Following a competitive campaign season amidst an unprecedented pandemic, Joe Biden has become the 46th president-elect. During his interview and speeches leading up to the election, the former vice-president has hinted at new tax policies that will primarily impact Big Business.
Of course, a tax policy overhaul is only likely if Democrats can achieve a majority in the Senate elections of January 2021. But even if major legislation is unlikely, the executive branch can impact tax policies, even as the new administration gets busy with pandemic relief.
In today’s blog, we provide a glimpse of what accounting and tax planning will be like in the Biden administration, especially for small businesses.
Say Goodbye To TCJA
One thing we can say for sure is that Biden will do everything possible to annul Trump’s Tax Cuts and Jobs Act of 2017. TCJA brought the corporate tax rate down from 21%. And while President Biden will not restore the previous tax rate, he will bring it up to 28%. Also, he plans to double the taxes on offshore profits.
Other potential tax changes include:
- An increase in payroll taxes for wages above $400,000
- 15% minimum tax on worldwide book income
- An increase in business income tax rate from 29.6% to 39.6% for entities (partnerships, S corporations, and sole proprietorships) making more than $400,000 a year
- Increase in Social Security and Medicare tax rates by 3.8% and 16.2%, respectively
In short, Biden is after Big Business that enjoyed significant relief in the Trump Administration (both in the form of tax cuts and tariffs).
What About Small Businesses?
In the primary debate of Feb. 20 in Las Vegas, President Biden clearly said, ‘No, taxes on small businesses will not go up.’
However, if the proposed tax changes are passed into law, we can work out what the average business owner will have to pay in taxes over the next four years.
Under the current law, a business earning $1.5M in revenue and paying $400,000 in employee wages will have to pay around $250,000 in taxes.
The Qualified Business Income Deduction is 50% of the wages paid or 20% of the owner’s net income, whichever’s lower. In this example, the deduction amount will be ($400,000 x 50%) $200,000, which brings the owner’s net income to $640,000 after wages.
Out of this $640k, we deduct:
- $200,890 in income tax (as per 2021 tax rate schedules)
- $17,993 in Social Security tax
- $28,600 in Medicare tax
This brings the tax bill to $247, 283.
So what will change under the Biden Plan? Let’s work the numbers again.
In the absence of QBID, the owner’s net income remains around $800,000 after deducting wages.
Out of this $800k, we deduct:
- $272,619 in income tax (as per proposed capital gains rates)
- $96,993 in Social Security and Medicare tax (if Biden would remove the cap on Social Security taxes)
- $9,979 in income tax reduction (based on the proposed bracket for self-employed individuals that have sole proprietorships or are partners in a partnership)
This brings the tax bill to $359, 633, significantly higher than current rates.
On the flip side, small businesses are likely to benefit from pandemic relief, as well as stable market conditions in the absence of trade wars and an aggressive foreign policy. Tax incentives can also be earned for green businesses.
Let’s wait and watch.
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