously provided.

Projected capital gains and dividend tax rate increase for higher-income earners

Capital gains and dividend tax rates will increase for some taxpayers with incomes above the current level of 23.8% (a tax rate of 20% plus 3.8% income tax net of investments) up to 43.4% (the highest tax rate is 39.6% plus tax on investment income of 3.8%). Higher rates should apply to taxpayers with adjusted gross income greater than $1 million, although that limit may equal income higher than $400,000. The Biden administration's proposal would tax high-income taxpayers on their long-term capital gains and their eligible dividends at the same rate as their short-term income and regular dividends. It seems that many senators may feel uncomfortable with capital gains rates above 28% (31.8% because that the tax of 3.8% on net investment income is added). For now, taxpayers should expect a nominal increase of at least eight percentage points (8/20 = 40%; 8/23.8 = 33.6%) or a 33.6% increase in capital gains rates. Most expect higher capital appreciation rates to apply to sales that take place from the effective date of the legislation, which we expect to take place in the last quarter of 2021.

Expected Like-Kind and carried interest changes

Expected interest income should be more (perhaps modestly) tax-oriented at normal tax rates. Like-kind exchange rate rules should be repealed entirely. The effective date for the repeal of like-kind repeal is expected to be the date of the enactment this fall.

Expected individual income tax rates increase and change. 

For individuals (including joint taxpayers) who earn more than $400,000 in a calendar year, the top marginal income tax rate is expected to return from the current level of 37% to the pre-2018 level of 39.6%. The pass-through deduction provided for in section 199A, which allows certain owners of pass-through companies to deduct up to 20% of their eligible business income (which leads to a current statutory rate of 29.6%), may be removed or may not be available to taxpayers with an income of over $400,000.

The $10,000 limit for state and local tax deductions (SALT) may be repealed and replaced with limitations on itemized deductions (e.g., eliminations, a 28% limit on the value of itemized deductions, etc.) for taxpayers earning up to $400,000. 

The complete repeal of the SALT limit is expected to cost the government more than $600 billion over ten years. Congress is looking for ways to qualify the repeal of SALT as a neutral "adjustment" to disposable income for the original cap provision; these changes may be retroactive for some taxpayers going back to the 2018 tax calendar year.

Expected increases and changes in inheritance and gift taxes

The property tax and lifetime tax exemption (which was temporarily doubled until 2025) is currently $11.7 million per person ($23.4 million for couples). In addition, there is a donation tax exclusion of $15,000 per donor ($30,000 if the spouses agree). The current rate of property tax on amounts in excess of exempt amounts is set at 40%, and the tax basis on inherited property is "raised" to fair market value after the death of the deceased. The Biden government is expected to try to raise the property tax rate to 45% and reduce the exempt amounts to the previous TCJA level ($5.3 million per person, $10.6 million for couples). Some have proposed an even higher tax rate and a lower exemption. The tax basis on inherited property is expected to carry over rather than step up. There are also proposals in the House and Senate to tax capital gains when a donation is made and when a person dies, although neither of these proposals is expected to be enacted. The portability of spousal exemption amounts is expected to continue, but many of the planning techniques (including valuation discount obtained in related party transactions) currently used by taxpayers could be reduced or eliminated altogether.

Expected Additional Clarifications, details, and subsequent changes 

As the Congressional and executive committees continue to work on the tax and budget proposals, clarifications and details on the various proposals will emerge. Some of the original proposals may be dropped and revised, and other proposals may arise. As mentioned above, depending on the specific facts and circumstances of the taxpayer, taxpayers who anticipate expected tax changes and act according to their business plans, transaction processes, restructuring, operational issues, and capital plans in a manner that takes advantage of current tax provisions and rates.



Tiffany Gaskin
Contact Member