Introduction; Summary of Proposed Tax Reforms. On September 13, 2021, the Ways and Means Committee of the United States House of Representatives released a section-by-section summary (“Summary”) of revenue provisions accompanying a $3.5 trillion budget plan released by Senate Democrats on August 9, 2021. The tax-increase provisions would be under Subtitle I of a forthcoming budget reconciliation bill that Congressional Democrats intend to approve without Republican support. The Summary provisions reflect in part earlier tax proposals in the American Jobs Act and the American Families Plan. Summary provisions include corporate and international tax reforms, tax increases for certain high-income individuals, modifications to retirement plan rules, and additional appropriations for IRS enforcement of taxpayer compliance.
Corporate Tax Rate Adjustments. Most notably, section 138101 of the Summary provides for an increase in the top income tax rate for corporate taxpayers from 21 percent to 26.5 percent. The current flat corporate income tax rate is replaced with a graduated rate structure akin to the tax rates applicable to individual taxpayers. Under the proposal, corporate taxpayers would pay income tax at a rate of 18 percent on the first $400,000 of taxable income. The rate would increase to 21 percent on corporate income up to $5 million. The top 26.5 percent corporate tax rate would apply to income above $10 million. Certain corporations or income would be excepted from the graduated corporate income tax regime.
Miscellaneous Provisions. Certain other Summary provisions include modifications to tax rules enacted as part of the 2017 Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054 (2017) (“TCJA”) and more recently, as part of federal Covid relief legislation. For instance, section 138501 of the Summary provides an earlier effective date of amendments to Code section (“Section”) 162(m) and further curbs to deductibility of executive compensation awards to certain highly compensated employees. The Section 162(m) amendments were included in the American Rescue Plan Act of 2021, passed in March, Pub. L. No. 117-2 (2021) (“ARPA”).
Conclusion; Action Items for Taxpayers. Current budget reconciliation proposals include wide-ranging tax reforms. Broadly, taxpayers that have relied on extensive tax planning as a result of TCJA reforms should monitor closely forthcoming proposed legislation and seek counsel on tax planning that may be necessary to comply with further Code amendments. Significantly, entities treated as corporations for Code purposes, reorganizing or considering a check-the-box election closely should follow the text of Summary section 138101 provisions. Such taxpayers would find advisable to seek tax counsel on complexities in applying a newly graduated tax rate to their income. Likewise, taxpayers would find advisable to review with tax counsel choice of entity under applicable State incorporation statutes and classification under the Code for conducting business.