Are my taxes going up? Seven proposals to watch in the House Ways and Means Committee’s tax bill | Wyrick Robbins Yates & Ponton LLP
If you look at the news, you might get the impression that there is not much that Americans can agree on these days. One thing that I think we can all agree on, however, is that it’s been a few long and eventful years. I, for one, would like nothing better than to sip on a tasty drink, enjoy the cool weather, watch the leaves change color, and count the days until a delicious turkey dinner for Thanksgiving. However, Congress has other plans for tax practitioners this fall, starting with the House Ways and Means Committee’s first draft of major tax legislation. The bill proposes sweeping changes to existing tax laws, but not as far-reaching as the Biden administration might have hoped. This article explores some of the main provisions contained in the bill.
1. Corporate tax rate
Under the current law, the corporate tax rate is a flat rate of 21%. In its general explanations of the administration’s revenue proposals for fiscal year 2022 (commonly referred to as the âgreen bookâ), the Biden administration proposed to increase this rate to a fixed rate of 28%.
Rather than a fixed rate of 28%, however, the House Ways and Means Committee provision would replace the current 21% rate with a graduated rate structure, in effect for tax years beginning after December 31. 2021. The rate would be 18% for income up to $ 400,000, 21% for income over $ 400,000 and up to $ 5,000,000, and 26.5% on all income over 5,000 $ 000. Quick calculations show that the benefit of the graduated rate structure for corporations with income over $ 5,000,000 is $ 287,000, but this benefit is being phased out for corporations with income over $ 10,000,000. Also, personal service companies do not qualify for the graduated rate structure (sorry lawyers).
2. Personal income tax rate
This provision would increase the top marginal personal income tax rate to 39.6%, in effect for tax years beginning after December 31, 2021. The rate of 39.6% would apply to single taxpayers whose income exceeds $ 400,000, married taxpayers jointly reporting income in excess of $ 450,000, head-of-household taxpayers on income over $ 425,000 and married taxpayers separately reporting on income over $ 225,000.
Interestingly, the 39.6% rate would start at lower income thresholds than those proposed by the Biden administration in the Green Paper. The Green Paper imposed the tax rate of 39.6% on single taxpayers on income over $ 452,700, on married taxpayers jointly declaring income over $ 509,300, on head of household taxpayers with income over $ 481. $ 000 and to married taxpayers separately reporting income in excess of $ 254,650.
3. 3% surcharge
This provision would impose a 3% tax on an individual’s amended adjusted gross income (“AGI”) in excess of $ 5,000,000 ($ 2,500,000 for married taxpayers filing separately), effective for tax years beginning after December 31, 2021. For this purpose, âmodified adjusted gross incomeâ is its AGI less any deduction for investment interest.
4. Long-term capital gains tax rate
Under current legislation, long-term capital gains and eligible dividends are generally subject to tax at rates of 0%, 15% or 20% (depending on income level and reporting status), plus a 3.8% tax on net investment income for taxpayers. with a modified AGI greater than $ 200,000 ($ 250,000 for married taxpayers filing jointly).
The Green Paper had proposed to tax long-term capital gains and eligible dividends at ordinary income rates for any taxpayer whose AGI exceeds $ 1,000,000, but only to the extent that the taxpayer’s income exceeds 1,000. $ 000 ($ 500,000 for married taxpayers filing separately). Notwithstanding the Green Paper, the provision of the House Ways and Means Committee would increase the rate of long-term capital gains from 20% to 25%. The 25% rate would only apply to taxpayers who are in the highest marginal ordinary tax bracket.
The increased rate of 25% applies to all long-term capital gains and eligible dividends realized after September 13, 2021, with the exception of gains realized in the current tax year under a binding written agreement concluded no later than September 13, 2021 (and which is not substantially amended thereafter). The bottom line is that if you plan to sell your business in 2021 to avoid an increase in long-term capital gains tax rates on the sale, it may be too late.
5. Qualified actions for small businesses
Under current law, unincorporated taxpayers can exclude all or part of their gain on certain sales of qualifying small business shares (âQSBSâ). A full discussion of these rules is beyond the scope of this article, but in general they allow taxpayers to exclude 50%, 75% or 100% of gains made on sales of QSBS held for more than 5 years (subject to various limitations). The 50% exclusion applies to QSBS acquired before February 18, 2009; the 75% exclusion applies to QSBS acquired from February 18, 2009 to September 27, 2010; and the 100% exclusion applies to QSBS acquired on or after September 28, 2010.
The House Ways and Means Committee provision would apply the 50% exclusion to the sale of QSBS (regardless of when QSBS was acquired) by anyone with an AGI equal to or greater than $ 400,000. It is important to note that this provision would apply to all sales or exchanges taking place on or after September 13, 2021 (other than sales or exchanges made under a binding written contract in effect before that date and not substantially changed thereafter).
This proposal is surprising (at least for this tax specialist) because the exclusions increased by 75% and 100% were intended to encourage investors to put their capital at risk in smaller and less proven companies (rather than to invest in something relatively low risk, such as an index fund). Many taxpayers have made investment decisions based largely on the availability of the 75% and 100% QSBS exclusions, and it seems unnecessarily harsh and unfair to eliminate these exclusions. I think Congress would be better served to apply this provision only to QSBS acquired on or after September 13, 2021.
6. Tax on net investment income
The current law imposes a 3.8% tax on the ânet investment incomeâ of taxpayers with a modified AGI greater than $ 200,000 ($ 250,000 for married taxpayers filing jointly). Net investment income generally does not include income generated in the ordinary course of business or commercial activities of a taxpayer.
Effective for tax years beginning after December 31, 2021, this provision would expand the definition of “net investment income” for taxpayers whose amended AGI is greater than $ 400,000 ($ 500,000 for married taxpayers filing jointly). The expanded definition would include income earned in the ordinary course of a taxpayer’s business or commerce, except for wages on which the FCIA is already taxed.
7. Article 199A
Under current law, taxpayers can (subject to limitations beyond the scope of this article) deduct up to 20% of their qualifying business income. The House Ways and Means Committee provision would cap the allowable deduction for qualifying business income at $ 500,000 for married taxpayers filing jointly, $ 400,000 for single taxpayers, and $ 250,000 for married taxpayers. declaring separately.
The House Ways and Means Committee’s proposals would dramatically change the current fiscal landscape and can all be passed through the budget reconciliation process with only the support of Democrats. It will be fascinating to see which of these proposals – or others that are not currently included, such as the SALT cap relief – ultimately make it to President Biden’s office for signature.