Marcum 2021 Year-End Tax Guide

is proposed that top marginal tax rates will increase from 37% to 39.6%. This is an acceleration of the change in the top tax rate, which was slated to occur in 2025. The highest bracket applies to individuals filing jointly, with taxable income in excess of $450,000; single filers with taxable income over $400,000; to married filing separate taxpayers with taxable income over $225,000; and estates and trusts with taxable income over $12,500. In addition to the change in rates, a surcharge of 3% on high-income individuals, trusts and estates is proposed for taxpayers with Modified Adjusted Gross Income (MAGI) in excess of $5 million ($2.5 million for married filing separate). Individuals, trusts and estates are also currently subject to net investment income. Under current law, this income does not typically include investment income derived in the ordinary course of business where the taxpayer is actively involved. Excluded income includes S-corporation earnings of active owners. As part of the proposed Build Back Better legislation, a net investment income tax of 3.8% would be expanded to include investment income and S-corporation earnings derived in the ordinary course of business, for taxpayers with taxable income greater than $500,000 for joint filers ($400,000 for single). This rule will also apply to trusts and estates. Note: This article was drafted prior to any official legislation being passed during 2021. Companies need to monitor changes, create projections and models and talk to their advisors to understand how possible changes tax legislation could affect their businesses.

The Qualified Business Income (QBI) deduction was introduced as part of the TCJA and allows business owners the opportunity to deduct up to 20% of income taxed at the individual level (i.e., self-employment income, income from pass-through entities). For example, an owner of a qualified trade or business is taxed at a marginal rate of 37% but allowed a 20% deduction on qualified income, bringing the effective rate on non-corporate earnings down to 29.6%. Although this rate is higher than the 21% corporate rate, the double taxation issue mentioned above is no longer a factor. One of the wrinkles of this deduction relates to businesses considered to be specified service trades or businesses (SSTB). For purposes of QBI, these businesses are limited in the amount of the deduction that can be taken. Health, professional and consulting services are just some of the types of businesses that fall into the SSTB category. High- earning taxpayers owning a business deemed to be a SSTB are subject to deduction limitations. The SSTB earnings limits for 2021 are $429,800 (for those Married Filing Jointly) and $214,900 for all other filing statuses. In addition, all businesses may be limited in the amount of their QBI deduction based on wages and capital assets. Proposed Legislation: The House Ways and Means Committee’s tax proposals for the Build Back Better legislation include several provisions affecting taxpayers with pass-through income. Expected changes in the individual, trust and estate income tax rates as part of the Build Back Better legislation should be considered in making decisions regarding entity selection. For tax years ending after December 31, 2021, it

MARCUM RECOMMENDATION Tax legislation has changed a great deal over the past few years and will continue to change in the future. On the surface, the TCJA’s reduction in corporate tax rate may seem appealing for businesses considering C–corporation status. There are, however, various additional tax considerations that must be taken into account in the decision- making process. In addition to the factors associated with longstanding tax law and the reform connected with the TCJA, the CARES Act provides new benefits for C-corporations with net operating losses from prior years and potential losses in future years. The final version of the Build Back Better plan could also produce additional modifications in tax law. If business owners analyze the effects of the many factors described above, they may find establishing or converting to C-corporation status is the best answer for limiting taxes. If this is the case, owners should contemplate the overall costs of legal documentation and tax filings as well as registration fees. Modeling scenarios to determine the tax implications of entity choice for both operating and selling a business should be done before any final decision is made. For further insight into how current and future tax legislation impacts your business, consult your Marcum tax professional.

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