With significant revisions to the tax code currently under discussion in Congress, many businesses and individual taxpayers are struggling to determine how the proposed changes might affect them. The debate over the various tax packages is still underway, so it is too early to make any specific recommendations. Nevertheless, it is prudent to be aware of the proposals and consider their potential effects on your tax situation.
The revisions are included in two pending bills: the American Jobs Plan and the American Families Plan. Both bills propose to make substantial changes to existing tax laws in order to raise revenue for new programs and initiatives.
American Jobs Plan Provisions
Often referred to as the infrastructure bill, the American Jobs Plan includes provisions that would affect corporate taxes. Many of the changes apply only to narrow segments of the economy, but the following provisions are likely to impact a large number of companies:
- Increase in the corporate tax rate. The bill would increase the corporate income tax rate for C corporations from the current 21 percent to 28 percent for tax years beginning after Dec. 31, 2021. Of all the corporate tax reforms in the bill, this would likely have the widest impact.
- Other changes to corporate taxation. Very large corporations (those with more than $2 billion in worldwide revenue) would be subject to a minimum 15 percent tax on worldwide book income. The bill also includes changes designed to discourage businesses with international operations from profit shifting and offshoring.
- Housing and infrastructure tax credits. In addition to expanding the existing Low-Income Housing Tax Credit, the bill introduces the Neighborhood Homes Investment Tax Credit and makes other changes to support low-income housing, economic development, and public school and transportation infrastructure. These provisions could significantly impact the construction sector, as well as businesses with real estate interests.
- Changes to energy-related tax incentives. Existing credits and incentives to encourage oil, gas, and coal production would be eliminated and replaced with tax credits to encourage investment in renewable energy. Among the provisions are temporary increases in the renewable energy investment credit, an increase in the Section 179D deduction for energy-efficient commercial buildings, and expansion of tax credits for zero-emission vehicles to include medium- and heavy-duty vehicle fleets.
American Families Plan Changes
The revenue proposals in the American Families Plan would increase taxes on high-income taxpayers and investors while expanding tax credits for low- and middle-income workers. Tax advisors are watching the following areas with particular interest:
- Higher rates for high-income taxpayers. The bill boosts the top marginal individual income tax rate to 39.6 percent (up from the current 37 percent) for tax years beginning after Dec. 31, 2021. It also lowers the threshold for the top rate to $509,300 for married couples filing jointly and $452,700 for unmarried taxpayers.
- Taxation of capital gains as ordinary income. Under this proposal, long-term capital gains and qualified dividends of high-income taxpayers would be taxed at ordinary income tax rates, to the extent that a taxpayer’s income exceeds $1 million. While some taxpayers have considered speeding up the sale of assets in order to beat this increase, the legislation as written would make the change retroactive to the “date of announcement,” which was April 28, 2021.
- Other capital gains tax changes. The bill proposes requiring that capital gains be realized at the time of a taxpayer’s death, eliminating the step-up in basis that is allowed under current law. It would also change how and when gains must be reported if assets are transferred as gifts. The various capital gains tax changes are certain to generate considerable debate as they move through the legislative process, and taxpayers with sizable assets—such as a business, farm, or investment portfolio—will want to monitor these provisions closely.
- Additional changes for high-income taxpayers. The bill proposes to apply a 3.8 percent net investment income tax (NIIT) to pass-through income earned by S corporation shareholders, limited partners, and LLC members who are active participants in their businesses and have adjusted gross incomes in excess of $400,000. It would also repeal the so-called “carried interest loophole” for those earning more than $400,000, and limit the deferral of gains for like-kind exchanges under Section 1031 to $500,000 per taxpayer ($1 million for joint returns).
These are just a few of the far-reaching and potentially significant tax law changes in the two bills that are now making their way through Congress. While it is impossible to predict which provisions will ultimately become law, both businesses and individual taxpayers should be prepared to adjust their tax strategies once the outcomes become clear.
At Holbrook & Manter, we strongly believe in proactive tax planning. Please reach out to us to assist you with your tax needs.