Year-End Tax Planning for New Tax Laws: Business Taxes

This is the season for year-end tax planning. Updating your tax plan and overall financial planning strategy for 2022 is even more important because of potential tax changes on the horizon. President Biden and the House Ways & Means Committee are pushing ahead on new tax laws that will take effect by next year. This means there may be changes to your own plan that need to be made before any new rules and regulations are enacted.

In our previous article, we focused on significant tax changes affecting personal income taxes. Today, we want to focus on business taxes. What are the new tax laws within the American Families Plan (part of Biden’s overall Build Back Better campaign) that could have an impact on your business plan in 2022 and beyond? Here are some of the proposals you need to know:

Corporate Tax Rates

The new tax plan proposes a corporate tax rate increase from 21% to 26.5% for corporations with incomes of $5 million or more. Meanwhile, the rate would be reduced to 18% for corporations with incomes less than $400,000. Corporations that are taxed as personal service corporations will not be eligible for the graduated rates. Instead, they would pay a flat 26.5% rate.

Here’s how the new corporate tax rates break down:

• $0 to $399,999 – 18%
• $400,000 to $5 million – 21%
• $5 million or more – 26.5%

Foreign Income Tax Rates

For U.S. companies with foreign income, the rate would be raised from 10.5% to 16.5%. The President has also proposed a global minimum tax rate of 21% on all foreign income, along with several other changes to the international tax system.

Executive Compensation Deduction

The new plan proposes moving up the effective date of the amendment to Section 162(m) of the American Rescue Plan Act of 2021. The date would be moved to affect tax years following December 31, 2021 compared to the original date of December 21, 2026. This tax rule affects executive compensation deductions for the top eight highest-paid officers other than the principal executive and principal financial officers.

Net Investment Income Tax (NIIT)

Currently, profits from S corporations aren’t subject to employment taxes or the Net Investment Income Tax (NIIT). The proposed tax changes could change this exemption for certain high-income S corporation owners. An S corporation owner’s Modified Adjusted Gross Income (MAGI) couldn’t exceed an applicable threshold. If so, the “Specified Net Income” would be subject to the 3.8% NIIT surtax. The applicable thresholds would be $400,000 for single filers and $500,000 for joint filers.

Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit would be increased to 50% of the first $10,000 in wages paid to an employee during their first or second year of employment. This only applies if the employee falls within one of the WOTC targeted groups, with the exception of summer youth employees.

The tax landscape is always changing, and there will most certainly be some changes ahead with the current administration. This is why you must review your tax plan each year and adjust your financial plan accordingly. This year, it is critically important if one or more of these proposed tax changes could affect you or your business. Don’t wait to make changes until it’s too late.

For help with all your business planning, tax planning and financial planning needs, contact Illumination Wealth today to schedule a no-obligation introductory consultation with one of our top advisors.