What Is Tax Reform’s Impact on Your Business?

The American Jobs Plan introduced by the Biden Administration, along with the accompanying Made in America Tax Plan, failed to achieve bipartisan agreement by Memorial Day. As a result, across-the-aisle talks continue in an effort to reach a consensus with regard to infrastructure spending and how to pay for it. Consequently, Edgewater CPA Group shares some of the proposals being discussed, so that you can understand the potential impact of these tax reforms on your business.

What’s in the Plan(s)

The Made in America Tax Plan report seeks to restore corporate tax revenues back up to two percent of GDP. After the Tax Cuts and Jobs Act of 2017, corporate tax revenues adjusted down to one percent of GDP. The report compares the percentage with the U.S. historical average as well as the Organization for Economic Co-operation and Development (OECD) member states.

The Tax Cuts and Jobs Act of 2017 lowered the corporate income tax rate from 35% to 21%. The new proposal would increase that rate to 28%. The proposed rate still beats the 35% tax rate in 2017. Nevertheless, the change may negatively impact cash flow for C-corp businesses. As a result, some C-corps might reconsider their structure if legislation passes.  

Impact on Your Business

In a C-corp, double taxation occurs when the government taxes money first at the corporate level and then again at the shareholder level through distributions. To avoid this, some shareholders leverage S-corps and LLC structures as pass-throughs. In this scenario, the business income is passed through to the individual as personal income (or loss). When the corporate tax rate lowered to 21%, the impact of double taxation became almost negligible. Thus, many new businesses structured themselves as C-corps since the 2017 legislation. 

Higher corporate tax rates mean shareholders may re-evaluate their entity structures in an attempt to avoid double taxation. Alternatively, corporations establish themselves in other countries offering lower tax rates. To that end, the U.S. administration has asked other countries to agree to a 15% minimum corporate tax rate for multinational corporations to reduce profit shifting through offshoring efforts. 

Targeting the Top

Politicians on both sides of the aisle express dismay that top corporations avoid any federal taxes despite sky-high profits. Amazon is one example. In fact, approximately 50 Fortune 500 companies fall into this category. Officials are tasked with taxing top corporations appropriately while not causing an undue burden to others. Nearly two-thirds of C-corps include small businesses generating less than $1 million in revenue. 

Other proposals include adjusting the capital gains tax rate, currently at 20%, to 39.6%, treating contractors as employees, raising the federal minimum wage, and adjusting sick time and family leave. 

Position Your Business Accordingly

If your business entity is a C-corp, don’t lose sleep. Talks continue and questions remain. At the same time, you may benefit from a personal consultation with regard to your business structure, tax filing, and business exit strategy. If you own a business in Carmel, Westfield, Zionsville, or Fishers, schedule a consultation with an Edgewater CPA Group advisor.