There has been quite a bit of chatter around President Biden’s tax plan and the impact of certain provisions within his tax plan and the American Rescue Plan. The purpose of this article is to clear the air about Biden’s tax plan/hikes on small business owners. A lot of the talk has been around raising the corporate tax rate from 21% to 28%. While big corporations can deal with higher taxes more comfortably than smaller businesses, the long-term impact on the U.S economy will not be beneficial. For example, according to the Tax Foundation, raising corporate tax rates will lower the GDP by 1.62%. Above all, if you operate under Sole Prop, LLC or an S-Corp business structures you’re about to be hit with some really bad news.
What is the bad news? Well, the Biden Administration plans to phase out the 20% Qualified Business Income deduction that many of these flow through entities have enjoyed since the passing of TCJA (President Trump’s Plan). Small businesses are the life and blood of the U.S economy, not only are they job creators, but they invest back into the local economy as well. Biden plans to phase out this deduction for businesses who make over $400,000 dollars. Unfortunately, many business owners and even my clients who have struggled the most during this pandemic have been businesses with revenues between $200,000 – $400,000.
A business making $400,000 cannot be compared to a large corporation like Amazon or Google, the later can afford to pay higher payroll taxes while the former may find it more difficult. If businesses are going to worry about paying higher taxes, they are less likely to hire new workers, or make important investments to grow their business. Instead, small businesses are going to remain in a survival mindset, which is the last thing that the post-pandemic economy needs. As your strategic small business CPA, I recommend you get in touch with your tax pro/CPA and discuss key tax credits or savings that you may qualify for. The tax filing deadline has been extended to May 17, 2021 and while this may feel like forever, you need to start organizing your receipts and key documentation so that this process can be as seamless as possible.
However, there is not all bad news in Biden’s tax proposals, for instance here are some good things that small business owners can look forward to:
- Expansion of the Premium Tax Credit for employees if their current employer does not offer a plan.
- Expansion of several renewable energy related tax credits, including bringing back the Energy Investment Tax Credit
The final word on Biden’s tax plans/proposal is that it seems to be “evolving” – but flow-through entity small businesses and small business making over $400,000 are going to see massive tax increases. Nevertheless, Biden’s tax plan is projected to raise about $2.78 trillion dollars, down from $3.3 trillion when taking in account all the negative economic impact.