On March 31, the Biden administration announced its $2 trillion jobs and infrastructure plan.
The plan proposes various changes to the corporate tax code. Although most of the proposed tax law changes are targeted at large, multi-national corporations, below are eight key takeaways that business owners should consider as they plan for the future.
1. Revisit your business’s entity structure
President Biden’s tax plan would raise the corporate tax rate from 21% to 28%. Consider revisiting your business’s entity structure. Model various cash flow scenarios (C corporation versus pass-through versus S-corporation), taking into account: a) the cost and timing of converting from one entity to another, b) whether you plan to reinvest cash flows into the business or distribute them to your shareholders, c) other tax implications, such as employee payroll taxes.
2. Accelerate recognition of business income, and defer business expenses
Consider, to the extent feasible, recognizing income from your business earlier in the year (for example, negotiating contracts with customers to front-load more earnings) and deferring expenses as a preventative measure in the event that the corporate tax rate increases.
3. Compile expenses for supporting your U.S. workforce
Biden’s tax plan pledges to ensure that companies will no longer be able to write off expenses that come from offshoring jobs and provides a tax credit to companies for expenses incurred in support of onshoring jobs. Although President Biden’s plan does not provide details about the tax credits, work with your accountant to review your internal books and maintain detailed expense records for your U.S. workforce so that you are prepared to take advantage of these tax credits when they become available.
4. Consider the timing of placing assets into service
The Tax Cuts and Jobs Act of 2017 increased the amount of depreciation that business owners can deduct for certain tangible assets from 50% to 100% of the asset’s cost in the year that the asset is placed into service. After 2022, the 100% decreases by 20% until it is phased out altogether in 2027. From a tax perspective, when corporate tax rates increase, depreciation becomes more valuable to corporations. Consider possibly delaying certain large-scale capital expenditures until 2022 in order to increase your tax savings from depreciation in the event that the corporate tax rate increases next year.
5. Review any non-U.S. sources of income
Biden’s tax plan would increase the minimum tax on global intangible low-taxed income (GILITI) to 21% (calculated on a country-by-country basis). The plan also proposes to eliminate both the tax deduction for foreign-derived intangible income and the rule that “allows U.S. companies to pay zero taxes on the first 10% of return when they locate investments in foreign countries.” Review any current or anticipated sources of non-U.S. income, and evaluate the potential impact on your business’s profitability in the event that each of these tax changes is enacted.
6. Consider taking some cash out of the business
Consider paying your shareholders a dividend; for instance, through a dividend recapitalization transaction. Taking cash out of the corporation now will help to reduce the taxes that your company would owe in the event that the corporate tax rate increases. Additionally, it may reduce the tax burden on your shareholders if the tax rate on qualified dividends also increases.
7. Assess the potential impact of a minimum global tax on your foreign suppliers and customers
Biden’s tax plan encourages other countries to adopt strong minimum taxes on corporations “so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge by serving as tax havens.” Further, the plan commits to seek agreement through multilateral negotiations to achieve a “global minimum tax.”
Consider the downstream impact on your business of a minimum global tax, including any non-U.S. suppliers, vendors or customers that may look to increase pricing, renegotiate contract terms or change spending behavior as a result of increased corporate taxes in their respective jurisdictions.
8. Review the strength of your audit processes and financial reporting
Biden’s tax plan proposes to ramp up enforcement in order to “make sure that the Internal Revenue Service has the resources it needs to effectively enforce the tax laws against corporations.” This would be paired with a broader enforcement initiative to be announced in the coming weeks that will “address tax evasion among corporations and high-income Americans.” Review your audit process with your accountant – as well as your financial reporting, books and records, and internal accounting systems – to ensure they are up to date and that your team proactively addresses any potential issues.