Anytime there is a new president in office, you can expect there to be sweeping legislative changes proposed within the first year of office. There will definitely be proposals related to taxes. After all, the taxes we pay account for roughly 93% of federal revenue. Even though President Biden’s proposed plans have not yet passed, it is a good idea to understand which items may affect you and your business. Here are some things you should know:
- Corporate Tax Rates: The initial proposal is to increase corporate tax rates from 21% to 28%. Currently, in discussion with GOP negotiators is to keep the 21% corporate tax rate and instead enforce a 15% minimum tax rate that is aimed at companies that pay little to no taxes. If you are a C-corporation, you will want to keep an eye out for updates.
- Capital Gains Tax: President Biden’s proposed 2022 fiscal year budget includes an increase to the top capital gains tax rate from 20% to 39.6%. This would apply to taxpayers with an income of more than $1 million. This increase would not affect the majority of taxpayers reporting capital gains. However, if you are expecting to sell your business, keep an eye out for this legislation. If passed as is, it will be retroactive to the date it was announced.
- What Is Staying the Same: The consideration of increasing payroll tax contributions for Social Security is off the table. There has also been no change to the 20% business deduction that pass-through entities (S-corps and partnerships) and self-employed individuals have been able to claim.
As proposed changes are batted around by our elected officials, small business owners are awaiting the final results to understand their true impact, if any. Budgeting, planning, staffing, and more can be affected. You should not make any immediate decisions based on these potential changes, but you should understand what the impact could mean to you. If you are currently taxed as a C-corporation and are a small business, then you should explore the risks and benefits of changing to an S-corporation. If you are in plans to sell your business, you will want to check with your financial advisor on how the capital gains increase could affect you.