Is Joe Biden's Tax Plan Bad for Business?
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With Tax Day behind us and election campaigning in full swing, many be wondering how the presidential election could change their taxes when filing next year. Former Vice President Joe Biden announced his intention to get rid of President Trump’s $2 trillion tax cut, which if enacted, would have a direct impact on the finances of businesses and entrepreneurs.
Here are six components of Biden's plan that business owners should be aware of:
1. Real estate investors will lose tax incentives
Investors could have many incentives taken away under Biden’s proposed tax plan. Much of his $775 billion “caring economy” plan will be financed by taxes on real estate investors with incomes of $400,000 and above. This would be done by eliminating the 1031 exchange that allows investors to swap investment properties for another that is “like-kind.” He is also proposing to eliminate bonus depreciation for real estate and intangible drilling cost and depletion deductions for oil and gas development.
2. Capital gains tax will increase
Currently, the long-term capital gains (assets held longer than a year) tax rate is 20 percent for single households with more than $441,451 in taxable income ($496,601 for married-filing-jointly) in 2020. Under Biden’s proposed plan, he would raise taxes on capital gains by treating them as ordinary income for those earning more than $1 million. In addition, the plan calls to increase the 37 percent ordinary income rate set by the Tax Cuts and Jobs Act (TCJA) up to 39.6 percent. That means for those who would pay the top rate in capital gains, their rates would almost double from 23.8 percent to 43.4 percent. One of the biggest impacts would be in the year you sell your business, where your capital gains alone will likely put you over $1 million of taxable income.
3. Corporate income tax rate will jump to 28 percent
TCJA lowered corporate income tax for US resident C-corporations significantly from 35 percent to 21 percent, but Biden’s plan would implement an increase to 28 percent. One way to avoid this increase is to choose the right business entity. By setting up your business as a sole proprietorship, partnership, limited liability company (LLC) or S-corporation, you’ll be taxed as a pass-through entity, thus avoiding entity-level tax. In addition, you may qualify for the 20 percent pass-through deduction for small business, lowering your taxes even more. This will also have an impact on planning for the sale of the business using the Section 1202 exclusion.
4. Qualified business income deductions for income above $400,000 will be phased out
The TCJA provided many owners of sole proprietorships, partnerships and S corporations a deduction that allowed taxpayers to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Biden’s plan calls to phase out this deduction for income above $400,000, eliminating another great tax benefit for entrepreneurs.
5. Incentives for charitable donations could be reduced
While the TCJA nearly doubled the standard deduction for single, head of household and married taxpayers, there are still individuals who prefer itemized deductions. Under Biden’s reform, the value of itemized deductions would be limited to 28 percent. Many charities are concerned about this change as they believe it would limit the amount of donations they would receive as it would limit the incentive to make charitable contributions.
6. The cap on social security taxes for income above $400,000 will be eliminated
Biden’s current plan creates a donut hole in Social Security, where everything above the current limit of $137,700 and below $400,000 isn’t taxed and income above $400,000 would be subject to Social Security taxes at 12.4 percent split evenly between employers and employees.
Take the time to understand each candidate’s tax plan and how they will affect your business when considering your decision this election season.