Businesses, wealthy brace for Biden tax hikes

Businesses and wealthy individuals are preparing for the potential for former Vice President Joe Biden to raise taxes if he wins the presidential election.

Biden, the Democratic nominee, has released a number of proposals aimed at raising taxes on high-income people and businesses, though it remains to be seen how quickly and aggressively he would pursue tax increases if he wins. With less than two weeks until Election Day, he is leading in many polls nationally and in key swing states.

Professionals at law and accounting firms said that businesses and wealthy individuals are asking about how they may be affected by potential tax changes in a Biden administration, so that they can be ready to take actions to minimize their tax bills if they decide such measures are warranted.

“A lot of businesses and stakeholders, particularly the more sophisticated ones, are definitely actively assessing what the proposals could mean for them and their business,” said Jorge Castro, who was on former President Obama’s transition team in 2008 and now works at Miller & Chevalier.

Biden plans to raise taxes on wealthy individuals and businesses. He has said he would not raise taxes on individuals making under $400,000.

Several of Biden’s proposals in particular have caught the attention of wealthy people and businesses who are interested in keeping their taxes as low as possible.

Biden plans to roll back President Trump’s tax cuts for individuals making over $400,000 annually. This would include rolling back reductions in tax rates and phasing out a deduction for income from non-corporate businesses known as “pass-throughs.” 

The former vice president has also proposed taxing capital gains at the same rate as ordinary income for people with income above $1 million — raising the top rate from 20 percent to 39.6 percent — and taxing unrealized capital gains at death.

Biden has said he wants to return the estate tax to its parameters in 2009. That would result in increasing the estate tax rate from 40 percent to 45 percent and lowering the exemption amounts from $11.58 million for estate and gift taxes in 2020 to $3.5 million for the estate tax and $1 million for the gift tax.

On the corporate side, Biden has called for increasing the corporate tax rate from 21 percent to 28 percent and making changes to a minimum tax on the foreign earnings of U.S. multinational corporations.

Businesses interested in keeping their taxes as low as possible may be considering accelerating their income so it is subject to the current, lower rates but defer deductions until after any tax increases are enacted. Owners of pass-through businesses may be considering speeding up the sale of their assets or their companies in order to use the current capital gains tax rates.

Tax and finance professionals said that some business owners have already started to accelerate sales of their companies.

“The trend that we’re seeing is that founder or management-owned businesses that were considering going to market within the next six to 12 months or are already in the market are accelerating their process to try to get ahead of any potential negative impacts of a Biden tax plan,” said Winston Shows, senior vice president in the mergers and acquisitions tax advisory practice at the investment bank Houlihan Lokey.

He said he hasn’t seen evidence of people who had been planning to sell their businesses in five years planning to sell now instead.

Some businesses have also started to accelerate income. Christian Wood, a principal in the Washington national tax practice at the audit and tax firm RSM, said that some businesses have started to do so because they think tax rates are unlikely to stay as low as they are now even if Biden loses the election.

“They’re expecting rates to go up no matter what,” he said.

Many other businesses and business owners have not yet taken concrete steps to minimize their taxes but are evaluating what they might do depending on the outcome of the Nov. 3 election and the legislative environment.

“Taxpayers and practitioners are in a wait and see mode, and I think things will start to kick into gear November 4,” said Todd Simmens, a tax partner at BDO and former legislation counsel to Congress’s Joint Committee on Taxation.

A key factor in Biden’s ability to raise taxes if he wins is the outcome of the Senate elections. Democrats need to have a net gain of three seats to win control of the Senate if Biden wins, and the size of any majority could also influence how aggressive Democrats might be on tax increases for the wealthy and corporations. Democrats are expected to maintain control of the House.

Another factor is whether Democrats do away with the legislative filibuster if they have a majority in the Senate. Reform of the filibuster could ease passage of legislation.

Even if Democrats win control of the White House and both chambers of Congress, the timing and content of tax legislation is unclear.

Rohit Kumar, a former aide to Senate Majority Leader Mitch McConnell (R-Ky.) who is now co-leader of Washington national tax services at PwC, said if Congress delays passing another coronavirus relief package until next year, that would delay the consideration of any legislation to raise taxes.

Dustin Stamper, managing director in the Washington national tax office of the audit and tax firm Grant Thornton, said campaign proposals are candidates’ wish-lists, and “folks shouldn’t expect the tax plan to get enacted exactly as envisioned on the campaign trail.”

Stamper said that even if there is a Democratic sweep, taxpayers should approach tax planning cautiously. He said it may make sense for business owners to sell assets in December that they had been planning to sell early next year, but that there could be “real downsides” to rushing to sell an investment or business in order to achieve tax savings.

In addition to businesses and their owners preparing for potential tax increases in a Biden administration, high net-worth individuals are also inquiring about strategies they may want to use to lower estate-tax bills. One option that estate-planning experts say clients could use is to make gifts before the end of the year under the current lifetime tax exemption levels, which are significantly higher than the level Biden is proposing.

“There’s been a huge surge of interest among high net-worth families” in estate planning, said Anna Salek, a partner at Shearman & Sterling.