Notes on the above three charts:
- The above charts are for illustrative purposes only and include select deductions (such as 199A and deductions related to SE taxes).
- The charts include the 3% High-Income Surtax, meaning that these tax rates could apply at $5 million of modified AGI ($2.5 million for married filing separately).
- The 3.8% Medicare Tax applies only to active partners under current law. The Ways and Means proposal would apply a 3.8% tax (either Medicare or NIIT) to income derived from both passive and active owners of both partnerships and S-corps.
- The 199A deduction for qualified business income is not eliminated under the Ways and Means proposal, but it is limited to $400,000 (single), $500,000 (married filing jointly), or $250,000 (married filing separately).
- For corporate income taxes, the current flat rate of 21% is replaced with a graduated rate structure. The 26.5% rate applies to income over $5 million.
Introduction & Legislative Update on Business Tax Changes in 2021
Two large and high-profile bills (Infrastructure 1 and Infrastructure 2) have gotten much attention as they are being considered in Congress. Together, they contain over $4 trillion in spending and contain substantial changes to tax laws which could have huge ramifications for business owners. However, multiple different versions of the bills have been proposed, each with different implications for tax law, and the legislative situation is still fluid. Because of this uncertainty, it is crucial that taxpayers contact trusted advisors and be prepared to act in the brief window of opportunity that exists before the start of the next tax year. In this article (the first in a three-part series), we briefly outline the major business tax changes being proposed and suggest some key planning items that businesses can consider now.
- Tax planning before the end of the current 2021 tax year will be crucial. Business owners should meet with trusted advisors and experts to discuss these changes and ways they can prepare. Contact us here.
We refer to the two infrastructure bills as “Infrastructure 1” and “Infrastructure 2.” Infrastructure 1 contains almost $1 trillion in funding for physical infrastructure. Infrastructure 2 deals primarily with “human infrastructure,” such as childcare, Medicare expansion, and more. Both bills also contain important tax law changes, but the bulk is included in Infrastructure 2. Readers should also note that Infrastructure 1 has bipartisan support, and so is very likely to pass into law in some form, while the prospects of Infrastructure 2 are more uncertain.
On September 13, the House Ways and Means Committee released its version of Infrastructure 2, which included significant deviations from previous versions. We discuss some of the main proposals, considering the recent House version and also previous versions where it is relevant. These proposals are subject to change and may be modified by the House Rules Committee before making it to the House floor.
- This article is for informative purposes only and should not serve as legal or planning advice – discuss these items with financial planning and legal experts.
Key Business Tax Planning Takeaways for Upcoming 2021 Changes
When or if the tax changes pass congress, there may not be much time to act. Taxpayers should be prepared to move quickly and should consider the following planning tips.
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About Peter Ryan
Partner, Co-founder, & CPA
Peter T. Ryan co-founded Ryan & Wetmore in 1988 with business partner Michael J. Wetmore. Peter provides clients with the best strategies for success. His expertise extends across various industries, including government contracting. Peter obtained a Master of Business Administration in Finance from the University of Baltimore and a Bachelor of Arts in Accounting from the Catholic University of America.
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About Jack Ramsey
Jack Ramsey is a Finance Consultant at Ryan and Wetmore. He focuses on government contractor services as well as research and analysis of the economic, tax, and regulatory environment. Jack graduated from American University with a Bachelor of Science in Economics.