Taxes to Follow COVID
After a year of coping with COVID lockdowns and reduced revenues the potential increase in business and individual tax rates may be our next challenge. President Biden has suggested raising federal rates on businesses and the wealthy to pay for his forthcoming infrastructure bill and programs to combat inequality and climate change. Under his proposed plan, the current 21% rate for corporations would rise to 28%. The Section 199a deduction, a lucrative 20% tax benefit for passthrough businesses like sole proprietorships, S corporations, partnerships and limited liability companies, would be scaled back. And the current top individual rate would go back to 39.6% from 37%, and affect people making at least $400,000 a year. Even the $400,000 floor is subject to change.
The President has also proposed making the current top capital gains rate of 23.8% (20% plus the “Obamacare” tax) the same as the top individual rate for those making at least $1 million a year. Separately, some Senate Democrats are considering a proposal to tax unrealized capital gains of $1 million or more, at death.
One strategy for alarm company owners is to defer deductions to future years. Many owners have purchased big ticket items (computers, work trucks, tools, etc.) at year end and expensed them using what is know at the “179 deduction.” We have been encouraging most of our clients to depreciate these items instead, thereby deferring most of the deduction to future years. There are two reasons for this, first, a deduction in a future year in which tax rates are higher, may be worth more. Secondly, owners of most “pass through” entities such as S Corporations and some Limited Partnerships, receive a deduction of 20% against the taxable income of the entity. If this deduction disappears or becomes limited in future years, deductions will also become more valuable.
Many tax advisors are suggesting that their S Corporation clients revoke their status and revert to C Corporations. While this may be a good strategy in many industries, it can create disastrous tax bills in the sale of an alarm company.
Changes and challenges are coming. Make sure that you are communicating with your tax advisor throughout the year. Also, make sure that they understand your business and industry. If you feel uncomfortable, give us a call.