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A Guide to Tax Strategy in 2021

What businesses should know about policy changes in 2021 and how to adjust tax strategies accordingly.

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FEI Daily spoke with Todd Simmens, former legislation counsel to the U.S. Congress Joint Committee on Taxation and National Managing Partner of Tax Risk Management at BDO, about President Biden’s plans for corporate tax changes, what businesses should know about policy changes in 2021, and how to adjust tax strategies accordingly.

FEI Daily: During the campaign, President Biden has called for raising the corporate tax rate from the current 21% to 28%, counting on the revenue from the increase to help fund an ambitious infrastructure plan among other things. What is the likelihood of the corporate rate increasing in 2021 and is it realistic to expect the rate will go as high as 28% or should corporate taxpayers expect something lower than 28?

Todd Simmens: I believe that when a larger tax package is drafted, a corporate rate increase will be included. Whether it is 28% or some other number may depend on a couple variables. First, it may depend on the extent to which negotiation of a package is bipartisan. Something lower than 28% might be needed to gain more bipartisan support.

Second, it may come down to revenue. To the extent 28% is what’s needed to fund other priorities, there may be less flexibility. Regarding a 2021 increase, our 2021 Tax Outlook Survey found that 92% of respondents expect the federal corporate tax rate will increase this year. However, I suspect any increase would not be effective until January 1, 2022. Retroactive tax increases are generally not favored, and as we get further into this year, it may look more like 2022 effective dates.

FEI Daily: A large number of FEI members are affiliated with private companies – many pass-through entities and family businesses – and most welcomed the Tax Cuts and Jobs Act’s creation of a deduction for income of certain pass-throughs. President Biden has called on phasing out the Section 199A deduction for taxpayers with over $400,000 in income. What is the likelihood of that happening?

Simmens: President (then candidate) Biden and his campaign noted they would seek tax increases for individuals with income over the $400,000 level – the tax rate table would increase for those with incomes at the $400,000 level, and the 199A deduction would be phased out at that same level. With the makeup of today’s House and Senate, it is very possible that some individual tax increase will make it to enactment; whether it is at exactly the $400,000 level is unclear. There may, for example, be some senators that would move the $400,000 number up for either the general rate table, the 199A deduction, or both. Again, depending on the administration’s desire for a more bipartisan package, any individual tax increases may reflect bipartisan input.

FEI Daily: As I mentioned, many FEI members work for family-owned businesses and, as you’d expect, are always concerned about changes to estate tax law. Biden’s tax plan includes a proposal to reduce the estate tax exemption by 50% and eliminate the step up in basis at the time of death. How likely is it these changes will be enacted and what can family businesses do to prepare?

Simmens: During my time at the Joint Committee on Taxation, the Economic Growth and Tax Relief Reconciliation Act of 2001 was enacted, which repealed the estate and generation-skipping transfer taxes for one year. During that year, the step-up in basis was repealed in favor of carryover basis. Use of a carryover basis regime is complex to implement and difficult to comply with. I think that elimination of step up in basis would be less likely, as it would materially change estate tax policy.

Regarding a decrease in the exemption, that is less complex to implement, and it would return exemption amounts to pre-2017 TCJA levels. I believe it is likely that we see some change to the exemption amount.

FEI Daily: It seems clear that the Biden Administration’s current priorities are an additional COVID-19 relief bill and comprehensive infrastructure bill in 2021. Do you see the White House pursuing a big tax bill like the Tax Cuts and Jobs Act sometime this year or will tax changes come in a more piecemeal fashion? If there is a big tax bill, do you expect it would have to be done through the budget reconciliation process just like the TCJA was?

Simmens: While I expect there will be some tax provisions in any COVID-related bill that makes it to the President’s desk, I also expect a more comprehensive tax package down the road. Because of the uncertain makeup of the Congress come January 2023, I would expect the administration will push for a package before the end of this Congress. Unless the legislative filibuster is repealed or a tax package is vastly bipartisan, both of which today seem unlikely, I believe the only option will be reconciliation.