How will it impact you?
President-Elect Joe Biden has often argued the Tax Cuts and Jobs Act (TCJA) was skewed to large corporations and upper-income individuals and that the U.S. federal income tax system needs to be retooled to ensure that these taxpayers are contributing “their fair share.” To that end, the President-Elect has generally proposed higher top income tax rates, along with expanding the tax base by limiting or eliminating various incentives currently available to these taxpayers under the TCJA. However, the President-Elect did not release a detailed description or technical explanation of his tax policy proposals.
What’s the future of U.S. tax policy?
President-Elect Joe Biden is expected to assume responsibility of the nation’s fiscal and tax policy beginning in January 2021, when he is likely sworn in as the nation’s forty-sixth president. Whether he can execute his proposed tax plan will depend on the balance of power on Capitol Hill. Although the Democrats will hold a slim majority in the House of Representatives, the control of the Senate will hinge on the outcome of Georgia’s two runoff elections on January 5, 2021. If the Democrats control both the White House and the incoming 117th Congress, albeit with slim majorities, then there might be a greater likelihood for some dramatic changes to the current U.S. federal tax landscape. Otherwise, no significant changes are expected under a divided government until the next midterm elections in 2022.
We outlined a high-level overview of the key tax policies from the President-Elect that would impact corporate and individual taxpayers. Since the President-Elect did not release a detailed description of his tax policies, we can only ascertain his tax policy platform based on comments during the primary debates, campaign speeches and briefings to reporters. Since tax policy originates in the Congress, it remains to be seen which tax policy prevails and whether a divided government will prevent any significant changes to the current tax landscape.
Key aspects for corporate taxpayers
Corporate tax rate
Biden has proposed to increase the U.S. federal corporate tax rate from 21% to 28%. The ramifications of the rate increase can be significant for some taxpayers that have global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) both of which are tied to the corporate income tax rate. If enacted, the new 28% corporate tax rate coupled with state income tax would make the U.S. one of the highest tax jurisdictions among the countries of the Organization for Economic Co-operation and Development (OECD).
The U.S. federal corporate tax rate is currently 21% decreased from 35% after 30 years effective in 2018 under the TCJA, which made the U.S. one of the lowest tax jurisdictions in the OECD. Biden has not proposed any reversals of the corporate tax base broadeners that were enacted under the TCJA to partially offset the cost of achieving the lower 21% tax rate. As a result, the higher 28% tax rate would be on a broader tax base than prior to the TCJA, and in effect, certain corporate taxpayers would experience a higher tax burden than they did under the 35% tax rate prior to 2018.
GILTI
Biden has proposed a few changes to the GILTI tax regime, particularly increasing the effective tax rate from GILTI to 21% (which is double the current rate), eliminating the GILTI inclusion exemption of 10% of qualified business asset investment (which is generally the adjusted basis average of foreign-based tangible property) and requiring a country-by-country GILTI calculation rather than the current consolidating basis which allows taxpayers to offset income and losses between high-tax and low-tax jurisdictions. As a result, and in conjunction with the higher proposed 28% corporate tax rate, certain taxpayers would experience a higher tax burden with respect to their foreign operations.
The TCJA originally enacted GILTI to curb tax-base erosion generally by U.S.-based multinationals. Under the TCJA, the current effective tax rate from GILTI is 10.5% effective through 2025 and then increases to 13.125% beginning in 2026.
New corporate alternative minimum tax rate
Biden has proposed a new 15% minimum tax on book income for companies that report net income of more than $100 million for financial statement purposes but owe no U.S. income tax. While many details of the proposal are currently unspecified, it would provide a tax credit for income taxes paid to foreign countries and would allow companies to carry over book losses from unprofitable years.
The TCJA repealed the corporate minimum tax regime effective in 2018.
Other proposals and incentives
Biden has proposed various incentives to help encourage manufacturing in the U.S., invest in infrastructure and address climate change. Some of these proposals include:
- Establishing 10% “Made in America” tax credit for activities that restore production, revitalize existing closed or closing facilities, retool factories to advance manufacturing employment or expand manufacturing payroll.
- Reinstating the energy investment tax credit and electric vehicle tax credit.
- Expanding tax deductions for energy technology upgrades, smart metering and other emissions-reducing investments in commercial buildings.
- Enhancing tax incentives for carbon capture, use and storage.
To contrast, Biden has proposed various revenue-raising initiatives that directly impact certain business sectors and other disincentives to discourage offshoring of U.S. jobs and manufacturing. Some of these proposals include:
- Imposing 10% surtax that will increase the effective tax rate to 30.8% on corporations that “offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market,” as Joe Bidon commented during the campaign in September 2020.
- Eliminating incentives and other tax preferences for the fossil fuel industry.
- Eliminating the deduction for prescription drug advertising.
- Eliminating certain tax preferences for the real estate industry, such as terminating the use of like-kind exchanges.
- Phasing out the qualified business income deduction under Section 199A.
Key aspects for individual taxpayers
Individual tax rates
Biden has proposed to revert the individual top tax rate on taxable incomes exceeding $400,000 from 37% to its pre-TCJA level of 39.6%. It is unclear whether the $400,000 threshold would apply to single taxpayers or joint filers. Biden also proposes to cap the value of itemized deductions at 28% and restore the limitation on itemized deductions (known as the Pease limitation after the late Congressman Donald Pease), which was repealed under the TCJA through 2025. Moreover, these changes would affect more than 60% of passthrough business income.
The TCJA reduced the top tax rate to 37% through 2025, when it is scheduled to revert back to 39.6% effective January 1, 2026.
Capital gains tax rates
Biden has proposed to increase the tax rate on long-term capital gains and certain dividends to 39.6% on taxpayers with taxable income exceeding $1 million.
Payroll taxes
Biden has proposed to impose a 12.4% payroll tax on taxpayers with taxable income exceeding $400,000, equally split between employers and employees. Since payroll taxes currently only apply to the first $137,700 of an individual’s income, Biden’s plan would create a gap whereby taxpayers with income between $137,700 and $400,000 wouldn’t be subject to the tax.
Other proposals and incentives
Biden has proposed various incentives to help encourage domestic manufacturing and infrastructure investments and address climate change. Some of these proposals include:
- Expanding the estate and gift tax by restoring the rate and exemption to 2009 levels, which was the top rate of 45% (up from the current 40%) with an exemption of $3.5 million per taxpayer.
- Expanding the Earned Income Tax Credit (EITC) for childless workers aged 65 or older.
- Expanding the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents), and increasing the maximum reimbursement rate from 35% to 50%.
- Increasing the Child Tax Credit (CTC) from a maximum value of $2,000 to $3,000 for children 17 and younger (while providing $600 bonus credit for children under 6), which will be fully refundable,
- Reestablishing the First-Time Homebuyer’s Tax Credit, which was originally introduced in 2009 during the Great Recession, that would provide up to $15,000 for first-time homebuyers.
- Expanding the Affordable Care Act’s premium tax credit.
- Increasing the Low-Income Housing Tax Credit.
What to do next?
We are happy to discuss how these proposed tax policies may impact your organization. Please reach out to Joel Gardosik (617-620-9705, jgardosik@cfgi.com), Chris Booth (508-789-3254, cbooth@cfgi.com) or Mark Gauthier (978-273-8457, mgauthier@cfgi.com) if you have any questions.