The Infrastructure Bill: How Could It Affect Your Business’s Year-End Tax Planning?
The waiting game continues for the highly-anticipated and widely-debated Infrastructure Investment and Jobs Act (Infrastructure Bill), making it more challenging for business owners to get a jump on specific aspects of year-end tax planning. Among other things, the Infrastructure Bill includes Biden’s plan to repair and improve roads, bridges, waterways, airports, and access to broadband across the nation. Why the wait? Initially, the bone of contention in Congress was finding common ground on the addition of social policies, such as those addressing climate change, Medicare, and taxpayer relief. The main area of friction now is in deciding how best to cover the costs of these infrastructure and social policy initiatives.
Because the legislation aims to reach a number of lofty goals, it comes with a high price tag, with spending occurring over the next eight years. With the additional social policies proposed in the budget reconciliation process, the legislation’s $1.2 trillion in spending has risen to $3.5 trillion. As it stands, various tax increases would offset the costs, with repayment occurring over the next 15 years. While we had hoped to see some resolution by October 1st, Congress voted to raise the debt ceiling and buy more time for negotiations. Even though the legislation is still subject to change, there are proposed provisions that business owners should start thinking about as they begin year-end tax planning.
Corporations should plan for an increase in the federal statutory corporate tax rate.
Currently, the corporate tax rate is 21%. The Infrastructure Bill initially proposed raising that rate to 28%; however, the House of Ways & Means released an updated proposal in September, which softened the blow to corporate taxpayers. The latest proposal includes a graduated rate increase for corporations, which would phase out for corporations making more than $10 million. Under the latest proposal:
The first $400,000 of income would be taxed at 18%
Income up to $5 million would be taxed at 21%
Income over $5 million would be taxed at 26.5%
Personal services corporations would pay a flat rate of 26.5%
Multinational corporations should plan for higher tax rates and fewer deductions.
The proposed infrastructure and budget reconciliation legislation would affect corporations with multinational operations significantly. The latest legislation proposes:
Imposing a 15% minimum tax on corporate book income for multinational corporations with over $2 billion in net income
Increasing taxes on foreign fossil fuel income
Eliminating tax deductions for offshoring jobs and creating a credit for onshoring jobs
Limiting the interest deduction of domestic corporations that are members in an international financial reporting group (with average excess interest expense over interest includible over three years exceeding $12 million) to an allowable percentage of 110% of the net interest expense
Reducing the Section 250 deduction for foreign-derived intangible income (FDII) to 21.9% and global low-taxed intangible income (GILTI) to 37.5%
Reducing the exemption of the first 10% return on foreign qualified business asset investment (QBAI) to 5%
Changing the GILTI regime to a country-by-country application
Gradually increasing the base-erosion and anti-abuse tax (BEAT) rate until it reaches 15% for tax years beginning after December 31, 2025, and amending the way the base-erosion minimum tax amount is determined to take tax credits into account
Partnerships and S Corporations may see significant changes.
Business interest expenses incurred by an S corporation or partnership under Section 163(j) would apply at the partner or shareholder level. There would also be a 5-year expiration on disallowed business interest expenses incurred after December 31, 2021.
The partnership interest holding period required for gain to qualify for long-term capital gain treatment would be extended to five years. This excludes real property trades or businesses and taxpayers with an adjusted gross income (AGI) less than $400,000.
For partnership interest, Section 1061 would extend to all assets eligible for long-term capital gain rates.
A corporation that was an S corporation on May 13, 1996, and maintained that S corporation status through liquidation might be eligible to reorganize as a partnership without triggering tax.
Businesses may have better access to or more or less time than anticipated in taking advantage of certain tax credits.
The credit for employers to offset wages paid to employees during family and medical leave would end for tax years beginning after 2023.
The Work Opportunity Tax Credit would increase to 50% for the first $10,000 in wages for targeted groups through December 31, 2023.
The deduction under Section 174(a) for research or experimental expenditures would be extended through December 31, 2025.
Contact Livingston & Haynes
In times of economic or legislative uncertainty, tax planning becomes increasingly complex. L&H provides comprehensive tax planning & compliance, accounting, bookkeeping, and consulting services to privately-held businesses, healthcare providers, and nonprofits. If you would like to talk about your year-end tax planning strategy, contact me today.
by Steven J. Haynes, MBA
Steven Haynes, MBA, is an administrative partner at Livingston & Haynes. Steve’s firm, Emerging Business Partners (EBPI), became an affiliate of L&H in 2007. Steve specializes in bookkeeping, payroll, and business advisory services, including tax, M&A, and funding and equity transactions, for technology, entrepreneurial, and emerging growth firms.