Tax Supervisor, Ryan DiPeri offers tax planning insight in NJBIZ article, The Big Question for 2021-Political change complicates the planning process for businesses, individuals and families

December 16, 2020

 

Ryan DiPeri was interviewed by NJBIZ reporter following the November 3rd election, about tax changes that may ensue with a new administration. His answers were featured in the November 30 edition of NJBIZ. The article can be accessed by NJBIZ account holders only. Below is the full text of the questions and answers contained in his interview:

Question: What sort of small businesses and corporate tax changes will we see with a change of administration?  

With the controlling parties of the House and the Senate currently split, and the Senate not yet fully determined, there is a good possibility that any changes would need to go through reconciliation. We saw this with the Tax Cuts and Jobs Act (TCJA) during President Trump’s administration. Based on what Joe Biden proposed during his campaign, we may see the corporate tax rate increase from 21% to 28%. There is also focus on increasing investment in domestic manufacturing by offering a 10% tax credit.

 

Question: Should small business owners try to shift income recognition into 2020 tax year, or defer to 2021?

Normally it is recommended to accelerate deductions and defer income.  With everything that has one on in 2020 (the election, COVID, etc.) it is difficult to predict what 2021 will look like. If a business has current losses in 2020, and expects more income in 2021, it may be beneficial to pull the income into 2020 to use some or all of the loss to offset the income.  During COVID, the CARES Act suspended the limitation on losses individuals were allowed to claim through 2020 (as many small businesses are pass-through entities or single-member LLCs).

 

Question: Assuming they have the flexibility and it makes economic sense, should they make capital expenditures in the 2020 tax year, or defer to 2021? Why or why not?

Currently, there is 100% bonus depreciation through 2022.  Starting in 2023 bonus depreciation begins to phase out, with 0% available beginning in 2027.  Bonus depreciation, unlike Section 179 expensing, does not limit the loss a business can make.  If a capital asset qualifies for bonus depreciation, and a business has the ability to make the purchase, it may make sense to purchase the asset in 2020 and generate a loss.

 

Question: Are corporate and personal tax rates likely to go up in 2021? Why or why not?

Joe Biden has indicated in his proposal that he would like to increase the corporate tax rate to 28% (up from 21%) and raise the highest individual rate from 37% to 39.6%.  If any changes were to occur, the House and Senate would have to agree to the changes (as neither party currently controls both).  With COVID hitting individuals and businesses hard in 2020, it will take some time for things to return to a sense of normalcy.  An increase in tax rates is most likely the way to assist in recovering the funds distributed in the different stimulus packages, and also provide funds if an additional stimulus package were to be approved.

 

Question: Based on his campaign, how friendly to small- and medium-sized businesses do you think (President Trump or Joe Biden, whichever one wins) will be? 

One of the proposals made by Joe Biden would be to phase out the Qualified Business Income (QBI) deduction for individuals above $400,000 of taxable income.  Small business owners relied on the QBI deduction for their pass-through businesses to help lower their taxable income to offset the higher individual rates compared to the corporate tax rate (which fell to 21%).

 

President Trump’s changes to SALT deductions are likely to stick if he wins re-election. If Biden wins, do you think that may change (again, we’ll talk after the election, so the question will be based on who controls the White House and Congress) 

Joe Biden has indicated that he would like to restore the limitation on itemized deductions for individuals above $400,000 of Adjusted Gross Income (AGI).  In many high cost of living areas (New York, New Jersey, California, etc.), the SALT deduction made up much of an individuals itemized deductions prior to the TCJA limitations.  If a phase out were to apply, there is a possibility that the SALT limitation may be increased or removed in order to allow for the limitation on itemized deductions for individuals above $400,000 of AGI.  By not doing so, the itemized deduction limitation could apply against charitable contributions made by individuals.  This limitation could affect the decision on how individuals donate to charities.