IRA Financial’s Adam Bergman Esq. discusses a possible increase to 28% for the corporate tax rate, which is part of President Biden’s proposed infrastructure plan.
Coming off of last week’s episode talking about the possible estate tax, here’s Adam Bergman talking about a possible corporate tax rate hike. It’s a given with any new president that there will be changes coming to taxes. Of course, this year is a little unique, in that one party (the Dems) controls the presidency, House and Senate. This means changes are more likely to occur, although, not always. Here’s Mr. Bergman’s take on the proposed corporate tax and his thoughts about if it will get enacted.
Corporate Tax Rate Hike
As part of President Biden’s $2.3 trillion infrastructure plan, there’s a provision which would increase the corporate tax rate to 28%. This is a 7% increase to the current rate. It will also seek to increase taxes on a a company’s foreign earnings. Supposedly, the tax increase will pay for the entire plan over the course of 15 years. Infrastructure is a major concern in this country. The proposed plan would look to improve on the nation’s roads, bridges, tunnels, and broadband access, among other things.
Of course, there are two sides to every proposal. The usual back and forth is expected to last for a few months, with the hopes of a deal being reached by the Summer of 2021. Any changes would probably not go into affect until next year. Obviously, this proposal would only affect corporations, and not individual taxpayers and those rates.
Mr. Bergman explains the different types of businesses in the podcast, and how they are treated. These include C and S Corporations and limited liability companies (LLC). Some get treated on the business side, while other on the individual, while another is taxed at both levels!
Choosing the Right Entity for Your Business
If you own a corporation, you need to choose between a C Corp and an S Corp. Depending on what you choose, your taxes will vary. When former-President Trump lowered the corporate tax to 21%, many businesses changed to a C Corp, since the 21% tax was well below many owners’ individual tax rate (30-35%). It made financial sense to do so. But, what are your options if the corporate tax rate climbs back to 28% (although that may only be 25% if this legislation gets passed)?
An S Corp only has one level of tax. It’s a pass-through entity, which means there is no tax on the corporate level. The income generated gets passed on to the shareholders, who report that on their individual tax returns. On the other hand, C Corps are taxed on both the corporate level and the individual level. If you don’t need to divvy out funds to the shareholders (or yourself), it may make sense to stay with a C Corp. Further, if you use Last-In, First-Out (LIFO) and switch to an S Corp, you would owe tax on the benefits arising from that strategy. Lastly, if you have net operating losses, or NOLs, you cannot offset earnings with an S Corp.
Deciding on which type of business to go with will vary by individual. You would need to weigh the pros and cons and how much you will be taxed at either the corporate or individual level (or both). Every situation is unique, so one would need to consult a financial advisor to decide which is best.
Tax attorneys, like Mr. Bergman, know all the details of how to best deal with taxes. They system can be used for you, if you know what you are doing. Keep in mind, the IRS is watching and will get you if you are not paying your fair share. In the podcast, Adam discusses all the possible ramification of the proposed bill, so be sure to listen to the whole thing!
As always, you can find us on our SoundCloud page, iTunes, YouTube and other streaming services. Just search IRA Financial or Adam Talks! Thanks for listening and be sure to check us out next time, for another episode!