There are several changes to tax policy on the table in the United States under the Biden administration. The administration has discussed tax increases on high-income earners at some point in the future, while the timing is yet to be determined. If you are a business owner considering the sale of your company in the next few years, you may want to speed up your timeline because waiting could mean you have to pay higher taxes if laws do change.
Tax changes proposed for businesses include:
- Raising the corporate income tax rate from 21% to 28%
- Having U.S. companies pay a minimum 21% tax on foreign income.
- Upping the current minimum tax of profits earned by foreign subsidiaries of U.S. firms from 10% to 21%
- Requiring a 15% minimum book tax on companies with book incomes of over $100 million but that have not paid federal corporate income tax.
Tax changes proposed for individuals include:
- Restoring the maximum federal income tax rate from 37% to 39.6% for those earning over $400,000
- Taxing capital gains and dividends as ordinary income for those with income over $1 million
- Repealing some deductions and exemptions for those with incomes over $400,000
President Biden has said that he will not raise taxes on those with annual incomes under $400,000. The major factor with capital gains tax hikes is that they will make risky investments even riskier.
Also, the administration has suggested extending the Social Security tax to higher-income levels, lowering the estate tax exemption by around 50%, and rescinding the “step-up in basis” that allows investments passed to heirs tax-free. On top of that, the preferential treatment of carried interest could be affected, which is key to private equity firms and hedge funds.
Another possible provision includes the phasing out of qualified business income (QBI) deductions for those earning more than $400,000. Under current law, non-C-corporation taxpayers may deduct 20% of QBI from pass-through entities or qualified real estate trusts.
Biden’s tax proposals would reverse the significant tax reductions enacted by the 2017 Tax Cuts and Jobs Act (TCJA). Of course, all specific tax changes will need to be negotiated. But Democrats control the Senate, so they have the option to use the budget reconciliation process to approve some of Biden’s proposals. Additionally, the pandemic combined with the projected size of the federal debt and budget deficits will impact tax policy decisions.
There are also some current tax laws set to expire in the near future. Most of the TCJA’s provisions will run out by 2025. But some are set to do so much earlier, including:
- The immediate deduction of research & development (R&D) expenses replaced by five-year amortization
- The phasing down of bonus depreciation
2022 will usher in new rules requiring the capitalization of research expenditures. Prior to this year, business owners could take an immediate deduction for R&D expenses. But these costs can no longer be immediately deducted. Instead, they will have to be paid off and then deducted over a five-year period.
Bonus depreciation is another provision that will begin to phase out. It allows companies to deduct a percentage of the cost of assets the year they acquire them versus depreciating them over a period of years. Under the TCJA, certain businesses could write off 100% of the cost of eligible purchases and property. But after 2022, that 100% will begin to decrease by 20% each year, so 80% in 2023, 60% in 2024, and so on.
Significant tax savings can be found in the ability to deduct 100% of a large asset’s cost in the year of acquisition. Companies looking to make significant fixed asset purchases in the next few years may want to do so before bonus depreciation starts to taper off.
The House of Representatives has also offered two other tax proposals that could impact M&A transactions. The first is a provision that allows S corporations to reorganize as partnerships in a tax-free manner for a two-year period. This provision could make S corps more attractive to potential buyers because it un-complicates transactions. The second is a proposal to limit the exclusion on qualified small business stock under Section 1202 for those with adjusted gross income over $400,000, as well as any estate or trust. It would eliminate the special 75% and 100% exclusion rates, but the baseline 50% exclusion would remain in place for everyone. This could increase taxes for sellers who have organized as a C corporation.
For business owners thinking about selling, you may want to consider getting ahead of these potential tax policy changes while you still can. Keep in mind that it can take several months to sell a company, so the sooner you act, the better off you may be in the long run.
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
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Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $8.25B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 14 offices across the world, have assisted thousands of owners with achieving their personal objectives and ensuring the continued growth of their businesses.