With so much election news in the air, small business owners are focused on something other than the coronavirus for a change: tax plans. President Donald Trump’s and former Vice President Joe Biden’s proposed tax policies both have the potential to change the playing field for small business owners. With so much riding on the presidential election, it’s important to understand how these two plans differ and how they will impact business growth in 2021 and beyond.

Tax Rates

Current Tax Law (2020)Trump Tax PlanBiden Tax Plan
Corporate tax rateAssess a flat tax rate of 21% on all corporate tax profitsLower the corporate tax rate to 20%Raise the corporate tax rate to 28%
Corporate Alternative Minimum TaxRepealedMaintain current lawApply an alternative minimum tax of 15% on book profits (as opposed to tax profits) for businesses earning more than $100 million
Individual tax rateAssess taxes using progressive rates with a top marginal tax rate of 37% through 2025Permanent extension of current law, perhaps cut rates for middle-income familiesRaise the top marginal tax rate to 39.6%
Capital gains tax rateAssess a tax rate on long-term capital gains ranging from 0% for the lowest earners to 20% for the highest earnersMaintain current lawRaise the capital gains tax rate from 20% to 39.6% for taxpayers reporting more than $1 million of taxable income
Social Security taxesAssess 12.4% of Social Security taxes on wages up to $142,800 (cap for 2021). Half of this tax is paid by the employer, half by the employee. Self-employed individuals must pay both portions.Maintain current lawReintroduce 12.4% Social Security taxes for those wages in excess of $400,000, creating a “donut hole” where tax is not assessed
Tax on global intangible low-taxed income (GILTI)Assess a 10.5% minimum tax on GILTIMaintain current lawRaise the GILTI tax rate to 21%

Deductions

Current Tax Law (2020)Trump Tax PlanBiden Tax Plan
Qualified business income deductionA 20% deduction of business income is available to sole proprietors and owners of pass-through entities through the year 2025Maintain current lawMaintain the deduction for most taxpayers, but eliminate the deduction for those earning more than $400,000 per year
Cap on itemized deductionsThrough 2025 there is no limitation on a taxpayer’s total itemized deductions, but some individual deductions are limited to a certain dollar amount or reduced based on a taxpayer’s adjusted gross incomeMaintain current lawPhase out itemized deductions for single taxpayers with incomes above $400,000. Simultaneously, taxpayers would only be eligible to receive 28 cents off each deduction dollar, even when their marginal tax brackets are greater than 28%.
Meals and entertainment expense deductionA 50% deduction is allowed for some business meals; entertainment deductions are disallowedAllow 50% deduction for all meals and entertainmentMaintain current law
Bonus depreciation deduction100% bonus depreciation is allowed through 2022. Beginning in 2023, the deduction is reduced by 20% until it is fully eliminated in 2027.Extend 100% bonus depreciation, perhaps indefinitelyMaintain current law
Research and development (R&D) expense deductionCompanies can elect to fully expense R&D costs in the year they were incurred, but beginning in 2022, these costs must be amortized over five yearsMaintain current lawRemove the amortization requirement in 2022 and continue to allow businesses to fully deduct R&D expenses

Credits

Current Tax Law (2020)Trump Tax PlanBiden Tax Plan
Homebuyer’s / renter’s tax creditThere is currently no homebuyer’s tax credit. After the 2008 recession, Congress enacted a tax credit of up to $8,000 for first-time homebuyers, but it expired in 2010.Maintain current lawCreate a permanent $15,000 First-Time Homebuyer Tax Credit, and establish a refundable tax credit for low-income renters intended to limit their rent and utility payments to 30% of their monthly income
Caregiver tax creditsThe Child and Dependent Care Credit provides a non-refundable credit to caretakers of up to $3,000 per dependent (max of $6,000) for households making less than $43,000Maintain current lawMake the Child and Dependent Care Credit refundable and expand it to $8,000 per dependent (max of $16,000) and only phase out the credit for families making more than $125,000.

Additionally, create a $5,000 tax credit for informal caregivers who do not qualify under the stricter Child and Dependent Care Credit guidelines.

Other

Current Tax Law (2020)Trump Tax PlanBiden Tax Plan
Estate taxAssets transferred at death receive a tax basis that has been stepped up to fair market value, which in effect permanently eliminates certain gains from taxation.

Estates valued at $11.58 million or less are exempted from taxation through the year 2025, at which time the exemption reverts to $5 million. Taxable estates are subject to a 40% tax rate.

Maintain current tax rate and step-up basis provisions, and make the $11.58 million estate tax exemption (adjusted annually for inflation) permanentRepeal the step-up provision so inherited assets have a carryover tax basis. Potentially return to the 2009 level of exemption ($3.5 million) and tax rate (45%).
Retirement plansIRA contributions are deductible for those earning below a certain threshold. Most taxpayers can contribute $6,000 per year, and those age 50+ can make additional $1,000 “catch-up” contributions.Maintain current lawEliminate deductible retirement plan contributions but establish a 26% refundable credit for taxpayers earning below a certain threshold. The refundable credit would be deposited directly into the taxpayer’s retirement account and would therefore act as a matching contribution.

Expand “catch-up” payments to certain caregivers.

Partially subsidize the costs of setting up automatic 401(k) plans for small businesses.

Like-kind exchangesReal estate investors can defer capital gains on sales of real estate if they simultaneously purchase property that is of like kind to the property they soldMaintain current lawEliminate like-kind exchanges for those taxpayers earning more than $400,000.
Passive loss exception for real estate professionalsLower-income taxpayers deemed to be “real estate professionals” can offset nonpassive income with up to $25,000 of passive rental losses. For most taxpayers, passive losses can only offset passive income.Maintain current lawEliminate the $25,000 exception for passive rental losses

These tax plans show just how many opposing economic and fiscal ideologies President Trump and former Vice President Biden hold. But they have at least one thing in common: Whoever secures the presidency will be tasked with putting these plans through the rigorous legislative process. And with Senate seats also up for election, we cannot predict the outcome of that process, or what sacrifices and compromises will be needed to get the job done.

If you would like to discuss how your business can prepare for either scenario, contact your CRI advisor today.