5-minute read
When a new administration takes office, new tax policies are usually quick to follow. That’s never more true than this year.
To finance the latest round of stimulus payments and the COVID-19 relief bill, the Biden administration is proposing several new tax policies that will affect many individuals and business owners.
The first quarter of 2021 brought a lot of changes for small businesses, and this is likely just the beginning. As the year moves forward, you’ll need to stay informed of the latest tax policies for key decision-making and accurate financial records.
Here’s a quick overview of potential upcoming changes that may affect your small business taxes and accounting processes.
The Tax Cuts and Jobs Act of 2017
In 2017, the Trump administration passed the Tax Cuts and Jobs Act (TCJA), which significantly changed several tax policies for both individuals and corporations.
For the most part, tax rates decreased, and the TCJA simplified the tax process for the majority of filers.
Proposed tax changes under the Biden administration may revert some of these tax rates to their prior levels.
Biden’s plan is to reduce taxes for lower income earners and increase tax rates for the highest earners, including individuals and corporations. He’s also proposed changes to existing tax brackets and capital gains taxes.
Here are the latest details. Please be aware they may change with future updates.
Highest Tax Rate at 39.6%
Under the Trump administration, the highest individual income tax rates were cut to 37%. Biden has hinted at increasing this to 39.6%.
If tax brackets remain the same, this increase would affect individuals earning $518,401 or more. There’s speculation that tax brackets may change, however, and additional tax brackets may be added to the current tables. Biden has mentioned taxing single taxpayers earning $400,000 or more at the highest rates.
Capital Gains Tax Rate Changes
Currently, capital gains are taxed at graduated rates, with 23.8% being the highest effective rate.
Biden proposes changes to this legislation, making the highest long-term capital gains rate the same as the highest individual tax rate at 39.6%.
This proposal only applies to those with incomes of $1 million or more, but it doesn’t include the 3.8% surtax on net investment income.
The highest income earners would be subject to an effective tax rate of 43.4%.
Biden also proposes taxing unrealized capital gains upon death, which could affect the tax strategy of deferring realization of gains.
Experts believe this new tax rate will likely create an additional tax bracket for long-term gains and capital dividends. Current brackets include 0%, 15%, and 20%.
Corporate Income Tax Rate Changes
Under the Trump administration, corporate tax rates were cut to just 21% across the board. This was a huge change from the tiered corporate tax rates of prior years, ranging from 15% to 35%.
President Biden’s policymakers have proposed changing the corporate tax rate to 28% and imposing a minimum 15% tax rate for corporations with more than $100 million worth of book income.
Experts believe the rate hike will be a single tax rate rather than a graduated structure, but the details aren’t clearly defined just yet.
When Will These Changes Go into Effect?
The truth is that no one knows exactly. Of course, it’s possible to write laws that affect taxes retroactively. The Biden administration could make January 1, 2021, the effective date. However, based on history, it’s not likely.
In prior administrations, sweeping tax policy changes usually went into effect the following year. If we follow this trend, Biden’s tax changes will be in effect starting in 2022.
Final Thoughts
These changes aren’t finalized yet, but it’s a good idea to stay on top of the latest updates regarding tax legislation, particularly for high income earners and business owners.
If you have any questions about your small business or personal taxes, AccountedFor can help. Contact one of our tax experts for assistance; we can help clarify tax policy, keep you informed of upcoming changes, and make recommendations based on your unique circumstances.