Fernway DiarySM

Jan 02, 2021

The coronavirus pandemic has devastated many small businesses and caused significant economic impact in the United States. The effect of this pandemic on businesses of all sizes cannot be understated. The Trump and Biden administrations’ approach to tax law vary greatly. The incoming Joe Biden administration has announced plans to make a variety of changes to federal income tax law that will impact corporations around the country. How much change this new administration is able to actually effect will depend greatly on cooperation from the House and Senate. If passed, here is an overview of some of the US federal income tax policy changes and its impact on domestic businesses.

Large Corporations

The Biden administration’s proposal increases the US federal corporate income tax rate to 28{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}. It also doubles the tax rate on Global Intangible Low Tax Income earned by foreign subsidiaries of US businesses to 21{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}. The Global Intangible Low Tax Income will also be assessed on a country-by-country basis and the current exemption for deemed returns under 10{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} of qualified business asset investment will likely be eliminated.

Their proposal creates a minimum tax on corporations with book profits of $100 million and upwards. The minimum tax is structured as an Alternative Minimum Tax, meaning that corporations will pay either their regular corporate income tax or the 15{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} minimum tax – whichever is larger. This proposal does still allow for net operating loss and foreign tax credits.

Small Businesses

Small businesses have been hit especially hard during the global pandemic. As of October, nearly 100,000 small businesses in the US had closed permanently since the pandemic began. The incoming Biden administration’s proposal offers tax credits to small business for adopting workplace retirement savings plans. Though the administration has announced plans to increase taxes by raising capital gains and individual rates and limiting the popular “pass through” deduction, these tax increases will mostly hurt wealthier entrepreneurs. That is, those making more than $400,000 per year; the average small business owner makes about $70,000 annually.

Tax Credits

Expands several renewable-energy-related tax credits, including tax credits for carbon capture, use, and storage as well as credits for residential energy efficiency, and a restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit. The Biden plan would also end tax subsidies for fossil fuels.

Depreciation

Under the Trump administration, a 100{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} first-year bonus deduction is allowed for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023, (after September 27, 2017, and before January 1, 2024, for certain property with longer production periods). The additional first-year depreciation deduction is allowed for new and used property.

Under Biden’s administration, the proposal repeals the TCJA depreciation provisions that overwhelmingly favor businesses. If Biden completely repeals the TCJA depreciation provisions, then prior TCJA law (PATH Act) will be in effect. This would likely result in no bonus depreciation, as bonus depreciation was set to expire in 2020.

Other proposals not modeled due to a lack of detailed information include:

• Imposing a new 10{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} surtax on corporations that “offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market.” This surtax would raise the effective corporate federal corporate income tax rate on such activity up to 30.8{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}.
• Establishing an advanceable 10{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} “Made in America” tax credit for activities that restore production, revitalize existing closed or closing facilities, retool facilities to advance manufacturing employment, or expand manufacturing payroll.

Coronavirus Effect

The pandemic has certainly cast light on how interconnected our economy is. Closures and lifestyle changes caused by the novel coronavirus have had ripple effects on businesses of all sizes. The Biden plan establishes a Manufacturing Communities Tax Credit to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure. It also expands and makes permanent the New Markets Tax Credit to provide an incentive for investment in low-income communities, which are areas often most drastically affected by the pandemic-induced economic downturn.

Conclusion

Though some of the proposed legislative changes do not impact all corporations in the US, businesses of all sizes should pay close attention to the federal income tax rate increases and tax credits as there are implications and opportunities to be aware of. It is difficult to say with certainty how much success the Biden administration will have in implementing the above proposal, though specific elements of the above are more likely than others to take effect. Also, the enactment date on these changes remains unclear.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com

Disclaimer:
The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway Solutions assumes no obligation to inform the reader of any such changes.