Biden 2021 Tax Proposals and Implications

© H. Len Musgrove, Jr. 2021, all rights reserved

Each of us in this country and, in all likelihood, worldwide has suffered the effects of the COVID-19 pandemic and its related issues.  The obvious costs other than the increased healthcare costs and the impacts of the aggressive disease itself are the economic costs of our economic slowdown and the resulting governmental intervention with the nominally worthy goal of putting funds in the hands of the US citizens during the pandemic and its governmental-required shutdowns and business limitations.  In the coming years, the tab for such programs will come due like a vacation charged on a credit card, along with the ongoing costs of the national debt that we have apparently become addicted to in this country. Logically, the federal government will feel the need to increase the revenues from taxes, such as increasing income tax 2022, to cover these mounting costs. President Biden’s cornerstone solution to this issue is a wholesale increase of taxes, particularly on corporations and the “wealthy.” This month’s Blog will address these proposals, which have not yet been passed by Congress, as well as the potential implications of such tax increases if they are ultimately implemented.

“Green Book” Proposals for FY 2022 Budget.

The Biden administration published its proposed Fiscal Year 2022 Revenue Proposals in some detail in late May of this year in a publication informally referred to as the “Green Book.”  The Green Book took the initial campaign platform proposals announced by President Biden and provided greater detail, including information on effective dates and revenue estimates of the new taxes proposed. This article will provide a brief summary of the proposed new taxes and rates.

Since the new Administration has committed to focus primarily on corporate tax and income tax 2022 for the wealthy, we will divide our discussion into those two general categories.  Of course, these proposals are likely to evolve and be subject to active negotiation with Congress, as despite the nominal control of both the House and the Senate by the Democratic party, passing these proposals is far from a given. 

Corporate and International Tax Proposals Include:

  • Increase of the statutory maximum C corporation rate to 28% from 21%;
  • Imposition of a 15% minimum tax on global book income of large multinational corporations;
  • Reduction to 25% the deduction on “global intangible low-taxed income”, and thus eliminate the current “qualified business asset investment” exemption;
  • Restriction of the deduction of interest by a financial reporting group attributable to disproportionate US borrowing;
  • Denial of certain deductions related to offshoring jobs;
  • Increasing the IRS enforcement budget;
  • Reformation of taxation on foreign fossil fuel income; and
  • Repeal of fossil fuel subsidies.

Generally, the proposals noted above are focused on the increase of both domestic C corporation tax rates and the addressing of perceived abuses by multinational corporations, and less on individual income tax 2022. Additionally, the latter two proposals generally go with the Biden platform of pushing toward non-fossil fuel energy production.

Individual and Investment-related Tax Proposals Include:

  • Increase of the statutory maximum individual rate to 39.6% from 36%;
  • Taxation of long-term capital gains at ordinary income rates (i.e., up to 39.6% rather than the current 20%) for taxpayers with adjusted gross income exceeding $1MM;
  • Trigger of taxation on death or gift of appreciated property with unrealized capital gains of $1MM or greater, with a few exclusions;
  • Taxation of carried interest income as ordinary income;
  • Repeal of deferral of gain from like-kind exchanges greater than $500,000 for tax years beginning after December 31, 2021; and
  • Requirements of financial institutions to report information about account flows.

Along with income tax 2022 changes, there are various proposals relating to both gift and estate taxes, which include increasing the current marginal gift and estate tax rates, reducing the current approximately $11.7MM unified credit against estate and gift tax (which, in fairness, is currently scheduled to sunset and return to the pre-Trump era tax legislation levels of $5MM per person beginning in 2026) and even a proposal to eliminate the current tax-free step-up in basis for estate transfers to beneficiaries.  

In summary, this is quite a list of tax increases of a scope not seen for a couple of decades.

What Tax Increases Can We Expect?

The prediction of where the Biden Green Book tax proposals end up is beyond the scope of this discussion; however, it is a reasonable bet that there will be some change to the current Internal Revenue Code of 1986, as amended, as a result of these income tax 2022 proposals. Were I a betting man, I would look toward the low hanging fruit of these proposals as more likely to become law, such as an increase of the IRS enforcement budget, a closing of the perceived “loopholes” for multinational corporations, a negotiated increase of tax rates (for example, 25% for C corporations and a point or two for individuals), a compromise on long-term capital gains rates (perhaps to 25 or 28% instead of full equalization with ordinary income rates), and the like. With such a narrow majority in both houses of Congress and with a mid-term election year looming, I have a hard time imaging that the entire Biden Green Book income tax 2022 wish list will be implemented.  My belief is that the real estate industry lobby will push back truculently on the proposal to eliminate the 1031 Like-kind Exchange benefit, the oil and gas lobby will raise cain about limiting or eliminating the “fossil fuel” subsidies that have been in place for decades, and the family business and farm lobby will similarly push back on the proposed elimination of the tax-free step up in basis, but one never knows in politics.  At this juncture this late in the fiscal year, I don’t think a retroactive tax change is likely, although it is not an impossibility.

The lawyers of Musgrove Law Firm, P.C. are available to assist our clients with complex business; federal, state and local income tax 2022; Mergers & Acquisitions; intellectual property; and real estate and estate planning matters among our specialties. Our goal is to be not only excellent lawyers, but true business partners with our valued clients. Contact us today to schedule a consultation regarding your business and tax matters.