Proposed Business Changes in the Build Back Better Act
Since earlier this year, the Biden Administration has been pursuing a legislative agenda that focuses on COVID-19 economic recovery and re-energizing the American economy. It started with the American Rescue Plan Act and has continued with several other proposals culminating in the Build Back Better Act (the Act). The Act is designed to reduce costs, create new jobs, and cut taxes for working families. There are proposed investments in health and childcare, higher education, workforce training, and teachers and schools. The cost of the legislation, which is estimated at $3.5T, will be paid for by increased taxes on corporations and the wealthiest Americans.
While the House is still reviewing the legislation through committees, it is expected to be voted on before the end of September. If passed, it may mean a significant tax increase for many New Jersey and Pennsylvania-area individuals and corporations. To help clients, prospects, and others, understand the proposal, Klatzkin has summarized the key details below.
Proposed Business Tax Changes
- Graduated Business Tax Structure – A pivotal change to business taxes came when the Trump Administration successfully lobbied to move to a flat 21% tax rate. The proposal contains language which would eliminate the current flat tax and return to the graduated system based on income. The change would include an 18% tax on corporate income below $400,000, 21% on income between $400,000 and $5M, and 26.5% for those with over $5M in income.
- Section 199a Deduction Limitations – The proposal calls for a limit to the deduction for pass-through business owners on eligible income. The deduction would be limited to $500,000 for married filers and $400,000 for single taxpayers. Currently, a deduction of up to 20% of qualifying income is permitted.
- Business Loss Deduction Limitations – Currently, there is a $250,000 limitation on the deduction amount for excess business losses. In addition, businesses are prohibited from offsetting more than the threshold amount of non-business income. These changes are set to expire at the end of 2025. Under the proposal, these changes would become permanent, and a new classification for loss carryforwards would be developed.
- Amortization of Research Expenses – Under current rules, a business that incurs qualified research expenses after December 31, 2021, would need to capitalize the expense and amortize it over five years. This change significantly reduces the immediate tax benefit of claiming such expenses. Under the proposal, the effective date would be changed to January 1, 2026, permitting additional time to benefit from the research and development (R&D) tax credit.
- Small Business Stock Capital Gains Exclusion – Under the proposal, there would be an elimination of the special 75% and 100% exclusion for gains realized from small business stock for taxpayers with an adjusted gross income (AGI) of $400,000 or more. It is important to note the baseline exclusion of 50% will remain available to all taxpayers regardless of income.
- Work Opportunity Tax Credit – Under the proposal, the work opportunity tax credit would increase to 50% of the first $10,000 of wages through December 31, 2023, with the exception of summer youth employees.
- Paid Family Leave and Medical Leave – Under current law an employer could receive a credit for wages paid to employees for family or medical leave up until 2025. The proposal will shorten the period in which employers can take advantage of this credit to years up until 2023.
Expanded IRS Funding
The staffing shortages at the IRS have been well documented, especially in recent months when pandemic-related closures exacerbated an already difficult situation. Under the proposal, an additional $80B would be allocated over the next ten years to obtain the resources needed to increase enforcement efforts on corporations and high net worth individuals.
The proposed business tax changes in the proposal mean that many New Jersey and Pennsylvania companies and high net worth individuals could be facing a very different tax situation in a few short weeks. Although these provisions are still being debated in Congress, they provide important insight into potential future changes.
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©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date. The content is provided for informational purposes only and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.