How the New Biden Administration is going to dramatically affect your Business...

How the New Biden Administration is going to dramatically affect your Business... ...and it is not going to be pretty either!

The following is detailed information of exactly how this affects ALL business owners. In short, when the Biden Administration takes control your income will decrease, your taxes will increase AND your Tax Incentive Recovery will DECREASE. If you have not applied for your Tax Incentives for any of the past 3-4 years, you have less than 45 Days to apply. If you don’t apply you will lose tens of thousands, maybe hundreds of thousands. Control of the US Senate With the Democrats retaining the majority in the US House of Representatives, control of the US Senate may be the decisive factor in determining if President-elect Biden’s proposals could become law. Control of the US Senate won’t be determined until after Georgia’s run-off election on January 5, 2021. Georgia law requires a candidate to be elected by a majority vote—and there wasn’t a majority winner in either of Georgia’s US Senate races so a run-off has been scheduled. A Democratic win in both Senate races would provide an even 50–50 split between Democrats and Republicans in the Senate, with Vice President-elect Kamala Harris casting the tie-breaking vote. However, if the Republicans win at least one of the two races, they will retain control of the US Senate. Other Mechanisms for Changes A president can also implement limited tax policy through executive orders or Treasury Regulations. Here are some examples: • President Trump on August 8, 2020, implemented the elective deferral of withholding, deposit, and payment of certain payroll taxes through year-end. See our Alert on this topic. • The Obama Administration on August 2, 2016, promulgated the Section 2704 regulations in an effort to limit discounts of family-owned entities for estate and gift tax purposes and issued regulations under Sections 7874 and 367 addressing inversion transactions and limiting utilization post-inversion earnings stripping strategies. Executive action can also include removing or changing proposed regulations. For instance, the Trump administration withdrew the above proposed Section 2704 regulations in 2017.

Biden Tax Proposals Below is a side-by-side comparison that shows current tax law as well as proposed changes from President-elect Biden, including those for businesses (both domestic and those operating internationally) and individuals. Businesses There’s anticipation that a Biden presidency’s tax policy could reverse many of the business-friendly provisions enacted via the 2017 tax reform act (TCJA) in an effort to raise nearly $3.5 billion in revenue. Many of the proposed tax increases and eliminations of preferences are directed toward high-income taxpayers and larger multinational businesses. The Biden proposal impact would be felt across business entity types and by the individuals who own those businesses. Here are some highlights: • Corporate taxpayers. The proposed tax rate increase is still lower than the pre-TCJA 35% corporate tax rate. For some corporate taxpayers, the book value of net operating loss carryforwards would increase as the corporate rate increases, however the 15% minimum tax may blunt this benefit for corporations with annual book income over $100 million. • Flow-through entities. The qualified business income (QBI) deduction, also enacted by TCJA, allows individuals who own businesses taxed as sole proprietorships, partnerships, and S corporations to reduce their effective highest individual tax rate from 37% to 29.6%, by way of a deduction based on 20% of the qualified business income earned. Under the Biden proposal, the QBI deduction could be phased out for business owners whose annual income exceeds $400,000. • Top bracket of capital gains tax. This proposal could increase to equal the top ordinary income tax bracket, eliminating favorable tax treatment for the highest income earners. Impact of the top capital gain rate increase will be felt most in the context of how transactions impact corporate shareholders and flow-through entity owners. • Choice of entity. Decisions around entity choice could become more challenging with Biden’s tax proposals. Higher corporate rates and less substantial increases in individual rates could drive more businesses to seek the tax efficiencies of flow-through entities; however, a corporation won’t be impacted by an increased top capital gain rate and the phase out of the QBI deduction. Ultimately, changes to individual tax rates impact businesses as well by affecting the decision- making of business owners. • Credits and incentives. A number of new or expanded tax credits and incentives are included to help reduce tax burdens for small businesses and working-class Americans.

Comparison Table for Business Proposals CURRENT LAW JOE BIDEN CORPORATE TAX RATE 21% • 28% corporate tax rate. • For corporations reporting more than $100 QUALIFIED BUSINESS INCOME (QBI) million of annual book income, enact a 15% DEDUCTION “minimum tax” on book profits, reduced ACCELERATED BONUS by any foreign taxes paid or loss carryovers DEPRECIATION allowed. CREDIT JOBS IN THE UNITED STATES Taxpayers other than C corporations are allowed Phase out the deduction for taxpayers earning MANUFACTURING a 20% deduction of QBI from pass-through more than $400,000. CREDIT entities or qualified real estate investment trust WORK OPPORTUNITY (REIT) income, with some limitations. Set to TAX CREDIT (WOTC) expire December 31,2025. COMMUNITY DEVELOPMENT 100% bonus for eligible property through 2022 No specific plan announced, but generally FOSSIL FUELS AND with phase out starting in 2023. supports reversing 2017 TCJA provisions that RENEWABLE ENERGY benefit corporations. REAL ESTATE NA 10% Made in America tax credit for companies that create jobs for American workers or that increase manufacturing wages above the pre- COVID-19 baseline. NA Enact a Manufacturing Communities Credit that promotes revitalizing, renovating, and modernizing existing (or recently closed) facilities, requiring strong labor standards and a prevailing wage for workers. Businesses can have a nonrefundable tax Expand the WOTC to include military spouses. credit for a portion of wages paid to certain new employees who qualify as members of disadvantaged groups. New markets tax credit (NMTC) is available Expand and make the NMTC program for taxpayers who hold a qualified equity permanent. investment in low-income communities. The NMTC limitation for 2020 is $5 billion. No allocation for after 2020. Several deductions exist for businesses that • End fossil fuel subsidies. invest in fossil fuels, including a deduction for intangible drilling costs paid or incurred by • Reinstate or expand various tax credits operators of oil and gas wells and a deduction for the depletion of minerals and oil and gas designed to reduce carbon emissions, such extraction. as deductions for emissions- reducing investments in residential and commercial buildings, the solar investment tax credit, and credits for the purchase of electric vehicles. • Taxes on gains of real property are deferred if • Remove like-kind exchange deferral. the property exchanged is “like-kind.” • • Owners of certain residential property • Expand the low-income housing tax credit. occupied by low-income tenants may claim a Create $15,000 tax credit for first-time home tax credit that’s a percentage of the qualified buyers. ¢ Create renter’s tax credit to help basis of the property over a 10-year period. low- income families.

International Biden’s international tax proposals aim to help incentivize US companies to bring production jobs back to the United States, as well as eliminate some corporate tax breaks passed by the Trump administration. Proposed plans could provide a 10%“Made in America”tax credit to companies to encourage onshoring of manufacturing activity and the expansion of US production jobs. He also proposed plans that could eliminate the 50% deduction from global intangible low-taxed income (GILTI) currently available to C corporations as well as impose a 10% surtax on imports from offshored business activity. While few details have been released regarding the international tax provisions contemplated by Biden’s plan, the changes to the GILTI provision alone could raise $289.7 billion in revenue over the next 10 years. Comparison Table for International Proposals GLOBAL INTANGIBLE CURRENT LAW JOE BIDEN LOW-TAXED INCOME GILTI taxes 10.5% of US shareholder’s income (GILTI} AND BASE from controlled foreign corporations (CFCs) • Raise GILTI rate to 21% and impose it on a EROSION AND ANTI- with a deduction of 37.5% for foreign-derived ABUSE TAX (BEAT) intangible income (FDII) plus 50% of the GILTI. country-by-country basis. TAX TREATMENT OF US Minimum BEAT for certain taxpayers is 10% and CORPORATIONS THAT 12.5% for tax years beginning after 2025. • Eliminate GILT] exemption for qualified RE-DOMESTICATE Foreign-derived intangible income (FDI) JOBS OR MOVE JOBS deduction and anti-inversion regulations. business asset investment (QBAI). OVERSEAS • Create a 10% Made in America tax credit applicable to qualifying expenses incurred to return production to the United States, revitalize manufacturing plants, and increase wages paid to US manufacturing workers. • Impose a 10% surtax on corporations that send manufacturing and service jobs overseas when goods are ultimately sold back into the United States. This could raise the effective corporate tax rate on associated activity to 30.8%. • Establish a claw-back provision to require companies to return public investments and tax benefits when they close down jobs in the United States and send them overseas.

Individuals Biden’s tax proposals would provide a tax increase for higher income taxpayers with the following items: • Top ordinary income tax rate could return to its pre-2018 rate of 39.6% • Itemized deductions limited to 28% of adjusted gross income • Return of the 3% phaseout of itemized deductions for higher incomes Capital gains and qualified dividends for taxpayers with income over $1 million would be taxed as ordinary income ending a preference for capital gains that’s existed since 1922 (with the exception of 1988 to 1990 when the highest marginal tax rate on all income was 28%). The estate and gift tax exemption could be significantly reduced from its current level of $11.58 million. Biden has provided limited information about his plans but indicated his desire to reduce the exemption and increase the rate. The elimination of the basis step-up of inherited assets also was proposed. An open question is if a Biden administration could change the final Treasury Regulations issued on November 26, 2019. According to the regulations, gifts that utilized the higher exemption amount before it’s currently set to be reduced on January 1, 2026, won’t be clawed back into a taxpayer’s estate if the exemption is later decreased. Expansion of Individual Tax Credits On the other end of the spectrum, Biden’s proposals include increasing the child care tax credit, child tax credit, and student loan relief; reinstating the first-time home buyer’s credit; and increasing the eligibility for the premium credit under the Affordable Care Act. These proposals could also increase the refundability of many of the previously mentioned credits.

Comparison Table for Proposals for Individuals INDIVIDUAL TAX RATE CURRENT LAW JOE BIDEN CAPITAL GAIN RATE Top rate is 37%, expiring after 2025. DEDUCTIONS Raise top marginal tax rate to pre-TCJA rate of Top rate is 20%. Additionally, 3.8% net 39.6% for income over $400,000. ESTATE TAXES investment income tax (NIIT) for income over QUALIFIED $200,000 (single) and $250,000 (married filing Remove preferential rate for capital gains and OPPORTUNITY FUND jointly). qualified dividends for taxpayers with income (QOF) Standard deduction for married filing jointly is over $1 million by taxing them at ordinary rates. CHILDCARE AND $24,800, expiring after 2025. Itemized deduction Would retain 3.8% NIIT. DEPENDENT CARE for state and local taxesis capped at $10,000. TAX CREDIT TCJA suspended the personal exemption and Would limit itemized deductions at 28% of most itemized deductions through 2025. value for taxpayers in a marginal tax bracket STUDENT LOANS that exceeds 28% and restore overall itemized AND EDUCATION For 2020, estate and gift tax exemption is $11.58 deduction limitation, also known as the Pease million. This is scheduled to revert to a pre- limitation. Generally supports eliminating the CHILD TAX CREDIT TCJA indexed amount of $5 million (indexed for cap on the state and local tax deduction. inflation) after 2025. Transfers of appreciated property at death get a stepped-up basis. • Eliminate step-up basis on assets inherited Taxpayers may elect to defer recognition of, and avoid recognition of future appreciation related at death. to, capital gain from certain sales or exchanges of property by investing the gain in a QOF. • Indicated preference to reduce the estate • Nonrefundable credit to partially offset and gift exemption and increase the tax rate. expenses related to caring for children under Reform QOF rules to focus on creating jobs age 13 or a disabled dependent living in a and development in low-income communities, household. partnering with not-for- profit and community organizations, and provide transparency on • Credit is worth up to 35% of up to $3,000 of investments. expenses or $6,000 for multiple dependents. • Increase dependent care credit to $8,000. Phased down to 20% for higher incomes. Increase refundable credit to 50% for Loan forgiveness is typically included in income childcare expenses up to $8,000 per child or unless an exception applies, typically because an $16,000 for more than one child for families individual worked for a certain period of time in making less than $125,000 a year. certain professions. • Phase out credit for families making The child tax credit (CTC) provides up to $2,000 per child under age 17 (60% refundable). Other $125,000-$400,000 a year. Investigate ways dependents, including children ages 17-18 and to make credit advanced. full-time college students ages 19-24, can receive a nonrefundable credit of up to $500 each, which • Student loans could be canceled tax- free, is phased out for higher incomes. after borrowers are enrolled in the income- based repayment plan for 20 years. • Offer $10,000 of undergraduate or graduate student debt relief for every year of national or community service, up to five years. Increase the CTC up to $3,000 for children 17 or younger and a $600 bonus credit for children under six. The CTC could also be made fully refundable, removing the $2,500 reimbursement threshold and 15% phase-in rate. Phased out for higher incomes.

Other Tax Provisions Biden proposed additional changes to retirement accounts, payroll tax, and health care. For retirement accounts, Biden’s proposal would aim to increase access and participation by subsidizing the establishment of additional employer plans and changing the current individual deduction to a credit, limiting the tax benefit for higher income taxpayers while incentivizing lower income earners. For example, using a 26% rate, a taxpayer earning $600,000 and contributing the maximum of $19,500 to a 401(k) plan receives a tax credit of 26 cents on each dollar, or $5,070 (versus the current law, which is a $19,500 deduction at 37% or $7,215). However, a person earning $50,000 and contributing $5,000 to the same 401(k) plan would receive a credit of $1,300, which is likely more than double what they are currently receiving as a benefit, assuming a 12% marginal tax rate. Comparison Table for Other Provisions PAYROLL TAX CURRENT LAW JOE BIDEN RETIREMENT 12.4% payroll tax is applied on worker’s wages INCENTIVES up to $137,700 for 2020, with tax split between Impose payroll tax on those earning more employer and employee. than $400,000. Wages between $137,700 and HEALTH CARE AND $400,000 wouldn’t be subject to payroll tax. LONG-TERM GARE • Most workers can contribute up to $19,500 a • Help small businesses cover the costs of year to a 401(k) account ($6,500 if age 50 or higher). setting up “automatic 401(k)” plans for workers without access to pensions or 401(k) • The deferred salary isn’t included in taxable plans. income until withdrawn. Not all employers • Allow caregivers not earning wages to offer qualified retirement plans. Minimum distributions are required when a taxpayer make catch-up contributions to retirement turns 72. accounts. • Low-income taxpayers may be able to • Change the current deduction for retirement claim a tax credit to help pay premiums contributions to a credit. for purchasing health insurance under the Affordable Care Act (400% income cap). • Eliminate the 400% income cap on tax credit • Long-term care insurance premiums are eligibility and lower the cost of coverage from 9.86% of income to 8.5%. Middle-class eligible medical care expenses for purposes families would receive a premium tax credit of the medical deduction. to help pay for coverage. • Impose a tax penalty on drug manufacturers that abuse product pricing and limit price increases to inflation. Terminate pharmaceutical corporations’ tax break for advertisement spending. • Create $5,000 tax credit for informal caregivers and other caregiver benefits.

Economic Update In the weeks preceding the US presidential election, the stock market was pricing in the potential for large fiscal spending. The anticipation of a blue wave election, wherein Democrats win control of Congress and the presidency, caused longer-term Treasury bond yields to move higher—the curve steepened—and there was rotation from growth and technology stocks to more cyclical reflation plays. However, post-election, that trade reversed course somewhat with bond yields slipping 10 basis points on November 4, 2020, reaching a two-week low—prices increased—and cyclical stocks sold off while technology and health care rallied. In following days, stocks were mostly higher across the board because Wall Street priced in the prospects of a divided government with a Republican-controlled Senate. Senate and House Control The working assumption is that, regardless of who wins the White House, a Democratic House and a projected Republican Senate would mean a smaller stimulus package—$1 trillion–$1.5 trillion, versus $4 trillion—and more limited infrastructure spending. This is important because the market had bid up construction and industrial companies, betting that a blue wave would mean a large infrastructure bill to fix roads, bridges, and highways. However, on November 4, those infrastructure-oriented stocks reversed course, trading lower, while technology favorites like Google, Facebook, Amazon, Microsoft, Apple, and Nvidia made strong gains, repricing some of the previous posturing. Of course this outcome isn’t etched in stone as there are two Senate positions still in play in the Georgia run-off elections in January. While it isn’t the consensus view, if those two seats should be taken by Democratic candidates, the market may once again reassess the implications of a 50–50 Senate with the tie-breaker going to the vice president-elect.

305 W. Woodard Street, Suite 101 Denison, Texas 75020 Phone: (866) 668-2974 • Fax: (866) 668-2974 • Email: Info@abisvs.com