A key factor that voters should consider in determining whether to vote for President Donald Trump or former Vice President Joe Biden on Nov. 3 is how each of them proposes to reform federal taxation if he wins the election. And for many New Hampshire business owners, this factor may be decisive.
Below are my summaries as to the major reforms thus far proposed by each of the two candidates. In listing these reforms, my goal is to be as objective as possible.
■Biden proposes to increase the tax rate applicable to “C corporations”—i.e., to all public corporations and to a few closely held corporations—from 21% to 28%. In addition, Biden proposes an additional federal income tax on these corporations if they have book profits of $100 million or more.
■Trump has not yet made any proposals affecting the federal income taxation of C corporations.
Section 199A provides owners of most privately held businesses with an annual federal income tax deduction of up to 20% of their net business income. These businesses include sole proprietorships, S corporations and entities taxable as partnerships. Under its present terms, the section 199A deduction will expire after 2025.
■Biden will extend section 199A indefinitely, but he will phase it out for business owners whose net business income exceeds $400,000.
■Trump will make no changes in the section except, like Biden, to extend it indefinitely.
■Biden proposes to strengthen the Affordable Care Act (the “ACA”) by eliminating the 400 percent income cap on tax credit eligibility and by lowering the limit on the cost of coverage from 9.86% of income to 8.5%. In addition, he proposes expanding various family tax credits to increase health care coverage and lowering health insurance premiums.
■Trump supports repealing the ACA.
■Biden proposes ending subsidies for fossil fuels, restoring the full electric vehicle tax credit and enacting various credits and deductions to incentivize residential and commercial energy efficiency.
■Trump has not yet proposed any energy-related federal tax reforms.
Under current law, there are seven federal income tax brackets for individuals – namely, 10, 12, 24, 32, 35 and 37%.
■Biden proposes increasing the top federal income tax rate for individuals to 39.6%, the rate in effect before 2018.
■Trump has not yet made any proposals to change federal income tax rates for individuals.
The Self-Employment Tax currently applies to sole proprietors and to individuals who are partners of entities taxable as partnerships at a rate of 15.3% on the first $137,700 of earned income and 2.9% on any excess. Employers and employees split federal FICA taxes.
■Biden proposes to eliminate the above earned income cap on taxpayers with income above $400,000, thus substantially increasing the Social Security Tax liability of these taxpayers.
■Trump has thus far made no Social Security Tax proposals, but he has lobbied to cut or eliminate these taxes. It is unclear how Social Security Tax benefits will be financed if such a cut or elimination occurs.
Under current law, the federal tax rate applicable to individuals on capital gains varies between 0% and 20% depending on their taxable income.
■Biden proposes to increase the top marginal income tax rate on long-term capital gains to 39.6% for taxpayers earning more than $1 million annually, and he proposes to eliminate the “basis step-up” of property transferred from deceased individuals to their heirs. These transfers may thus be subject to federal tax.
■Trump has stated that, among other capital gains tax reforms, he is seriously considering a capital gains federal tax rate cut by executive action.
John Cunningham is a Concord tax and businesses lawyer and estate planner. He has published Drafting Limited Liability Company Operating Agreements and Maximizing Pass-Through Deductions under Internal Revenue Code Section 199A. Both are the leading books in their fields. If you have business or tax questions you’d like addressed in this column, call John at (603) 856-7172 or e-mail him at [email protected]