House Ways and Means Committee Proposes Major Tax Increases to Architecture & Engineering Firms

On Monday, the House Ways and Means Committee released their plan to increase taxes to U.S. businesses and their owners. If passed, this would result in about $2 trillion of new revenue based on this summary document.

Below is an overview of the major proposed revisions under the bill.

S Corporation shareholders:

  • The proposal takes the maximum pass through rate, which is now 29.6 percent, up to over 46 percent. This higher rate would apply to taxpayers with modified adjusted gross income in excess of $5 million (joint filers).
     
    The Qualified Business Income deduction, which reduces taxable income on certain pass-through companies by 20 percent, would be capped at $500,000 (joint filers). For owners that are trusts or estates, the cap is reduced to $10,000.
  • The Net Investment Income Tax (NIIT) would be expanded to include the pass-through income derived in the ordinary course of a trade or business for taxpayers with modified adjusted gross income greater than $500,000 (joint filers). This would subject pass-through income to the 3.8 percent NIIT, regardless of whether the income is from a passive or nonpassive activity. The provision would also apply to estates and trusts with income in excess of $12,500.
  • The top individual tax rate would increase from 37 percent to 39.6 percent and the threshold of taxpayers subject to this rate would decrease to $450,000 for joint filers.
  • There would be an additional tax of 3 percent for those individuals with adjusted gross income in excess of $5 million.
  • Excess Business Loss limitation of $500,000 would be made permanent and the carryover provisions would be modified.
  • The top capital gains rate would increase to 25 percent (not including the 3.8 percent NIIT nor the 3 percent additional tax for high income taxpayers). This rate would apply to gains entered into after September 13, 2021.

C Corporation shareholders:

  • The proposal would increase the maximum income tax rate for those making over $5 million from 21 percent to 26.5 percent. For taxable income between $400,000 and $5 million, the rate would remain at 21 percent.
  • Dividends would still be subject to a second level of individual tax.

To the surprise of some, the proposed legislation did not include a repeal of the $10,000 limit on the state and local income tax deduction for individual taxpayers. Taxpayers and their representatives in high tax states (e.g., New Jersey, New York, and California) will be pushing to get these limitations increased; however, recent news reports suggest that the provision does not have solid support from Congressional leaders.

Planning opportunities:

  • Most everyone believes tax increases are inevitable. Taxpayers are considering ways to maximize their 2021 taxable income by accelerating income and deferring expenses. For cash basis taxpayers, this means accelerating collections and deferring vendor payments.
  • Taxpayers may consider switching to a C Corporation given the rate differential; however, this decision is dependent on each owner’s unique circumstances and requires an in-depth review to determine the correct answer.

These tax proposals remain fluid, and we expect further changes before anything is formally signed into law. We will continue to monitor these developments and provide updates as they become available. If you have any questions about these or any other tax matters, please contact your Kreischer Miller relationship professional or any member of our Architecture & Engineering Industry Group.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.