Ask Leyla

What are some of the key components of the Biden Tax Plan?

Per the Tax Foundation, some of the key components of this plan include the following:

  • Imposes a 12.4 percent Social Security payroll tax on income earned above $400,000, evenly split between employers and employees. This would create a "donut hole" in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed.
  • Reverts the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law to the pre-Tax Cuts and Jobs Act level of 39.6 percent.
  • Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million and eliminates step-up in basis for capital gains taxation.
  • Caps the tax benefit of itemized deductions to 28 percent of value for those earning more than $400,000, which means that taxpayers earning above that income threshold with tax rates higher than 28 percent would face limited itemized deductions.
  • Phases out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000.
  • Expands the Earned Income Tax Credit (EITC) for childless workers aged 65+; provides renewable-energy-related tax credits to individuals.
  • Expands the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and increases the maximum reimbursement rate from 35 percent to 50 percent.
  • Expands the estate and gift tax by restoring the rate and exemption to 2009 levels.

Biden's plan also includes the following proposed business tax changes:

  • Increases the corporate income tax rate from 21 percent to 28 percent.
  • Creates a minimum tax on corporations with book profits of $100 million or higher. The minimum tax is structured as an alternative minimum tax — corporations will pay the greater of their regular corporate income tax or the 15 percent minimum tax while still allowing for net operating loss (NOL) and foreign tax credits.
  • Doubles the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms from 10.5 percent to 21 percent.
  • Offers tax credits to small business for adopting workplace retirement savings plans.
  • Expands several renewable-energy-related tax credits, including tax credits for carbon capture, use, and storage as well as credits for residential energy efficiency, and a restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit. The Biden plan would also end tax subsidies for fossil fuels.

I heard that the IRS plans to disallow the deduction for expenses incurred in 2020 which were paid and funded through a PPP loan. Is this true?

Yes, it is true. The IRS has issued Revenue Ruling 2020-27.

In a nutshell, the IRS holds the following:

A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.

The AICPA and many other Groups are urging Congress to fix this by allowing for a tax deduction related to the payment of allowable PPP expenses. To date, however, this seems to be the law. Non-deductible.

If I incorporate in California during the last 15 days of the year, am I required to pay the $800 minimum tax and file a tax return for that short period year?

Taxpayers must be careful if incorporating in CA close to the end of the year. California allows the first year to be free of the minimum tax and also would not be required to file a tax return for that short period IF they do no business in that short taxable year. The problem is that if the CA Secretary of State ("SOS")receives your filing documents prior to December 17, the date of receipt is the date which is used to determined whether or not you get the 1st year exemption from paying the $800 and filing a return.

If you are planning to incorporate close to year end without conducting business in that short period, you should indicate on your application that you want to treat the filings as filed at a future date. The SOS has created a new online portal for filing the articles of incorporation for general stock corporations that specifically provides a box for companies to check to specify a future filing date, for example, January 1 of the following year.

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