By Anthony Cammarata Jr.
With Democrats now in control of both the U.S. House and Senate, there are a host of changes to the tax laws that could be passed by Congress in the near future. President Biden's various tax proposals and intentions (collectively, the "Biden Plan") are comprehensive and contain propositions ranging from individual income tax increases to corporate tax reform, which will result in higher taxes for corporations as well. This advisory is meant to highlight some of the Biden Plan proposals for which individuals and companies should start seeking professional legal and tax-planning advice in preparation of their enactment.
Elimination of Favorable Tax Treatments for Real Estate Investors
Certain favorable tax treatments for real estate, such as Internal Revenue Code Section 1031 exchanges, could be eliminated for some taxpayers under the Biden Plan. Owners of real estate who are contemplating Section 1031 "Like-Kind" exchanges and other similar transactions should consult appropriate advisers and possibly consider accelerating those transactions before their benefits are no longer available. Another real estate tax change that has been proposed is a prohibition against investors' use of real-estate losses to lower their income tax bills.
Corporate Tax Rate Increases and More
The Biden Plan includes a proposal to increase the corporate income tax rate from 21% to 28% (or 35% if the Tax Cuts and Jobs Act of 2017 is repealed). The Biden Plan also proposes the creation of a minimum tax on the book income of corporations that meet certain criteria. The minimum tax would be structured as an alternative minimum tax, meaning corporations would pay the greater of their regular corporate income tax or the 15% minimum tax while still allowing for net operating loss and foreign tax credits. Business owners should be preparing now for these imminent corporate tax changes and should keep them in mind when contemplating any future corporate formations or restructuring.
Estate, Gift, and Generation-Skipping Transfer (GST) Tax Reforms
President Biden has expressed an intention to decrease the federal estate tax exemption amount either to $5 million per individual ($10 million per married couple), perhaps indexed for inflation and perhaps not, or to the $3.5 million per individual ($7 million per married couple) threshold that existed prior to the Tax Cuts and Jobs Act of 2017. This decrease in the lifetime exemption might also be coupled with an increased top tax rate of 45%. The Biden Plan might also repeal stepped-up basis of estate assets upon the owner's death and, moreover, might tax unrealized capital gains at death at the increased capital gains tax rates. While it is not yet clear whether these GST tax reforms would apply retroactively to January 1, 2021, taxpayers should nevertheless contact an experienced estate planning professional to navigate these impending changes.
These are but a few of the major changes we could see to increase taxes in the coming months. Now is the time to assess your potential options and plan accordingly for the implementation of President Biden's tax agenda. Whether reviewing your current estate plan, preparing for the effects of increased corporate taxes on your business, or ensuring that the damage to your real estate and other investments is limited to the fullest extent possible, it is imperative that you employ the help of knowledgeable and qualified legal professionals and tax experts to confirm you are taking the right steps as we enter life under the Biden administration.
Anthony and the other attorneys at Flint, Connolly & Walker, LLP are experienced in helping clients with the various legal matters addressed in this advisory and can assist you with implementing your own real estate, corporate, and estate planning strategies. We encourage you to also seek independent advice from knowledgeable financial and tax-planning professionals in preparation for the Biden Plan proposals.