Effects of the US Corporate Tax Rate Increase on Businesses

President Joe Biden’s tax hikes proposals receive both favorable and disapproving views from various groups. Some believe that it can efficiently improve revenues by pushing wealthy Americans and big corporations to pay their fair share of taxes. Others, however, are skeptical of its possible impacts on cash flow and global competitiveness. As a small business owner, should you be worried about the possible effects of the proposed US corporate tax rate increase?

A quick overview of the proposed US corporate tax increase

A few months after his inauguration, US President Joe Biden has proposed a series of tax hikes that aim to support job creation, infrastructure development, and better support for middle and working-class families which will become possible by raising the taxes of high-income earners and rich corporations. Meanwhile, individuals who earn less than $400,000 a year will not experience any tax adjustments.

Biden’s administration believes that this is essential in creating a “fair” economy for everyone, especially for ordinary Americans.

Two of the proposed plans, which can take effect as early as January 2022, are 1) the American Jobs Plan and 2) the American Family Plan.

American Jobs Plan

• This plan aims to increase the income taxes of large corporations to help fund infrastructure improvement projects.
• Under this, the 21% corporate tax rate will increase to 28%.
• A 15% minimum tax will also be imposed to ensure big companies are paying their taxes properly, regardless of the number of tax credits and deductions they apply for.
• Moreover, this plan also looks at trimming down tax preferences for pass-through businesses such as sole proprietorships, partnerships, limited liability companies, or S-corporations which was enacted during Trump’s administration.

American Families Plan

• Wealthy individuals who earn more than $400,000 per year will experience higher income taxes and capital gains rate under this plan. 
• This is intended to help fund education, child care, nutrition, and other family-related programs. 
• Once enacted, the top individual federal income tax rate will rise to 39.6% from 37%. 
• In addition, individuals who earn more than $1 million will be required to pay a tax of 43.4% on capital gains.

As of this writing, negotiations between lawmakers are still ongoing. Note that any of the pointers discussed here are not yet finalized and can be revised or eliminated anytime.

Possible effects of Biden tax hikes on small businesses

The proposed US corporate tax increase has received divided opinions ever since President Biden announced it to the public.

In a recently published article, the U.S Chamber of Commerce emphasized the negative impact of the proposal on roughly one million small businesses’ investment and growth plans, including its hiring and job creation efforts.

The business organization further added that small businesses organized as C Corporations would see a significant increase in their tax bills, as opposed to Biden’s announcement that only the rich will be affected.

Similarly, pass-through entities — or the small businesses that pay their income taxes based on individual tax rates — are also foreseen to be hit if the proposed revocation of the 20% tax deduction will continue.

However, U.S Treasury Secretary Janet Yellen reminded the public that the Biden administration will not propose policies that will harm small businesses or Americans. Instead, the additional taxes that will be imposed on large corporations will even benefit them by shoring up the competitiveness and productivity of the American economy.

This is supported by an article published by the Center on Budget and Policy Priorities (CBPP), a progressive American think tank. According to CBPP, the 2017 tax cuts under the Trump administration provided few benefits that are only felt by corporations and households “at the top”. As a result, the disproportionate benefits of the tax cuts only widen the gap between the rich and the poor.

By reversing some critical areas of the 2017 tax cut, the think tank believes that it would make the tax code more progressive and help generate revenues to finance essential investments — therefore, building a much-needed impartial recovery for small businesses and Americans who have been hit the most by the COVID-19 pandemic.

Need help with your taxes? Let us connect you with our tax accountants. Contact us today to learn the services that best suit your business. You can also download our free outsourcing guide, “Outsourcing: How to Make it Work” for more details.