Proposals in the Build Back Better Act that impact tax rates and deductions for pass-through businesses such as LLCs, S-Corps, Sole Proprietorships, and Partnerships include:
- Limiting the Small Business Deduction (IRS Section 199A) to a maximum amount of $500,000 (joint filers), threshold not indexed for inflation.
- Increasing the top individual rate from 37% to 39.6%.
- Lowering the top rate threshold to $450,001 (joint filers).
- Imposing 3.8% surtax on active business income above $500,000 (joint filers), further increasing tax base, threshold not indexed for inflation.
- Imposes additional 3% surtax for larger businesses with income greater than $5 million, threshold not indexed for inflation.
Corporate tax changes could include:
- Restoring graduated corporate tax rate.
- 18% – up to $400,000 in taxable income
- 21% – $400,001 – $5,000,000 in taxable income
- 5% – above $5,000,000 in taxable income
The policy overview for family business taxes includes:
- Increasing the top capital gains tax rate from 20% to 25% (higher rates when surtaxes listed above are included).
- Accelerating the sunset of estate tax thresholds with the exemption reduced to $6 million per individual.
The Build Back Better Act is also proposing mandate changes that would hit small businesses hard. It would create a federal paid family and medical leave program which applies to all businesses and employees. This program would allow up to 12 weeks of leave a year, and only requires 7 days of notice given to employers. This proposal could exacerbate staffing difficulties on short notice for many small businesses. The policy also would mandate auto-enrolling employees into retirement accounts called “Automatic Contribution Plans or Arrangements” (ACPAs) for businesses with more than five employees. This mandate would require employers to withhold 6% of employee earnings initially, increasing annually to 10% over the next five years, though employers are not required to contribute to the retirement accounts.
- Another major concern as negotiations continue is the further curtailing of small business deduction and eligibility. A Senate proposal differs by not limiting the deduction amount, but instead would limit eligibility for the deduction for any business earning above $400,000 in qualified business income.
- NFIB is also keeping a close eye on information regarding increased IRS enforcement which would allow the IRS to access bank information for any account above a specified threshold and could lead to increased audits on small businesses. The latest development is the minimum threshold would be raised from $600 to $10,000, with the proposal impacting virtually all small businesses.
- NFIB is pushing to maintain a graduated corporate tax rate and pushing back against the possibility of increased corporate tax rates.
- Also concerning is a further potential capital gains tax rate increase and the repeal of stepped-up basis.
- While it seems members of Congress agree that the original amount of $3.5 trillion is too high, the debate continues between how much the budget reconciliation should cost, anywhere from $1.5 to $2.2 trillion and whether the bill will contain more programs funded for fewer years or fewer programs funded for more years.
Key dates to watch start on Oct. 31 when the federal highway funding expires.
“The significance of this deadline is Congressional Democratic Leadership, both Leader Schumer and Speaker Pelosi have said they want to complete both the bipartisan infrastructure deal and reconciliation by October 31,” Kuhlman explains. “NFIB will be prepared as if this is the deadline, but we are a little bit skeptical that they will be able to wrap up all this work in less than three weeks’ time.”
Dec. 3 is when federal government funding is set to expire. Additionally, President Biden signed a temporary extension of the debt limit on Oct. 13, which will likely push when the limit is reached to sometime between December or early January.
Dec. 31 is when multiple federal programs will expire, including the Coronavirus Relief Fund for states and localities, the Payroll Tax Deferral, the ERTC, the Enhanced Child tax credit, the Enhanced Child and Dependent Care tax credit, the EIDL program application period, and a few Medicare programs.
“Small business owners are important pillars of the community. When Members of Congress hear from you, as opposed to me, they tend to value your opinion and listen to what you have to say. The voice of NFIB members collectively is very powerful.” Kuhlman said.