Managing New Corporate Tax Laws: Part 2
President Joe Biden has announced his plans for an ambitious infrastructure program, along with the tax increases to pay for it. His proposals include raising the corporate tax rate from 21% to 28% and the capital gains tax to 39.6% with a maximum rate of 43.4% for top earners, including many business owners. The capital gains tax may be retroactive to May 2021. Biden has also floated the idea of a minimum corporate rate of 15% to eliminate the problem of major corporations paying little or nothing in taxes each year. In addition, taxes on foreign income may be raised to 21% and tax exemptions on foreign assets eliminated.
Business owners and individual investors are naturally concerned by these proposals and may be unsure of how to proceed. Maryland alone has nearly half a million small businesses that these changes will affect. Fortunately, expert tax advice can help you maximize tax benefits while minimizing the negative financial effects of potential tax hikes. But you need to begin your tax planning now and not wait until Congress acts.
Ways to Reduce Future Tax Liability
Future corporate tax rates are uncertain at this point, but you should proceed as if these tax proposals will pass, with some of them being applied retroactively. The following are five ways to prepare your company for these potential changes.
Delay Business Acquisitions and Sales
Businesses in transition need to consult with a tax advisor before proceeding and potentially delay any acquisitions or sales until the financial picture becomes clearer. Selling an SMB is often a multi-million dollar transaction, which can place the business owner in the highest capital gains bracket of 43.4%. That number, combined with local and state tax levies, can add up to an exorbitant rate and eliminate most of the transaction’s profit. You should meet with your tax advisor well before a proposed sale or purchase — at least six months in advance — to adequately plan your strategy and minimize your tax burden.
Change Your Depreciation Strategy
In anticipation of higher taxes, you may want to switch from using bonus depreciation and instead write off your assets using the Modified Accelerated Cost Recovery System, or MACRS. By making this change, you may be able to defer depreciation deductions into coming tax years with a higher tax rate. Taking less in depreciation deductions this year may help you in the future if the new tax laws pass.
In anticipation of an increased tax rate, business owners may want to accelerate income recognition so you’ll be taxed now at the lower rate. You can accomplish this strategy in several ways, including converting your traditional IRA to a Roth IRA. When you make this switch, you’ll be taxed on the Roth IRA in the year you make the conversion, which will save you money in the long run.
You may also want to sell appreciated assets to take advantage of today’s lower tax rate. Once you do sell, you can even rebuy these assets, which resets their basis and means you’ll pay less in taxes if you decide to sell them in future years. You may also decide not to defer income into your deferred compensation plan in order to secure the current lower tax rate.
You can also choose to defer deductions, saving them for the years with a higher tax rate. This strategy is the exact opposite of what business owners usually choose, which is to accelerate deductions. You may want to defer charitable giving into the next year, doubling up on contributions then to take advantage of the deduction, or you could pledge future gifts to these charities, allowing them to better plan their expenditures while letting you defer the deductions.
Restructure Your Portfolio
You can restructure your portfolio to maximize lower tax realizing investments. A tax-managed index account will often produce annual capital losses while still matching the market pre-tax. You can use these losses to minimize taxes on profitable accounts in your portfolio.
These tax-managed accounts can be the tax-saving grace of your investment picture. Your financial advisors can offer you more tax-managed choices.
No one knows what will happen with business taxes in the coming months. Members of Congress are trying to work out a compromise on the infrastructure plan that may alter the President’s corporate tax proposals. What will pass, if anything, is an open question. However, as an SMB owner, you cannot afford to wait to take action. You can reduce your tax burden for the coming years by making changes to your portfolio, delaying some business transitions, accelerating income, and employing other strategies.
Chesapeake Growth Network can help you put these plans into motion before the government burdens you with an enormous tax bill on this year’s income. CGN offers legal and financial solutions for small businesses. A consultation with our expert team can show you how to manage these higher tax rates while minimizing negative financial impact. By contacting CGN now, you can prepare for whatever tax changes take place and preserve your company’s assets.
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