Since the start of the new term, the Biden Administration has been focused on passing comprehensive legislation to overcome the pandemic while driving economic recovery. Initial legislation included the American Rescue Plan Act, which focused on providing financial, economic, and other resources needed to overcome the pandemic. Judged as a success, the White House has now turned attention to economic recovery and helping middle class workers and families. The Build Back Better Act, which is currently under Congressional consideration, would help to create jobs, reduce expenses, and cut taxes. The price tag is estimated at $3.5T and will be primarily paid for through targeted tax changes on the wealthy and large corporations. Since the legislation is still under consideration, it is possible additional modifications could be forthcoming. However, it is expected that many businesses will face a higher tax bill if the legislation is passed. To help clients, prospects, and others, Calvetti Ferguson has provided a summary of the key details below.
Key Corporate Tax Provisions
Corporate Tax Increase
There is a provision which calls for the removal of the flat corporate income tax rate and replaces it with a graduated rate structure. This includes an 18% tax rate on the first $400,000 of income, 21% rate on income up to $5M, and a rate of 26.5% on higher income amounts. Any benefit associated with the graduated structure phases out on annual income greater than $10M.
Small Business Stock Exclusions (Sec. 1202)
There is also a provision that limits the special 75% and 100% exclusion rates for gains realized from small business stock from applying to taxpayers with income of $400,000, or greater. It is important to note the 50% baseline exclusion will remain in place for eligible taxpayers and will apply to all sales and exchanges made after September 13, 2021.
There would also be a change to allow an eligible S-corporation to reorganize as a partnership without incurring any taxes. An eligible S-Corp must liquidate and transfer assets and liabilities to a domestic partnership during the two-year period starting on December 31, 2021.
New Section 199A Deduction Limits
There would also be a change to the maximum amount of the Qualified Business Income Deduction, which can be taken by owners of pass-through entities (partnerships, S-corporations, etc.). The new maximum would be limited to $500,000 for joint returns, $400,000 for an individual return, and $250,000 for married filing separately. The change would apply to taxable years starting after December 31, 2021.
Work Opportunity Tax Credit (WOTC)
There is also a proposed increased to the WOTC to 50% for the first $10,000 through December 31, 2021. It is important to note the change applies to all targeted groups except summer youth employees. There is also an increase available for qualified wages earned by a WOTC target group employee in the second year of employment. This change represents a one-year extension.
R&D Tax Credit Update
Under current regulations, businesses claiming the Research & Development (R&D) tax credit are required to amortize research and experimental expenses starting after December 31, 2021. Unfortunately, this reduces the immediate value of the credit since companies would be forced to wait to receive the full benefit. However, there is a provision which would change the effective of the change until after December 31, 2025.
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