What Does the American Jobs Plan Mean for Taxes?

Dark Horse CPA

Hint: You’re probably not going to like the answer...

Podcast Transcript

This is taxes made simple. The only podcast that gives you the tax information you need  without going too far into the weeds. Chase Birky here again with you today to talk about  President Biden’s plan to rebuild American infrastructure, which has been dubbed the  American Jobs Plan. Some argue that there is more than just infrastructure in Biden’s plan.

But one thing is absolutely certain. This proposal demonstrates the  administration’s intent to raise taxes on corporations and the wealthy in a significant way.  And the math is simple. There’s been a lot of spending with COVID relief bills and there’s  plenty more spending planned under this proposal and others yet to come.

And as one would expect, the Democrats would want to push this burden on the  wealthy, whom they believe have disproportionately benefited during the pandemic and  under the previous regimes tax code, which in many cases is probably true. Nonetheless,  what’s on the table here. Number one corporate tax rates will likely increase from 21% to  28%.

The tax cuts and jobs act reduce the top corporate tax rate from 35% to 21%. So  this slashes that previous tax cut in half additionally, the global minimum tax rate would be  increased from 13% to 21%, which essentially is a tax that is imposed on worldwide income.  So that companies aren’t unfairly benefiting from shifting profits overseas.

A common theme in Biden’s overall tax plan is to provide incentives for ongoing  operations and disincentives for offshoring them. Additionally, there will be a minimum 15%  tax rate on corporate book income, which often would be their us gap based financial  income that they would use for reporting purposes, which often differs substantially from  taxable income.

This would be levied on companies with revenues exceeding $100 million. The net  of all of this is that many corporations would face an income tax rate exceeding 30%. When  you add in the tax imposed by States and in the bluest of States, you’d be looking at  something around 35%. Number two, the plan will provide additional funding to the IRS who  quite honestly needs it in a major way.

However, there will be more taxes, more complication, and yes, more  enforcement. It’s going to create noticeable drag on productivity and free cashflow for  businesses. Number three, don’t forget about the plan increases on individuals making more  than 400 K I’ve talked about this at length on previous episodes.

This also hits companies since the employer has to chip in on social security taxes  for employees wages above $400,000. So the takeaway here is that you can no longer bear  your head in the sand. Higher taxes are coming. You would be wise to evaluate tax planning  strategies that increase your taxable income in 2021, either via accelerating income or deferring expenses, because the tax regime this year is likely to be much more favorable  than that.

In future years, however you’ll want to wait until near the end of the year before  you totally commit to the strategy as these changes could come as soon as this year. So  taking advantage of flexible tax provisions, such as elections for depreciation and retirement  contributions that can be made after year end will be of extra value to make sure that you  get 20, 21, right from a tax standpoint.

Beyond 2021 strategic tax planning is going to be that much more impactful as  the savings will be amplified due to the higher taxes. Anyway, that’s it for now? Thanks for  tuning into TMS or taxes made simple. If you’re not into the whole brevity thing, because  there’s TMI and then there’s TMS. See you next week

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