PERSPECTIVE: Biden to seek tax changes on high earners, capital gains, some businesses

The Biden Administration recently released detailed tax proposals through the so-called Green Book. If approved, there would be big changes for high-income earners, on capital gains and for some business taxes.

While these proposals would all have to go through the legislative process and therefore may not pass or may be changed, it’s possible some of these may become law and therefore warrant tax planning considerations.

Even if Biden’s proposals don’t become law, there are some automatic taxes changes coming down the road as tax changes in President Trump’s Tax Cuts and Jobs Act only run through 2026. While five years feels like a long time, it’s not when it comes to tax planning.

Here’s what the Biden administration has proposed:

Corporate Tax Rate

Increase the tax rate for corporations from 21% to 28%, effective for taxable years beginning after December 31. Although for taxable years beginning after January 1, 2021 and before January 1, 2022 (i.e., taxable years that straddle 2021 and 2022), the tax rate would be 21%, plus an additional 7% rate times the portion of the taxable income earned in 2022.

Individual Tax Rates

Biden’s proposal would increase the top marginal individual income tax rate to 39.6%. The proposal would be effective for taxable years beginning after December 31, 2021.

In taxable year 2022, the top marginal tax rate would apply to taxable income over $509,300 for married individuals filing a joint return, $452,700 for unmarried individuals (other than surviving spouses), $481,000 for head of household filers, and $254,650 for married individuals filing a separate return.

After 2022, the thresholds would be indexed for inflation using the consumer price index, which is used for all current tax rate thresholds for the individual income tax.

Capital Gains Tax Rates

Under the proposal, long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income rates, with 37% generally being the highest rate (40.8% including the net investment income tax), but only to the extent that the taxpayer’s income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022.

Biden’s tax plan also says: “A separate proposal would first increase the top ordinary individual income tax rate to 39.6% (43.4% including the net investment income tax).” The effective date is stated to be “after the date of announcement” (which presumably relates the announcement in connection with the American Families Plan of April 28, 2021). Although not entirely clear, the intention appears to be that capital gains would be taxed at the top ordinary income rate, which would be 37% from the date of announcement (April 28, 2021) until 12/31/21, and then 39.6% thereafter.

Capital Gains Tax Rates on Appreciated Property

The proposal treats transfers of appreciated property by gift or on death as realization events. The donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer.

  • For a donor, the amount of the gain realized would be the excess of the asset’s fair market value on the date of the gift over the donor’s basis in that asset.
  • For a decedent, the amount of gain would be the excess of the asset’s fair market value on the decedent’s date of death over the decedent’s basis in that asset.
  • That gain would be taxable income to the decedent on the federal gift or estate tax return or on a separate capital gains return. The use of capital losses and carry-forwards from transfers at death would be allowed against capital gains income and up to $3,000 of ordinary income on the decedent’s final income tax return, and the tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent’s estate (if any).

Capital Gains Taxes on Unrealized Appreciation

Gain on unrealized appreciation also would be recognized by a trust, partnership or other non-corporate entity that is the owner of property if that property has not been the subject of a recognition event within the prior 90 years, with such testing period beginning on January 1, 1940. The first possible recognition event for any taxpayer under this provision would thus be December 31, 2030.

With this and the other capital gains tax proposals, there are several exclusions.

Taxes on Carried Interests

The proposal will tax carried (profits) interests as ordinary income. Taxing all income allocable to an “investment services partnership interest” as ordinary (and subjecting such income to the self-employment tax) except to the extent allocable to a qualified capital interest.

The proposal would apply to taxpayers with taxable income in excess of $400,000 and would be effective for taxable years beginning after 12/31/21. (Section 1061 – capital gain holding period for partners with carried interests – would continue to apply to taxpayers earning $400,000 or less.)

Self-Employment Taxes

The proposal would eliminate the self-employment tax exception for limited partners who provide services and materially participate. It also would subject all trade or business income to the 3.8% Net Investment Income Tax (NIIT) if not otherwise subject to the self-employment tax.

In particular, for taxpayers with adjusted gross income in excess of $400,000, the definition of net investment income tax would be amended to include gross income and gain from any trades or businesses that is not otherwise subject to employment taxes. S-Corporation, Partnerships and LLC owners who materially participate in the trade or business would be subject to self-employment tax on their distributive shares of the business’s income to the extent that this income exceeds certain threshold amounts.

The exemptions from self-employment tax provided under current law for certain types of S-Corp, partnership or LLC income (e.g., rents, dividends, and capital gains) would continue to apply to these types of income. This provision would eliminate the exception to the NIIT tax for real estate professionals. This proposal would be effective for taxable years beginning after 12/31/21.

Like-Kind Exchanges

The proposal would repeal section 1031 for gain in excess of $500,000 for each taxpayer (and $1 million for married couples filing jointly) each year for real property exchanges that are like kind. The proposal would be effective for exchanges completed in taxable years beginning after 12/31/21. Under this proposal, if a taxpayer begins an exchange in 2021 but does not complete the exchange until 2022, the exchange would be subject to the new rule.

Excess Business Losses

The section 461(l) limitation on excess business losses, which currently is set to expire for taxable years beginning after 12/31/26, would be permanently extended.

New Market Tax Credits

The proposal would permanently extend the New Market Tax Credit, with a new allocation for each year after 2025. These annual amounts would be $5 billion, indexed for inflation after 2026. The proposal would be effective after the date of enactment.

Other Tax Incentives

There are a number of provisions providing tax incentives for housing, energy, and infrastructure.

Next Steps

While these proposals are still up in the air and may not become law, it’s still a good idea to meet with your CPA to talk about your future plans. It’s likely there will be tax changes in the upcoming years – including some that may be significant – and you’ll get the most benefits if you start planning early.

Tony Deutsch, CPA, MT, CGMA is a shareholder at Concannon Miller, a CPA and business advisory firm in Hanover Township, Northampton County. He can be reached at [email protected]

PPP’s extension gave borrowers needed time to apply, funds expected to dry up before end date

An extension to the Paycheck Protection Program (PPP) from March to May allowed more time for small firms and businesses looking to draw from the program for a second time to benefit from it. But without additional funds, the program is expected to dry up soon.

The newest wave of PPP loans began early this year and was signed into law by President Trump in December.

The third round of the program allowed businesses to apply for a second PPP loan if they had 300 or fewer employees, demonstrated a drop in revenue for one calendar quarter compared to the previous year, and showed they used all of their first-round money.

Late last February, the Biden administration revised PPP small business loans to reach smaller, minority-owned firms. However, the federal business loan program was scheduled to end just a month after businesses had a chance to cash in on the significant increase in funds they would receive.

It also gave businesses who were unable to apply for the first round of loans a chance to do so, but because of an eight-week hold on applying for a second round, many of those businesses would have been unable to apply for their second round by the March end date.

Biden signed the PPP Extension Act of 2021 in late March, allowing borrowers to continue to apply for PPP loans until May 31. At the time the act was signed, the Small Business Administration (SBA) had already approved nearly $196 billion out of the $290 billion in funds set aside for the program.

Between businesses applying for their second loan at a max of $2 million and small businesses now borrowing against their gross income rather than their net profit thanks to the new PPP rules approved by the Biden administration, the program is expected to be out of money weeks before the new deadline.

“For the last month and a half the burn rate has been $10 billion a week,” said David Patti, director of communications and marketing at Chester County-based Customers Bank. “The guy who could qualify for $1,000 now qualified for $10,000. That unleashed pent-up demand and there are now a lot more people in line.”

As of April 26, the SBA reported having $18.5 billion left in its PPP loan pool, according to Patti.

Despite the swiftly dwindling funds, the extension has proven to be beneficial for borrowers newly eligible for the program, said Jeramy Culler, vice president and business banking manager at F&M Trust in Chambersburg.

“The changes were made late in this round of the program, and the additional time allows borrowers who were previously ineligible to compile their information and submit applications,” said Culler. “It also provides additional time for those borrowers who didn’t receive a first-draw loan until 2021 to meet the use of funds criteria for a second-round loan. I expect there to be continued interest from borrowers until the money is exhausted or May 31, whichever comes first.”

Banks also had more time and resources to manage the loan applications coming in from borrowers since the first wave of PPP was already behind them.

Last year, lenders had two weeks to prepare for the bevy of borrowers that would knock on their doors. This year, banks were able to take advantage of their experience from 2020, said Matthew Long, chief operating officer of Ephrata National Bank.

“That was in the height of COVID. We weren’t sure what to do from an employment perspective,” he said. “We did a very manual labor-intensive process to do it quickly. As we looked at this further and moved into the second wave, we took advantage of tech because we had more time on our side to reevaluate.”

Recently the SBA launched a new round of Economic Injury Disaster Loan assistance to provide $5 billion in additional assistance to small businesses and nonprofit organizations impacted by the pandemic.

This and other programs such as the $28.6 billion Restaurant Revitalization Fund are part of more targeted aid for businesses compared to the broader PPP, which could help lift up businesses hit hardest by the past year, said Patti.

“The Biden administration thinks it’s time to focus on hotels, restaurants and others and that’s all fair to now say ‘Let’s get help to the people who have lingering problems or problems unique to their sector and be much more tailored to their policy,’” he said.

Jaindl Farms participates in presidential turkey pardon

President Donald Trump formally pardons ‘Corn’ the turkey. PHOTO/SUBMITTED


Jaindl Farms participated in last week’s official presidential pardon of the National Thanksgiving Turkey.

The locally raised turkeys, however, weren’t the lucky honorees.

That went to a bird named Corn, and his back up, Cob, who received a formal pardon from President Donald Trump last week and will now reside on the campus of Iowa State University.

Jaindl’s Turkey Farm of Orefield provided the president’s family with two dressed turkeys – for eating — as part of the event.

Those turkeys were part of the First Family’s food donation to a local charity.

The National Thanksgiving Turkey pardon is a tradition that dates back to 1947.

It is organized, annually by the National Turkey Federation, which is the national advocate for America’s turkey farmers and producers, raising awareness for its members.

SBA offers $2M in loans to help businesses, nonprofits cover COVID-19 losses

The federal Small Business Administration (SBA) is working with state officials to support small businesses impacted by the spread of the coronavirus (COVID-19) with up to $2 million targeted, low-interest disaster recovery loans.

President Trump’s National Emergency declaration — the “Coronavirus Preparedness and Response and Supplemental Appropriations Act” — in response to the COVID-19 spread in the U.S. authorizes the SBA to offer Economic Injury Disaster Loans to struggling small businesses, according to the SBA.

“The president’s declaration, coupled with the administration’s unprecedented efforts to mobilize and involve the full force of the federal government and the private sector — including leaders in science, medicine, transportation, finance and business — will help save lives and reduce economic disruptions in every community,” said SBA Administrator Jovita Carranza.

“The agency is working closely with governors to make up to $2 million in targeted, low-interest disaster recovery loans available to any small business enterprise that has been severely impacted by the situation,” she said.

Loans can be used to pay fixed debts, payroll accounts payable and other bills that can’t be paid because of the disaster’s impact, according to the SBA. The interest rate is 3.75% for small businesses and 2.75% for nonprofit organizations, according to the SBA.

Local banks are working with business clients to ensure they have the resources they need to support their businesses at a time when they are sure to see a decrease in revenue as state officials call for the closure of nonessential businesses due to the outbreak of the coronavirus in the commonwealth.

In a statement, Customers Bank applauded the effort by the SBA to mitigate the economic and financial shortfalls on the small business community. President and CEO Richard Ehst said the bank has “committed to provide $200 million in new small business lending to qualifying companies.”

“We value the health and wellbeing of our clients and team members above all else and want to make sure the business community is aware of this important program,” Ehst said. “We want businesses throughout the community to know we are available to help them navigate the complexities of the SBA loan process. We can also provide other financial solutions, including lines of credit, to help mitigate any issues caused by this situation.”

Pa. Attorney General Shapiro sues Labor Department to block ‘joint employer’ rule change

Pledging to fight Trump administration policies that harm workers, Pennsylvania Attorney General Josh Shapiro joined 17 other state attorneys general in a lawsuit that alleges a proposed change in federal labor laws will undermine critical workplace protections.

Under current federal labor protection laws, a business that subcontracts for labor could still be responsible if the subcontractor fails to pay the workers as a “joint employer” under the New Deal-era Fair Labor Standards Act. But an update to this rule that would go into effect March 16 would stipulate new qualifications for “joint employer” status.

A Jan. 16 update to the act from the U.S. Department of Labor — headed by Trump appointee Eugene Scalia since September of 2019 — would create a four-pronged test to determine if an employer qualifies as a “joint employer” and is therefore responsible for the proper compensation of workers hired by the subcontractor. If the person hires or fires the employee, supervises their work, determines their pay rate and maintains employment records, they would be considered a “joint employer” under the updated rule.

“This final rule furthers President Trump’s successful, government-wide effort to address regulations that hinder the American economy and to promote economic growth,” Scalia said. “By giving greater clarity to businesses who want to work together, we promote an entrepreneurial culture that has driven American prosperity for decades.”

Cheryl Stanton, administrator of the department’s wage and hour division, said the changes to the rule would break down barriers currently keeping companies from “constructively overseeing, guiding and helping their business partners.”

“For small business owners, and the employees working in those businesses, the relationship and the guidance coming from franchisors and other contracting companies can greatly improve the workplace and help them create jobs,” Stanton said.

Shapiro argues in the suit that the department’s new rule provides incentives for businesses to offload employment responsibilities to smaller companies, which would be shielded from federal liability for wage and hour obligations under the FLSA. Shapiro said fewer employers would be liable for unpaid wages under this change, creating incentives for increased wage theft and other labor law violations.

The new rule would cost workers more than $1 billion annually, officials from the Economic Policy Institute said in a letter urging the department to reconsider.

“Pennsylvania workers are entitled to minimum wage and overtime regardless of whether they work for a small company, a temporary agency or a multinational corporation,” Shapiro said in an official statement Wednesday issued by his office.

Poll highlights importance of health care in 2020 Elections

Americans identify cutting health care costs as the “top domestic priority” for the president and lawmakers as the 2020 election season moves into high gear.

A new report released this month from POLITICO, a Virginia-based political opinion company, and the Harvard T.H. Chan School of Public Health found that Americans identify cutting health care costs as the top political issue during this election year.


POLITICO and Harvard polled 1,100 randomly selected Americans from Jan. 21 to 26.  About 80 percent of respondents, including 80 percent of Democrats and 76 percent of Republicans, ranked “taking steps to lower the cost of health care” as “extremely” or “very” important.

Reducing prescription drug costs also ranked in importance, with majorities in both parties rating it as “extremely” or “very” important.

According to the report, although health care issues are at the top of voters’ list for presidential and congressional action, the public does not place large health system reforms, including Medicare-for-all, among their top priorities.

“The poll results show that after the Democratic primaries are over, the focus for the public in their voting is going to be the pocketbook issue of lowering their health care costs and prescription drugs prices, not major health system reform,” said Robert J. Blendon, co-director of the survey and professor of health policy at Harvard, in the report.  “This suggests the importance of candidates in the general election having credible proposals to address these personal cost issues.”

The full report can be read here-Americans’ domestic priorities for President Trump and Congress in the months leading up to the 2020 election.


Report: Trump tariffs cost Pa. $1.17B

Pennsylvanians have paid $1.17 billion in import taxes on products subject to the Trump administration’s tariffs in its ongoing trade dispute with China, according to the latest Tariff Tracker produced by Tariffs Hurt the Heartland, a nonprofit coalition of trade advocacy groups.

After nearly two years of volleying tariffs across the Pacific, President Trump announced this week the United States and China are nearing a “very large and comprehensive” trade deal. Trump said he plans to sign the trade agreement Jan. 15, although the White House is declining to specify any details of the agreement.

“I will be signing our very large and comprehensive Phase One Trade Deal with China on January 15,” the president tweeted Tuesday. “The ceremony will take place at the White House. High level representatives of China will be present. At a later date I will be going to Beijing where talks will begin on Phase Two!”

The advocacy group says 84,800 jobs may be lost in Pennsylvania from the latent effects of the U.S.-China dispute. Farmers for Free Trade Co-Executive Director Brian Kuehl said this is bad news for Trump’s electoral success in battleground states like Pennsylvania where farmers have depended on the USDA’s market facilitation program to compensate for annual shortfalls.

“This data shows that farmers in America’s heartland, the very places where the 2020 campaign will turn, are paying a steep price because of the trade war,” he said. “Farmers want long-term reliable markets. One-time purchases are not a replacement for the certainty that global trade opportunities provide.”

Since the trade war began in 2018, Pennsylvania exports faced $608 million in new retaliatory tariffs from U.S. trading partners, according to the report. Pennsylvania exports experienced an 11% drop from 2017 to 2019. Total trade tariffs cost Pennsylvania’s taxpayers $430 million in 2018 and $742 in 2019. Overall, U.S. consumers and businesses have paid $42 billion in import taxes, the report says.

Tariffs Hurt the Heartland’s monthly Tariff Tracker is an analysis of data from the U.S. departments of Labor, Agriculture and Commerce.

Congress shores up pension, health care benefits for coal miners

Inside of the mine shaft with fog, illustration and digital painting PHOTO/GETTY IMAGES

Retired Pennsylvania coal miners will see their retirement and health care benefits preserved thanks to a bipartisan, end-of-year federal government spending deal announced this week.

Congress approved a funding package for tens of thousands of miners across the country, including legislation to shore up retired coal miners’ pensions and health care coverage. The Bipartisan American Miners Act of 2019 will ensure miners, whose health care is at risk due to recent coal company bankruptcies, will not lose their benefits, according to co-sponsor Senator Bob Casey, D-PA.

“Coal miners powered this country for decades and I am proud to say that after years of fighting, we have reached an agreement to keep our promises to the men and women who helped build our nation,” Casey said in a statement this week.

The spending deal secures lifetime health care benefits for 13,000 miners around the country who lost their benefits. Congress approved provisions to shore up the 1974 Pension Plan, headed for insolvency due to recent coal company bankruptcies and the 2008 financial crisis, threatening the pensions of 92,000 miners, according to Senator Joe Manchin, D-WV, who sponsored the bill.

Casey pledged to continue pushing for the Butch Lewis Act, aimed at establishing retirement trust funds for workers with the U.S. Department of the Treasury, to pass through the Senate. The Butch Lewis Act passed through the House of Representatives in July and would “ensure that pensions for our Teamsters, Bakery and Confectionery workers and all other Pennsylvanians remain secure,” Casey said.

In a statement released by Manchin, Senate Majority Leader Mitch McConnell, R-KY, laid the blame at the Obama Administration’s “eight years of regulatory assault” of the coal mining sector for the poor state in which many retired coal miners find themselves, promising less regulation under the Trump Administration.

“Earlier this week, I personally raised with President Trump the importance of protecting these coal miners’ pensions and health retirement benefits, and I am committed to continuing to work with him and my colleagues in congress towards a solution,” McConnell said in the statement released in early November. “The startling number of orphaned miners in drastically underfunded pension plans presents an urgent crisis for entire communities of miners, retirees and their families.”

Hopes running high for trade-war resolution

As the trade war continues with China, observers in Central Pennsylvania and the Lehigh Valley hope the latest stalemate might budge if and when President Donald Trump meets with Chinese leaders at the international G-20 conference in late June and agree that both countries can resolve their disputes sooner rather than later.

An agreement was supposed to have been reached this spring, but it was delayed after China tried to make last-minute changes that were rebuffed by U.S. negotiators. Trump has since signaled that he would meet with Chinese President Xi Jinping at the economic conference of 20 nations to see if the talks can stay on track for possible resolution this year.

“Tariffs drive up costs,” said Darlene J. Robbins, president of the Northeast PA Manufacturers and Employers Association, which is based in Pottsville. “We want to see the administration be successful for bringing China back to the table.”

Robbins, like others, said that an agreement shouldn’t be made without careful thought, as China has not been playing by the rules for decades.

“No tariff is good,” Robbins said. “But we certainly need a fair and level playing field.”

Pennsylvania observers – from farm interests to manufacturers – note that the strength of the U.S. economy has allowed growth to continue, despite the trade disputes have not undermined growth, at least not yet. Several experts pointed out that the tariffs have helped some and hurt others, so opinions vary. But, they add, a resolution would be in everyone’s best interests.

In a May 15 article, Wall Street Journal reporter Greg Ip, explained how the tariffs are rippling through the economy:
“As with any tax, the person paying the tariff doesn’t necessarily bear its burden,” Ip wrote. “If the tariff is simply passed along to the importer, American businesses or consumers bear the burden. If Chinese exporters cut prices to avoid losing sales, they bear the burden.”

“If imports shift to another country, no one pays the tariff — but Chinese are burdened by lost jobs and Americans by a higher price,” he continued. “And if production shifts to the U.S., some of what Americans pay in higher prices goes to other Americans as wages and profits.”

Some shifting of production already is helping in western Pennsylvania, said David N. Taylor, president & CEO of the Pennsylvania Manufacturers’ Association, which is based in Harrisburg. He pointed to a May announcement, reported by the Pittsburgh Post-Gazette, that U.S. Steel will be investing about $1 billion in western Pennsylvania facilities.

Gordon Denlinger, Pennsylvania director of the National Federation of Independent Business or NFIB, said such news is good for small businesses in the Pittsburgh area. Such a huge investment could create opportunities for new businesses to open and existing businesses to grow, as steel mills ramp up construction and then hire new workers.

“Certainly, small businesses will be benefiting,” he said.

Those positive improvements are important for everyone to recognize, said Taylor, who has been outspoken about how U.S. negotiators have a duty to make sure that any deal with China is fair. For decades, China has been cheating on trade, stealing intellectual property, limiting access to its own markets and conducting espionage – none of which should be accepted by a trade partner, Taylor said.

“Trade is for allies,” he said, adding that he fully supports free trade and open markets. “The principle of reciprocity stands above all others. Our national interest matters. Trade is necessary, but trade is for allies.”

Taylor credits Trump for making sure that any deal addresses the issues head on, though he said the implementation of Trump’s plans “has been messy.”

“He actually has defended our country and our economy against a hostile foreign power,” Taylor said. He isn’t confident that a deal will be reached soon, only because China hasn’t shown a willingness to change.

Mark O’Neill, media and strategic communications director for the Pennsylvania Farm Bureau, agrees that any agreement needs to be “fair and equitable.”

But for farmers, a deal needs to be reached as soon as possible, he said.

Pennsylvania farmers have been struggling for more than five years, predating the tariff crisis. But freer markets had helped, and farmers generally support open markets, he added. The tariffs are hurting farmers, but many farmers agree that there are important principles that need to be worked out with China.

The tensions with Mexico and Canada have had more of an impact on Pennsylvania, O’Neill also said. As long as the deal worked out to revise NAFTA is ratified by all three countries, the agreement will help the state’s farmers, particularly with opening dairy markets in Canada, he said.

“Our famers are very supportive of the current deal and would like to get it signed,” he said. “The political parties need to come together and hopefully they can.”

The North American Free Trade Agreement, which deepened trade among the United States, Canada and Mexico, took effect on Jan. 1, 1994. The Trump Administration sought to renegotiate the deal, saying it was outdated and unfair to U.S. workers. The new deal, called USMCA, was reached late last year but Democrats and Republicans in Congress need to ratify it. In late May, Trump threatened to add new tariffs to goods coming from Mexico unless Mexican authorities do more to stem the flow of people emigrating illegally from Central America into the United States.

Unlike counterparts in other parts of the country, Pennsylvania farmers export very little soybeans, pork and dairy to China. But those who raise such crops still are affected because prices are worldwide, so any changes globally will affect local operations, O’Neill said.

For soybeans, in particular, China cut imports by 97 percent, which means there is an oversupply – and lower prices – “everywhere,” he added.

The administration’s plan to offer financial payments to aid farmers for the duration of the trade talks will help, he said.

“But farmers don’t want payments. They would rather earn the money on an open market,” O’Neill said.

One concern is that supply chains are changing and that could hurt businesses long-term, as well as China’s latest threat to increase the costs of raw materials, said Tom Palisin, executive director of The Manufacturers’ Association, based in York County.

“Once you lose a market, it is hard to get that back,” Palisin said.

So far, a lot of consumers might not have noticed higher costs because some businesses have been holding off on price increases or had been stockpiling supplies until the trade tensions eased, several observers noted.

“But the hope was that the tensions would be short-lived,” Palisin said. “As it drags on, that isn’t always going to be possible.”