How the Proposed Business Tax Hikes Could Affect Your Business: Part 1

Just as the United States begins to see the light at the end of the COVID-19 tunnel, small business owners face potential tax hikes. The White House developed the American Rescue Plan and the American Jobs Plan to provide pandemic relief and rebuild the economy. According to the State of Maryland, almost 125,000 jobs were lost because of the pandemic within a year from December 2019 to December 2020. That amounts to a 4.5% decline. However, these recovery plans will cost $2 trillion.

President Biden has also proposed the Made in America Tax Plan to pay off the federal deficit within 15 years and beyond. Democrats, who have narrow control of both chambers of Congress, view the new plans as a great way to create jobs, promote clean energy, improve transportation, build and rehabilitate homes, and offer universal broadband services paid for through corporate taxes. Unfortunately, what this means for small business owners is that it may subject them to new tax hikes that could be detrimental to their survival.

If you’re an entrepreneur, particularly one doing business in Maryland, it pays to be prepared. In Part 1 of this series of articles, you’ll learn everything you need to know about how the proposed tax hikes targeted to large corporations could affect your small business.

Key Takeaway 1: Corporate Income Taxes Increase From 21% to 28%

President Biden hopes to pass the Made in America Tax Plan during the summer of 2021. The good news for small business owners is that the proposed tax law doesn’t suggest changes to pass-through taxation for S corporations and partnerships. That offers a tremendous tax advantage for deducting 20 percent of business income as compared to C corporations, which will be taxed at a higher rate of percent. It also doesn’t propose an increase in payroll taxes for Social Security. The bad news for small businesses that are C corps is that the new plan doesn’t make any special provision for businesses with a lower level of income.

Key Takeaway 2: Minimum Tax on Corporate Book Income Imposed at 15%

The 2017 tax bill cut corporate taxes from 35 percent to 21 percent, which allowed 91 Fortune 500 companies to get away with paying zero taxes in 2018. Biden designed the new tax law to target these mega corporations like Amazon, Salesforce, and Starbucks. To prevent profitable corporations from avoiding paying taxes, the new law will impose a minimum tax that would apply to corporate book income. It’s believed that all corporations should pay at least 15 percent in taxes on their earnings. However, two-thirds of all corporations are small businesses with less than $1 million in profits.

Key Takeaway 3: Capital Gains Taxes Increase from 23.8% to 39.6%

C corps are being hit with a hefty corporate tax hike to a rate of 28 percent. Even worse, C corps with capital gains of more than $1 million will get almost double-taxed when selling their businesses. The top tax rate on capital gains will increase from 23.8 percent to 39.6 percent. Biden proposed the new tax law to close the capital gains loopholes that high-income earners used for tax sheltering. It also eliminates the ability for individuals to avoid taxes by holding capital gains until death or donating to charity. Although the plan will help collect revenue on assets that usually go untaxed, it will cause corporations to pay taxes nearly twice.

Key Takeaway 4: Minimum Tax on Foreign Income Increases to 21%

The 2017 tax law incentivized multinational companies. In contrast, Biden’s tax plan discourages companies from taking advantage of offshore profits and jobs. He has proposed raising the foreign minimum tax rate to 21% for U.S. multinational companies that operate overseas. In addition, this new tax plan would apply the tax rate per country to eliminate cross-crediting. In this way, corporations aren’t able to offset high taxes paid in high-tax countries with low taxes in low-tax countries.

Key Takeaway 5: Tax Exemptions on the First 10% of Foreign Asset Returns Eliminated

Under the new tax law, companies that operate overseas will be subjected to increased taxation. The plan proposes to eliminate the previous tax exemptions allowed on the first 10 percent of foreign asset returns. This new law reduces the tax-based incentives provided for U.S. multinational companies. The elimination of the foreign tax exemption along with the minimum tax increase on foreign income serves to reduce preferences towards foreign profits as opposed to domestic profits.

Conclusion

As more people get vaccinated and head back to work, a huge federal deficit looms overhead. The Made in American Tax Plan seeks to replenish funds brought on by the pandemic through reformed tax laws. The new tax law also fights against various corporate tax loopholes, tax sheltering, and tax evasion tactics. Although the plan was created to rebuild the economy, the new tax hikes have the potential to wreak havoc on the growth and survival of small businesses.

Whether you’re a new or seasoned entrepreneur, understanding tax laws is a challenge best left to experts in the field. We’re here to help! Chesapeake Growth Network (CGN) is a partnership that offers legal and financial consultation and solutions for small businesses. Stay tuned for Part 2 in this series which will go into detail about how expert tax guidance can help businesses maximize benefits while navigating new tax laws.

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