The long-term impact of the tax proposals in the Treasury’s recently released Green Paper would permeate much of the economy, revolutionize wealth transfers, transform taxation in partnerships, and make big companies winners and small companies losers.
“Nothing will happen for a while,” said Tom Wheelwright, CEO of accounting firm WealthAbility. “At the moment there are just a number of proposals in the budget for the fiscal year beginning October 1, 2021.”
Of course, many of the proposals in the Green Paper that reflect the Biden administration’s plan for the next fiscal year are politically motivated, according to Wheelwright: and a proposal to extend Pre-K to younger children. And then there are the energy proposals, which are actually aimed at eliminating oil and gas production in the US. “
“By subtracting intangible drilling costs and percent depletion, you can effectively write off 100% of the investment in the first and second years of drilling,” he said. “Other expenses would likely be on devices that are subject to a bonus write-off that they don’t take away. On the other hand, they add credit, extend the solar credit back to 30% and expand the credit for charging stations. Interestingly, they even have a loan for existing nuclear power plants. It could be the first time that nuclear energy is classified as clean energy because it has the least impact on the environment. “
According to Wheelwright, there are some subtle and some less subtle provisions that put small businesses at a disadvantage: [Net Investment Income Tax] regardless of whether they are distributed or not, in contrast to C companies, which only pay on distributed profits. “
There are also differences in how property transfers are handled, according to Wheelwright. “The transfer of ownership to a partnership or trust other than a grantor trust would be subject to capital gains tax. However, a transfer to a corporation according to Section 351 of the Code would still be tax-free. This is a winner for big businesses and a loser for small businesses. It would create a large industrial economy – we will do more business as C companies and less than S companies. “
While the proposed changes could benefit large businesses, there are still provisions designed to create wealth by promoting small businesses, according to Elizabeth Sevilla, partner at Top 100 Firm Seiler LLP. “For example, the provision of qualified small business portfolios [Code Section 1202] is an incentive to create wealth by starting new businesses and creating jobs, ”she said. “This takes into account the fact that the majority of employers are small business owners.”
The proposals, which affect high net worth individuals, would constitute a full employment law for fiduciary and real estate professionals, Seville believes. “There’s a trifecta of aging baby boomers facing mortality, the value of most assets – businesses, houses, real estate, and stocks – has risen, and tax law changes are imminent,” she said. “You need to figure out how best to configure your estate plans.”
But it’s important that the tax tail doesn’t wag the planning dog, Sevilla said. “In comprehensive planning, it is important to consider the goals and desires as well as the vision of the trustor who created the wealth, how he would like to give away or leave an inheritance,” she said, more of an impetus, planning sooner than later, but if you create a plan based solely on proposed tax law changes, there is a chance the buyer will feel remorse if the proposed changes are not implemented. “
The US Treasury building in Washington, DC
Stefani Reynolds / Bloomberg
‘A wish list’
“The Green Paper is primarily a wish list,” said Ed Renn, senior equity partner at Withers Worldwide. “Most of the proposals came from positions he has held since 2019 in the election campaign. Nobody was surprised by the income tax increase or the corporate increase that changes offshoring income. “
“Section 1031 exchanges are limited to $ 500,000 per year. When you have a series of transactions, you have a lot of profits. That would effectively limit the section 1031 industry because you know you can’t put off profits greater than half a million, ”he pointed out.
“The proposal would effectively eliminate the economics of carried interest because if you pay the normal income rate you will not get a tax preference. When capital gains and dividends are taxed at 39.6% there is no longer any economic incentive to bear, but just in case the rates are lowered in the future the proposal makes it a tax priority again in the affirmative, ”he continued. “So not only is it economically impossible to get the benefit for more than $ 1 million, but it’s also impossible to restore the benefit simply by lowering the rates. You would have to change the code in the affirmative to bring it back. “
Renn said there were some surprises about what was not included in the proposals: “Biden’s campaign proposed reducing the inheritance tax exemption to $ 3.5 million. That was supposed to be in the American Family Plan, but it came out at the last minute. In addition, an inheritance tax hike has been omitted and the SALT cap of US $ 10,000 has been left alone. “
“There would be no increase in the base as we know it,” added Renn. “If you give a valued fortune to the children or to a trust or dying who holds the asset, these will be appreciation events. Transfers of cherished property to partners would also be recognition events. If I have a gas station and you are a mechanic and bring in and run the garage, then placing the property in a partnership would generate capital gains. I don’t think they wanted this consistency, but this concept would revolutionize the taxation of partnerships. “
Glenn DiBenedetto, director of tax planning at New England Investment & Retirement Group, believes the peak payout ratio proposed for those earning more than $ 1 million will hit many who would otherwise not be considered wealthy. “If a business owner wanted to sell their business, founded decades ago, and reap the benefits of a lifetime of work, they would cross the $ 1 million mark in the year they were sold and effectively pay double the tax.” said.
DiBenedetto proposed a spin-off to help those looking to capitalize on a one-off transaction like the sale of a closely run business. “Biden suggested that anyone making less than $ 400,000 a year would not be affected. But you could make that amount and have one of those events push you over the threshold, ”he said.
“For planning purposes, you need to look at the Green Paper’s suggestions and decide where your customer will go,” said Roger Harris, president of Padgett Business Services. “Increasing grassroots elimination is one of the things that is getting more complicated and could be problematic for many of the people who have benefited from it in the past. It was a great way to clean up a messy story. For example, if a property has been transferred within a family three times over time while moving from one family member to another, you can assign the value from a specific date on the tiered basis. You can clean up records where nobody knows the value. “
Politicians will play an important role in shaping any legislation, Harris suggested: “Senator Joe Manchin (D-West Virginia) has said he will not kill the filibuster, making the proposals difficult to pass. And he’s not going to support the suffrage bill, which is likely to be part of the infrastructure deal, so there has to be something that at least ten Republicans in the Senate support. “