On September 13, 2021 the House Ways and Means Committee released its proposed tax changes that would be used to pay for the proposed $3.5 billion “BUILD BACK BETTER” reconciliation spending program.
The proposals contain a number of International tax reforms that are beyond the scope of this article.
The initial provisions of the proposed business tax changes that are of most interest to our clients are discussed below.
Overview of Corporate Tax Proposals
Corporate Income Tax Rate Increases
The proposal would increase the maximum tax rate on C corporations from 21% to 26.5% for corporations with taxable income in excess of $5 million. A new graduated C corporation rate structure is proposed as follows:
- 18% on taxable income below $400,000
- 21% on the amount of taxable income from $400,000 to $5 million
- 26.5 % on the amount in excess of $5 million
The benefit of the lower graduated tax rates phases out for corporation with taxable income in excess of $10 million and Personal Service Corporations are not eligible for the graduated rates. The proposed rate changes would be effective for tax years beginning after December 31, 2021.
PLANNING NOTE: This new graduated tax rate structure coupled with the increases in the top individual income tax rate, imposition of the NIIT on business income, and limitations on the Qualified Business Income (QBI) deduction (discussed below) may cause many businesses to consider changing to a C corporation structure.
Business Interest Deduction
The IRC section 163(j) business interest deduction limitation would be changed so that it would be applied at the partner/shareholder level as opposed to at the entity level under current law. The proposal also limits the carryforward period for disallowed business interest to five taxable years for disallowed interest in a tax year beginning after December 31, 2021. Under current law the disallowed interest carries forward indefinitely.
Other Business Tax Provisions
For taxable years, beginning after 12/31/2021, the proposals would increase the holding period required in order to qualify for capital gain treatment from three years to five years. Taxpayers that have adjusted gross income of less than $400,000 or that have income attributable to a real property trade or business can still use the three year holding period. The new provision would also be expanded to section 1231 gains and qualified dividends if the five year holding period is not met.
S Corporation Conversions to Partnerships
S corporations organized prior to May 13,1996, would be permitted to reorganize as partnerships in the two-year period beginning on December 31, 2021 without triggering tax.
PLANNING NOTE. If this provision becomes law, S corporations with substantial holdings of appreciated property, especially real estate, should take advantage of this conversion provision because a partnership is a more tax efficient entity for holding real estate
Termination of Employer Credit for Paid Family Leave and Medical Leave
This credit is currently set to terminate for wages paid in taxable years beginning after 2025, but this provision would move the termination date up to taxable years beginning after 2023.
Tax Changes NOT Included in the Ways and Means Proposals
- Taxation of all carried interest income as ordinary income;
- Elimination of the step-up in tax basis under IRC section 1014 for assets included in a decedent’s estate;
- Limitation on the ability to use the Section 1031 exchange rule to defer the gain from the sale of real estate;
- Changes to the limitation on the state and local tax deduction (the SALT cap);
- Mark to market rules requiring capital gains taxes on an individual’s assets.
The Keiter team is closely monitoring these and other possible tax and regulation changes. If you have questions on tax planning and saving opportunities for your business, please contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000
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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.