On October 28, 2021, the Administration and House leaders released the framework and legislative text of the Build Back Better plan spending package.
No doubt, the chatter and speculation of another large spending and tax bill are looking to become more of a reality. As I read what is currently a part of the proposed bill, I am seeing a particular focus on tax issues for C Corporations and individuals who earn more than $10 million per year. The big hits on these two taxpayer groups include:
Minimum corporate tax of 15% on financial statement income even if corporate taxable income is $0. This ensures that financial statement profitable companies who use various tax strategies to wipe out any kind of taxable profit must pay a minimum tax of 15% on their financial statement income compared with the current corporate tax of 21% on their corporate taxable income.
A 3.8% medicare surcharge tax on business profits would hit S Corporation shareholders with taxable income of more than $400,000 (single taxpayers) or $500,000 (married filing joint taxpayers).
Taxpayers who earn more than $10 million will have a 5% federal income tax rate surcharge on their marginal income over $10 million. For those who earn more than $25 million, an additional surcharge of 3% is added on that income over $25 million.
What stays the same is an extension of the increased child tax credit allowances and the highest marginal federal tax rate stays at 37%. The current highest capital gain tax rate also stays at 20%. And Biden specifically reiterates that for households earning less than $400,000 they will not pay “a penny more” in federal income tax.
None of these changes are slated to hit until January 1, 2022, so we can plan accordingly for the 2021 year based on our current rules in place and enacted over the past two years. In all honesty, so many things have changed in the past four years with calculating business and individual taxable income, we need a year of little to no change just to accurately and completely report those many taxable changes – PPP forgiveness, Employee retention tax credits, taxable and non-taxable COVID relief grants, changes to deductibility with tax depreciation methods, meals and entertainment, and other books to tax reporting changes.
As we learn more, we will be sure to share our understanding and how it applies to you and your unique situations.