As the incoming Biden administration announces the nominees for key Cabinet positions, there is much speculation about out what certain policy initiatives, including tax reform, will look like under the new president.
During the 2020 presidential campaign, the Biden team made a few things clear: that he would work to roll back certain elements of the 2017 Tax Cuts and Jobs Act (TCJA), which he and other prominent Democratic Party figures see as tax breaks and loopholes for corporations and high-net-worth-individuals; and that he would work to spur economic growth with incentives focused on promoting U.S.-based manufacturing and supporting the clean energy sector.
With the understanding that there is a big difference between policy positions, and an elected party’s ability, and willingness, to effect the proposed changes, in the following we will look at some key components of Biden’s proposed tax code reforms and how corporations and individuals should approach planning for these changes.
The Changing Landscape for Corporate Filers
The biggest changes in the TCJA, celebrated by Republican supporters and derided by critics, were changes that significantly lowered the tax burden on U.S.-based corporations. Seemingly, first on the list of potential Biden-era reforms are efforts to roll back these tax breaks. Biden’s team has stated that they intend to raise the standard corporate tax rate seven points to the pre-TCJA level of 28%. Additionally, the TCJA removed the corporate Alternative Minimum Tax, which Biden could reinstate, requiring corporations with $100 million or more in income to pay the standard rate or a 15% minimum tax, whichever is higher.
Biden has also proposed changes to qualified business income (QBI) deductions. Under the current law, which is set to expire on Dec. 31, 2025, non-C-corporation taxpayers are permitted to deduct 20% of QBI from either pass-through entities or qualified real estate investment trusts. President-elect Biden could phase out these QBI deductions for those earning over $400,000.
While some of Biden’s tax policy positions could potentially increase the corporate tax burden, there are also proposed expansions to popular tax breaks. For example, Biden intends to make changes to New Markets Tax Credits (NMTC). Currently, these credits for qualified equity investments in low-income communities are limited to $5 billion, and can’t be allocated after this year. Biden could expand NMTC and make it a permanent program, creating a mutually beneficial situation for businesses and communities.
Biden would also expand renewable energy-related tax credits, including those for carbon capture, use, and storage; residential energy efficiency; and restore the energy investment tax credit (ITC) and the electric vehicle tax credit.
Individual Tax Planning
The biggest proposed changes to individual tax rates are targeted at an upper tier of high-net-worth earners. For example, Biden has proposed a 2.6% tax rate increase, returning to the pre-TCJA rate of 39.6%, for individuals earning over $400,000.
Additionally, the TCJA raised the estate tax exemption to $11.58 million (in 2020) and allows transfers of appreciated property at death to get a step-up in basis. Biden would reinstate pre-TCJA exemptions and remove the step-up in basis. As a result, individuals may want to consider options to maximize lifetime estate exclusions. Biden may also seek to eliminate breaks for long-term capital gains and dividends for income above $1 million, instead implementing standard tax rates.
The new administration may also seek to impose a 12.4% Social Security payroll tax on income earned above $400,000, evenly split between employers and employees.
Increased benefits and breaks could include expanding the child and dependent care tax credit maximum to $8,000, increasing the child tax credit to $3,000 while adding a $600 bonus credit for children under 6, and reestablishing the first-time homebuyers’ tax credit, which would provide up to $15,000 for first-time homebuyers.
International Tax Planning
Those with international business transactions may have their tax liability impacted by a new administration, as President-elect Biden has proposed implementing tax breaks and penalties concerning overseas income and business operations.
Specifically, there are three areas that deserve a closer look when it comes to evaluating how a Biden administration may impact international tax planning. First, there could be changes to global intangible low-taxed income (GILTI). Currently, U.S. multinationals pay a foreign tax rate between 10.5% and 13.125% on GILTI, with an increase to 16.406% slated to start in 2026. However, under a Biden administration, the tax rate could be doubled to 21% and a minimum tax assessed on a country-by-country basis.
Another area that could be impacted is offshoring. Right now, there are tax deductions for corporations that manufacture domestically and sell abroad. A Biden administration could create a penalty surtax of 10% for imported goods, as well as a 10% tax credit for goods created in the U.S. in an effort to generate manufacturing jobs.
Finally, the incoming Biden administration could impact repatriation. The current approach is that domestic corporations are able to defer paying U.S. income tax on profit from offshore subsidiaries until those profits are repatriated. This expires on Dec. 25, 2025. Yet President-elect Biden could create provisions that would make businesses return tax benefits if they send jobs overseas.
Ultimately, an incoming administration’s plans to effect change are limited by bipartisan concerns. The Republican Party fought hard to implement the changes in the TCJA, and it will require full Democratic support in both Congressional houses to push tax reform through. Democrats maintained a thin majority in the House of Representatives and with the tie-breaking vote in the Senate going to Vice President Harris, it is likely that the Biden administration will have the capability to effect some change. The biggest outstanding question will be how high tax reform is on their list of priorities.
Ultimately, it remains to be seen what will happen to individual, corporate, and international taxes when the Biden administration takes over next year. However, it is never too early to start planning for the potential impact that the new administration could have.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Sanjay Agarwal is the tax practice leader at MGO.