Friday, Jan 8th, 2021
By J. Robert Turnipseed and Steven C. Pearson,
Armbrecht Jackson LLP
Tax lawyers have been waiting with bated breath for the results of the Georgia Senate runoff elections, which would effectively determine control of the U.S. Senate. Those results are now out, and it appears, barring any last minute challenges to the vote counts, that the Democrats have won both elections, which means that the Senate is now a 50/50 split between Democrats and their affiliated Independents and Republicans. This means, in practical terms, that the new Vice President, former Senator Kamala Harris, now holds the tie breaking vote. If the parties continue to vote along party lines as they have now done for many years, then the Democrats are fully in control of both the legislative and executive branches of government, at least for the next two years.
There is still much uncertainty as to what this result will mean in many areas of government, but one thing we do expect will be drastic changes in the tax laws of the United States. In 2017, President Trump and a Republican Congress passed sweeping changes to the tax code, with very little support from Democrats and which the Democrats have criticized since its enactment. New President Biden’s campaign platform clearly shows that the Democrats will place a priority on reversing many of these tax laws, and adding many more of their own.
This tax alert is intended as a short summary of the expected tax proposals by the Biden administration, and also contains a few tax pointers that should be considered by taxpayers in the upcoming year, especially owners of smaller businesses.
I. Biden Tax Proposals
Based on the campaign proposals, we can expect that new President Biden and the Democratic Congress will at least propose the following major changes to the Internal Revenue Code:
Estate and Gift Taxation
II. Income Tax Planning
Based on the proposals by President Biden, we would recommend that individuals and businesses at least begin consideration of the following as part of their 2021 tax planning:
a. Review your Compensation Structures:
There are major tax provisions in President Biden’s proposals for taxpayers earning over $400,000. This includes a higher tax bracket of 39.6 percent; a reinstituted social security tax for all income over 400,000; and a phase out of the new qualified business income deduction for owners of pass-through entities. Accordingly, taxpayers will now be penalized for earning more than $400,000 per year, and for those taxpayers who are close to that number, it may be beneficial to reduce your compensation below that threshold, in order to avoid those new tax provisions.
b. Maximizing Deductions
Obviously, deductions are the key factor in lowering taxable income for both individuals and corporations. As far as we can tell, there are no additional deductions in President Biden’s platform, but there will be a cap on itemized deductions of up to 28 percent for upper-income individuals, which again we suspect would be for taxpayers earning more than $400,000.
For corporations, it will be very important to maximize deductions in order to lower overall corporate income, which will now be subject to a much higher tax rate (28% instead of 21%). One other item of note for all taxpayers is that most tax lawyers expect that the $10,000 limitation on state and local tax deductions which actually be eliminated (thus making it unlimited subject to certain itemized deduction thresholds and limitations), which should help most taxpayers.
c. Review Availability of Potential Tax Credits
Tax credits are powerful tools for lowering tax burdens, because they are a $1 for $1 reduction of the tax itself, rather than a reduction of taxable income. We expect that there will be many new tax credits passed by the democratic Congress in the upcoming year. This includes a potential “Made in America” tax credit for jobs created in the United States. There will also be many new “Green Energy” tax credits that are expected to pass. All taxpayers should pay attention to these credits and, where appropriate, structure their transactions to take advantage of them.
d. Special Issues for Real Estate
There are going to be many tax changes in the area of real estate with the Biden administration. Perhaps most importantly, we expect that the Democratic Congress will move to completely eliminate 1031 exchanges from the Code, which takes away one of the main tools of tax deferral for real estate investors. We expect that Democratic legislation will also eliminate various tax breaks relating to real estate, including faster depreciation rules; elimination of the QBI deduction for rental real estate activities; changes to the passive loss rules, and many others.
It is also expected that the capital gains tax rate will be converted to ordinary income for any taxpayers with taxable income over $1 million dollars. Accordingly, if you have any real estate transactions pending, you should consider accelerating those transactions to take advantage of the current tax laws. This of course assumes that the Congress will not make the tax changes retroactive, which is also something all taxpayers should pay attention to in the upcoming months.
e. C Corporations
Perhaps the largest tax burden of the Biden tax plans will be felt by larger companies and C corporations. As a starter, all C corporations need to be aware that President Biden expects to propose a new 28 percent corporate tax rate, which is a major increase from the 21% corporate tax rate that was put in place by President Trump’s tax reform package. This increase, along with a potential increase of taxes on dividends (which could rise to ordinary income tax rates), could significantly impact the overall tax burden of C Corporations, meaning that choosing what kind of entity you would like to use (C Corp, S Corp, partnership, etc..) could become very important.
All larger C Corporations need to be aware of the possibility of passage of a new minimum tax on corporate income. President Biden is expected to propose a minimum 15% tax on companies with at least $100 million dollars in book revenue, which effectively will ignore most of the typical deductions taken by C corps. It is expected that these tax changes alone will generate well over a trillion dollars in additional tax revenue over the next 10 years.
f. Oil and Gas Industry
If you own a business in the oil and gas industry, you need to be aware that President Biden is proposing major changes to deductions in that area, including the potential elimination of the deductions for drilling costs and depletion. While the oil and gas industry will most likely suffer a major tax hit, all taxpayers should at least factor in the increase in oil and gas prices as a result of these new changes. Simply put, it is likely that prices for oil and gas will rise significantly over the next year once these changes have been enacted, in order to cover the additional costs.
III. Estate and Gift Tax Planning
We also expect major changes in the area of Estate and Gift Taxation, which has been a relatively stable area for many years and which, due to the higher exemption amount (currently $11.7 million per person), has not been a major concern for most taxpayers. Based on the proposals by President Biden, we would recommend that individuals begin reviewing their estate and gift tax plans to determine if any action should be taken:
b. Planning Ideas and Tools
The election results in Georgia have caused great uncertainty in the area of tax law, and we do not yet know exactly what will happen. However, it is not too late (or too early) to make certain changes to minimize or avoid these higher taxes, so we would recommend that all taxpayers with moderate to significant estates set up an appointment with their respective financial advisors to discuss their options.
J. Robert Turnipseed is a tax and transactional partner with the Mobile law firm of Armbrecht Jackson LLP. For more information about Mr. Turnipseed and his experience, please see his professional biography at http://www.ajlaw.com/attorney_detail.php?attorney=31
Mr. Turnipseed welcomes the questions and comments of clients and others on this topic and other legal issues at:firstname.lastname@example.org or (251) 405-1311
Steven C. Pearson is a tax and transactional partner with the Mobile law firm of Armbrecht Jackson LLP. For more information about Mr. Pearson and his experience, please see his professional biography at http://www.ajlaw.com/attorney_detail.php?attorney=23
Mr. Pearson welcomes the questions and comments of clients and others on this topic and other legal issues at: email@example.com or (251) 405-1205
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