We’re roughly a month from Election Day, and I think it’s safe to say many Americans have strong opinions about who should be our President for the next four years. I also think it’s safe to say taxes are not the top campaign issue for all voters. That being said, tax policy is one issue that affects each and every American. After all, “in this world nothing can be said to be certain, except death and taxes.”[1]
With that in mind, let’s examine some of the major tax changes proposed by Democratic presidential nominee Joe Biden.
Business Taxes
1. Increase the Corporate Income Tax Rate to 28%
P.L. 115-97, commonly referred to as the Tax Cuts and Jobs Act (TCJA), decreased the corporate income tax rate from 35% to 21%.[2] Biden’s tax proposal would halve that decrease and impose a 28% corporate income tax rate.
On its face, Biden’s proposal retains a 20% decrease in pre-TCJA corporate income tax rates. However, the TCJA enacted a few provisions meant to increase the amount of corporate income subject to tax, such as the limitation on deductibility of interest under Section 163(j) of the Code.[3] Thus, the overall decrease in corporate income taxes under the Biden tax proposal may be less than 20% of pre-TCJA corporate income taxes.
2. Introduce a Minimum Tax on Corporate Book Income
Biden’s tax proposal would impose a minimum corporate income tax equal to 15% of the book income (as opposed to the taxable income) of any corporation with at least $100 million of book income. This would operate as a replacement of the former alternative minimum tax on corporations, which was repealed by the TCJA. The book income tax would not be imposed in addition to a corporation’s regular income tax; rather, the corporation would pay the greater of its regular income tax liability (at the proposed 28% rate) or 15% of its book income.
Book income is often higher than taxable income for a myriad of reasons, but some of the main drivers are net operating losses (NOLs), depreciation deductions, and tax credits. Biden’s book income tax proposal would allow corporations to deduct NOLs and foreign tax credits, but it would not allow accelerated tax depreciation or other business tax credits.
This proposal could have a significant impact on capital-intensive corporations that take advantage of bonus depreciation under Section 168(k) of the Code, which currently allows corporations to deduct 100% of the cost of certain property (e.g., computer software, vehicles, equipment, and other property with a depreciation recovery period of 20 years or less).[4] In fact, it might make sense for such corporations to elect out of bonus depreciation in some cases.[5]
3. Increase the GILTI Tax Rate to 21%
Under current law, Global Intangible Low-Taxed Income (GILTI) is subject to an effective tax rate of 10.5% (half the corporate income tax rate). Biden’s tax proposal would double the effective tax rate on GILTI to 21%.
While a detailed discussion of GILTI is beyond the scope of this article, a U.S. shareholder owning at least 10% of a controlled foreign corporation (CFC) is required to include in income each year its share of the CFC’s GILTI.[6] GILTI consists of income earned by a CFC in respect of certain intangible assets, such as patents, trademarks, and copyrights.[7] Importantly, GILTI is included in a 10% U.S. shareholder’s income each year even if the CFC does not distribute such income in the form of a dividend.[8]
The obvious group affected by Biden’s tax proposal is multinational C corporations, but the GILTI rules apply to any 10% U.S. shareholder, including individuals, partnerships (and other entities treated as partnerships for federal income tax purposes), and S corporations.
Individual Tax Changes
1. Restore Pre-TCJA Tax Rates for Individuals with Income in Excess of $400,000
The TCJA reduced individual tax rates through 2025 and instituted seven tax brackets at rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37% (previously, there were seven tax brackets with rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%). Beginning in 2026, the pre-TCJA tax rates will be restored, although President Trump has expressed a desire to make the TCJA individual tax rate cuts permanent.
Biden has proposed to immediately restore the pre-TCJA income tax rates for income in excess of $400,000, including an increase of the top marginal tax rate from 37% to 39.6%. What is not clear is whether the $400,000 threshold for increased tax rates applies equally to single taxpayers, heads of household, married taxpayers filing jointly, and married taxpayers filing separately.[9] If so, there would be a significant marriage penalty for two-income households under Biden’s proposal.
2. Impose Limitations on Itemized Deductions
Under current law, taxpayers can either take a standard deduction (for 2020, $12,400 for single taxpayers and $24,800 for married taxpayers filing jointly) or itemize their deductions.[10] Common itemized deductions are mortgage interest, charitable donations, state and local taxes (capped at $10,000), and casualty and theft losses.[11]
The value of a deduction generally depends on a taxpayer’s marginal income tax rate. For example, if an individual is in the top current income tax bracket of 37%, a $1 deduction will reduce the individual’s tax liability by 37 cents.
Biden’s tax proposal would cap the benefit of an itemized deduction at 28%. Thus, a $1 deduction would reduce an individual’s tax liability by a maximum of 28 cents (even if the individual is in a higher marginal income tax bracket). Additionally, Biden’s tax proposal would reinstitute the “Pease limitation” on individuals earning more than $400,000. The Pease limitation, which is currently suspended through 2025, generally reduces a taxpayer’s itemized deductions by 3% of the taxpayer’s adjusted gross income exceeding a threshold.[12]
3. Increase Capital Gains Rates for High Earners
Under current law, long-term capital gains (i.e., gains on capital assets, such as stock, held for more than one year) and qualified dividend income are generally taxed at a maximum rate of 20% (plus the 3.8% net investment income tax).[13] Biden’s tax proposal would replace these rates with ordinary income rates for taxpayers earning more than $1,000,000. Thus, long-term capital gains and qualified dividend income for these high-earning taxpayers would be taxed at 39.6% (presumably with the 3.8% net investment income tax tacked on).
One likely effect of such an increased tax rate would be additional interest in qualified small business stock (QSBS). A noncorporate taxpayer can exclude from taxable income all or a portion of the gain from the sale of QSBS held for more than 5 years.[14] In a nutshell, QSBS is stock in a C corporation issued directly to the taxpayer (i.e., not acquired by purchasing the stock from a third party) at a time when the gross assets of the corporation have never exceeded $50,000,000 (determined immediately after the issuance of the stock).[15] To qualify as QSBS, the corporation must use at least 80% of its assets in the active conduct of one or more “qualified trades or businesses.”[16]
4. Eliminate Step-Up in Basis at Death for Capital Gains
Another likely effect of increasing capital gains rates for high earners would be to encourage such high earners to hold onto their capital assets until death. This is because, under current law, the income tax basis in each of a decedent’s assets is “stepped-up” to fair market value.[17] However, Biden’s tax proposal also eliminates the basis step-up at death for capital assets. It is not clear at this time whether Biden would also propose taxing built-in capital gains at death, but Biden’s campaign has suggested he would.
To see how this works, let’s use an example. Assume our taxpayer, John, inherits stock in Apple worth $1,500,000 from his grandmother, who purchased the stock for $100,000 in 1981. Under current law, John would take a $1,500,000 basis in the Apple stock. If he sold the stock for $1,500,000 the next day, he would owe $0 in federal income taxes on such sale.
Under Biden’s tax proposal, John would take a $100,000 basis in the Apple stock. If he sells it for $1,500,000 the next day, he has $1,400,000 in income.[18] Unfortunately for John, he has also crossed the $1,000,000 income threshold for increased long-term capital gains tax rates on this income.
If Biden’s tax proposal also includes a tax on unrealized built-in gain at death, John has taxable income of $1,400,000 whether or not he sells the Apple stock. How will he pay for it? Apple stock is publicly traded, so he could sell some of the stock to pay the tax. But what if, instead of stock in Apple, he inherits stock in the family business or the deed to the family farm? These are not liquid assets, and even if they were the grandson may not want to sell them. For this reason, it would be important to understand what, if any, exclusions from immediate taxation would be allowed under Biden’s proposal.
5. Increase Social Security Taxes on High Earners
Under current law, employee wages are subject to a 12.4% Social Security (OASDI) tax, subject to a cap of $137,700 in wages for 2020 (for a maximum tax of $17,074.80).[19] Employees and their employers each pay half of this tax.[20]
Biden’s tax proposal would keep the $137,000 cap (adjusted each year for inflation) but would reimpose the OASDI tax on wages in excess of $400,000. Thus, wages would be subject to OASDI tax up to $137,700 and above $400,000 (leaving $262,300 in wages not subject to OASDI tax). If the $400,000 threshold is not indexed for inflation (as is expected), the $262,300 “donut hole” would get smaller each year as inflation increases the $137,700 cap.
6. Phase Out Pass-Through Income Deduction
The TCJA enacted a deduction for “qualified business income” (QBI) derived from sole proprietorships, S corporations, partnerships, and certain trusts.[21] The QBI rules are complicated and beyond the scope of this article, but in a nutshell they allow noncorporate taxpayers to deduct up to 20% of their QBI from “qualified trades or businesses.”[22] The availability of the QBI deduction depends on, among other variables, the type of business and the taxpayer’s total income for the year.[23] Biden’s tax proposal would phase out the QBI deduction for income over $400,000.
The likelihood of Biden’s tax proposals being enacted is unclear at this point. While Biden is leading in the polls, we will not know until November 3rd (or the days or weeks thereafter) whether he will be the next President of the United States. Even if he is, Democrats would almost certainly need to take control of the Senate for any of these proposals to become law. For this reason, tax practitioners (along with the rest of the United States) will be intently watching the results of the election. Get your popcorn ready!
[1] Benjamin Franklin, Ltr. to Jean Baptiste-Leroy, Nov. 13, 1789.
[2] More specifically, the TCJA replaced the graduated income tax rates for corporations (with a maximum rate of 35% on taxable income in excess of $10,000,000) with a flat 21% rate.
[3] Section 163(j) of the Code limits business interest deductions of a taxpayer to the sum of (i) the business interest income of such taxpayer, (ii) 30% of the adjusted taxable income of such taxpayer for such taxable year, and (iii) the floor plan financing interest of such taxpayer for such taxable year.
[4] I.R.C. § 168(k)(2). Under current law, 100% bonus depreciation will be phased out 20% per year beginning with property placed in service in 2023. Id. § 168(k)(6).
[5] Id. § 168(k)(7).
[6] Id. § 951A(a).
[7] Id. § 951A(b).
[8] Id.
[9] As discussed below, several of Biden’s tax proposals hinge on a $400,000 income threshold. The application of the $400,000 threshold to taxpayers with different filing statuses is unclear with respect to each of these proposals.
[10] Note, however, that “miscellaneous itemized deductions” cannot be deducted until 2026. Id. § 67(g). These include deductions for home office expenses, the cost of professional periodicals and work uniforms, certain unreimbursed employee expenses, and investment expenses.
[11] Id. § 67(b). The reduction was capped at 80% of a taxpayer’s otherwise allowable itemized deductions for the year. Id.
[12] Id. § 68.
[13] Id. § 1(h). There are exceptions, such as a 28% long-term capital gains rate on income from collectibles (e.g., art, stamps, coins, etc.). Id.
[14] Id. § 1202(a). The exclusion was originally 50%, was increased to 75% for stock acquired from February 18, 2009, through September 27, 2010, and was increased to 100% for stock acquired after September 27, 2010. Id. The exclusion is limited to the greater of (i) 10 times the total basis of the QSBS sold in a given year, and (ii) the net of $10,000,000 minus any prior amount of QSBS gain excluded by the taxpayer with respect to the corporation. Id. § 1202(b).
[15] Id. § 1202(d).
[16] Id. § 1202(e). A “qualified trade or business” is any business except certain specifically enumerated businesses. Corporations ineligible to issue QSBS include (among others) those in the business of banking, insurance, leasing, investing, farming, mining, health, law, engineering, architecture, accounting, hotel and restaurant management, and any other business the principal asset of which is the reputation or skill of its employees. Id. § 1202(e)(3).
[17] Id. § 1014(a).
[18] John’s income on the sale would qualify as long-term capital gain. Id. § 1223(2), (9). Note that under current law, the result in this example would apply if John’s grandmother gifted the stock to John before her death because the step-up in basis does not apply to property gifted prior to death. Id. § 1015(a).
[19] Id. §§ 3101, 3111.
[20] Id.
[21] Id. § 199A. The QBI deduction will expire for tax years beginning after December 31, 2025. Id. § 199A(i).
[22] Id. The term “qualified trade or business” is defined by reference to the QSBS rules (discussed above), with certain exceptions. For instance, engineering and architecture businesses are “qualified” for purposes of the QBI rules but not the QSBS rues. Id. § 199A(d)(2)(A).
[23] Id.
