If I was an ecom owner in 2021, I would 100% not sell any of my assets right now!
Instead, learn to utilize the correct tax deduction and the magic of depreciation to make sure Biden tax laws don’t affect me at all! Here’s How!
I want to summarize the often confusing state of changing tax laws, which happens frequently when we have a new president in office, especially of the opposing political party. Just like when Trump introduce the Tax Cut and Jobs Act in 2017, which was considered one of the largest tax reforms in the last 3 decades, Biden is looking to also make some sweeping changes of his own in his first 100 days in office.
The overall goal of his tax code change is to raise as much as 2.5 trillion dollar over 15 years to help fund the infrastructure plan he has for American roads, bridges, water pipes, and other public structures.
Perhaps one of the most impactful changes that President Biden is looking to implement is what is called the “Doubling” as it was revealed that the plan is to nearly double taxes on capital gain rates from 23.8% to nearly 43.4%. This would be something that has never been seen before as historically Capital Gain rates have always been lower than Ordinary income tax rates. To summarize what capital gain is, it is basically the tax you pay for selling investment assets that has increased in value over time.
Some examples of what would apply would be stocks, bonds, real estate, artwork, antiques, jewelry. Currently this is the chart for long term capital gain, which is any asset that you have held longer for a year and decided to sell.
As you can see from the chart, the top rate for those earning over 488K in 2019 is 20%, but effectively 23.8% as you are subject to another 3.8% medicare surtax when you have crossed that high income threshold. Biden’s proposed tax hike would make it so that if you make more than 1M a year in taxable income to 39.6% and you add in the 3.8% investment system on higher-income investors, you are looking at an overall tax rate of 43.4%.
Increase the federal corporate tax rate from 21% to 28%.
Big Corporations & What Biden Is Doing About It
Corporations such as Amazon, Apple, and facebook have historically got away from paying little or no tax but utilizing every trick in the book- but under Biden’s new proposed plan, he would eliminate this loophole by imposing a 15% tax on the profits they report to investors. It would be limited to companies earning 2 billions or more per year.This would be called a minimum tax.
“Companies aren’t going to be able to hide their income in places like the Cayman Islands and Bermuda in tax havens,” Mr. Biden said on Wednesday during remarks at the White House. He defended the tax increases as necessary to pay for infrastructure investments that America needs and to help reduce the federal deficit over the long term.
But most will need the approval of Congress, including increasing the corporate tax rate. Given Democrats’ narrow majorities in the Senate and the House, that proposed rate could drop. Already, Senator Joe Manchin III of West Virginia, a crucial swing vote, has said he would prefer a 25 percent corporate rate.
Under current law, companies with headquarters in low-tax countries can move some of their profits earned by subsidiaries in the United States and send them back to headquarters as payments for things like the use of intellectual property, then deduct those payments from their American income taxes. The Biden plan would disallow those deductions for companies based in low-tax countries.
Under current law, capital gains taxes are only applied to inherited assets such as land, buildings and stocks when they are sold, and then they are taxed according to the “stepped-up basis” — the value at the time of the decedent’s death, not the value at which the decedent originally acquired the property.
A summary of the president’s plan says he wants to eliminate a “loophole that allows the wealthiest Americans to entirely escape tax on their wealth by passing it down to heirs,” exacerbating income inequality.
“The President’s plan will close this loophole, ending the practice of ‘stepping-up’ the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and making sure the gains are taxed if the property is not donated to charity,” the summary says.
Individual Tax Rate
Another change is that the Individual tax rate increase from 37% to 39.6%
With all these proposed changes, there are several steps that ecom owners can take to protect themselves which I will list here.
- With the corporate tax rate hike to 28%, it may be more advantageous for ecom owners to stay with an LLC structure as long as Biden is shifting tax benefits from corporations back to individuals.
- No matter what happens, learning how to take advantage of deductions and credit will still be the utmost important to ensure you maximize your tax savings.
- With the capital tax rate change, if you are making more than 1M a year, it may be beneficial for you to not sell, and keep holding. Also the “Like-Kind Exchange” method may be even more useful in this area of capital gain rate increase.
- Foreign companies become even more attractive than having a US company.
- There are real, legitimate reasons why a corporation should not be required to pay corporate income taxes in a particular year, such as deductions for accelerated depreciation, R&D tax credits, and net operating loss (NOL) carryforwards.
Check out some of the news articles mentioned below: