To foot the bill of President Joe Biden’s new $2 trillion infrastructure plan, the administration is weighing corporate tax provisions, which will likely soon be followed by a new tax plan.
This has tax and estate planning lawyers reading the fine print to help clients avoid litigation with the IRS.
Stanley I. Langbein, a professor at the University of Miami School of Law who focuses on tax law, said the takeaway from these potential tax changes is that it shifts the burden to the corporate sector. That is a reversal of what has been happening over the last several decades.
“If your priority is avoiding litigation, the way to do that is to comply and not challenge the rules, but that could be expensive,” Langbein said.
“But the main thing you would do in a corporate setting if you expect the rates to go up is to accelerate income, into the years with the lower rates,” he explained. “The Internal Revenue Service doesn’t like to challenge things, lose and have a ruling with other taxpayers taking advantage of it.”
Biden unveiled the American Jobs Plan, which is his infrastructure package, in which he called for several actions, such as spending billions of dollars to improve both crumbling transportation infrastructure and drinking water infrastructure, along with allocating money to care for disabled and elderly Americans.
Attorneys say corporations are first in line to pay for these changes, as Biden seeks to raise the corporate tax rate while eliminating tax breaks for some industries and cracking down on companies who earn offshore profits.
For instance, Biden’s proposal would raise the domestic corporate tax rate to 28% from 21%, while for multinational corporations, the global minimum tax rate would increase to 21% from 13%.
Focus on the Wealthy
Now, Josh Rosenberg, a partner at Kelley Kronenberg in its Brickell office, predicted that consistently with imposing higher tax rates on corporations under the infrastructure plan, Biden will focus on high-income earners in his second plan to support the capital expenditures required under the $2 trillion infrastructure plan.
“The big thing is, there are still a lot of unknowns,” Rosenberg said. “There are two major ways they are discussing changing, the estate tax or an inheritance tax. One way is the step-up in basis and the second way is in dealing with the actual state unified tax level limit.”
Rosenberg said that the intended changes to the estate tax could cover a larger percentage of the population from a planning standpoint. He said Biden’s plan would reduce the $11.5 million state unified tax level limit to where it was in 2009, which was $3.5 million.
Meanwhile, Biden wants to increase the applicable tax rate on inherited property, with some Democratic senators calling for a rate of 60% of every dollar over the $3.5 million exclusion, or $7 million for married couples.
Rosenberg also pointed to Biden’s aim to reform the step-up in basis, which would change the administration of capital gains at death.
Beneficiaries are not taxed on the appreciation that took place before gaining control of assets, such as property or investment, but Democratic senators are still pushing to eliminate the step-up in basis. And while the IRS may be selective, they will closely follow these potential updates in tax returns.
“That would be a huge change because we never had a real inheritance tax on capital gains,” Rosenberg said. “It would have a large impact on wealthy families.”