During his campaign, President-Elect Joe Biden proposed significant income tax changes for businesses with a stated goal of helping the economy, increasing corporate taxes, and closing tax loopholes for corporations. Here we review the proposed tax changes impacting businesses which could potentially result under a Biden presidency, as well as the likelihood of the enactment of these proposals.
There are several proposed tax changes aimed at corporations specifically. The first of these is increasing the tax rate for corporations from the current 21% to 28%. In addition, corporations would be subject to a corporate version of the Alternative Minimum Tax (AMT). Under this Biden campaign proposal, corporations would have a 15% minimum tax on their financial statement income, with the goal of requiring all corporations to pay taxes.
Most of the tax proposals related to corporations focus on foreign income and aim to both tax foreign income and penalize corporations for sending jobs out of the United States. The proposals would double the current minimum tax on foreign earnings of U.S. companies located overseas, from 10.5% to 21%. There are also proposals for a 10% Offshore Penalty Surtax which would apply to profits from overseas production or services for sales back into the United States, as well as a 10% “Made in America” tax credit for investing and creating jobs in the United States. The proposals would also deny deductions and expense write-offs for moving jobs to overseas’ locations which could have been performed in the United States.
Currently the maximum amount of an individual’s earnings that are subject to Social Security tax is $137,700. The 12.4% tax is split between the employer and employee, each paying 6.2% on the earnings. A proposed tax change would affect those individuals who earn over the current income threshold for Social Security contributions, resulting in additional Social Security contributions by employers as well.
Under Biden’s proposal, while the tax rate would remain the same, the threshold would change. Earnings up to the threshold would remain subject to the Social Security tax and earnings between the threshold and $400,000 would remain not subject to Social Security tax. However, earnings over $400,000 would now also be subject to Social Security tax. This would affect individuals with earnings over $400,000 as well as their employers, both of which would now owe 6.2% Social Security tax on these earnings.
While President-Elect Biden has proposed significant tax changes impacting businesses, there remains the question as to the likelihood of their enactment. Although Democrats currently have a majority in the House of Representatives, the outcome in the Senate remains unknown. At least 50 of the Senate seats are Republican compared to 48 Democrats or Independents, meaning that a 60% majority in the Senate is not possible for Democrats. Therefore, a sweeping comprehensive tax reform is unlikely to happen in the next term. It is more likely that we will see targeted cuts and raisers being passed. However, the remaining two seats in the Senate will determine the likelihood of even these being passed.
Currently both remaining seats will be determined in the Georgia runoff election in January 2021. If either seat results in a Republican senator, it is unlikely that these tax proposals will be passed given that the Republicans will retain a majority in the Senate. Certain proposals, such as enforcing the Made in America measures, may be achieved through executive orders, but most of the proposals would likely not be passed without bipartisan support given the Republicans would control the Senate. If, however, both seats in the runoff election are won by Democrats then the Senate would effectively be split 50 – 50. In this case, a limited tax reform package may have a greater likelihood of passing through a budget reconciliation, given the Democrats would have the Presidency, majority in the House of Representatives, and a potential split vote in the Senate, the deciding vote being cast by Vice-President-Elect Harris.
Therefore, while the proposed tax changes are quite significant and would impact businesses, it remains to be seen how many of these proposed income tax changes the Biden administration will be able to pass.
Selden Fox will continue to monitor the status of these tax proposals impacting businesses as well as any new proposals that come forward as the Presidential transition progresses. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.