January 10, 2022 | Last Updated on: January 17, 2024
DISCLAIMER: This article was written in 2021 and has not been updated. For more up to date information about small business funding products and options, please browse our recent articles.
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If you’re an entrepreneur, you’ve likely been paying close attention to the proposed Biden small business tax plan, and with good reason. Higher taxes can impact your small business’s bottom line and how much you’re able to invest back into your business to help it grow. Your tax liabilities can also affect your ability to offer your employees an adequate living wage and performance raises. Any change in tax policies has the potential to profoundly impact your business’s operations, for the better or the worse. A 2021 tax survey by the National Federation of Independent Business (NFIB) found that the majority of business owners feel that small business taxes create a heavy administrative and financial responsibility, with federal income taxes requiring more than their fair share of the burdens. The Trump-era 2017 Tax Cuts and Jobs Act included several tax changes with significant benefits for small businesses. For instance, qualifying small business owners received a pass-through deduction through the tax policy, allowing them to write off 20% of their business income. Corporate income tax rates also saw a 40% reduction, from 35% to 21%. There were other changes as well, many of which will expire in 2025. With a new administration in the White House and President Joe Biden’s proposed tax initiative, many business owners wonder what the Biden tax plan means for their small business and how updated tax laws will affect their bottom line. Before we get into that, let’s look at what the new tax revenue will be used for.
President Biden has proposed several sweeping reforms to grow the American economy. The overall framework is called the Build Back Better Plan, and it consists of three parts: The American Rescue Plan, the American Jobs Plan, and the American Families Plan. The President was able to push through the American Rescue Plan that sent out stimulus checks to millions of Americans, provided support for small business losses during the pandemic, extended unemployment insurance, increased child tax credit and earned income credit, and more. But since that plan was enacted, the President has had a more challenging time getting approval for his other plans. For instance, The American Families Plan was a $1.8 trillion proposal to strengthen middle-and-working-class families. The plan addressed expanded tax cuts for working families, paid family and medical leave, an expansion of the child tax credit, and unemployment insurance reform. Biden’s American Jobs Plan centers around growing the economy, creating more jobs and strengthening the U.S. workforce, clean energy and fossil fuel initiatives, healthcare overhauls including Medicare and Medicaid expansion, domestic manufacturing initiatives, and improvement of the U.S. infrastructure. Both plans involve several provisions for tax reform that are in part meant to help fund Biden’s executive strategy, but Congress has not fully approved either of them. As a result, their content has evolved over time as lawmakers have debated them, and today, most simply refer to all three proposals collectively as the Build Back Better Plan.
The Build Back Better Plan is an expensive ambition for the President. The initial proposal was estimated to cost $4 trillion. An obvious problem was determining how Biden’s plan would receive funding. But the Biden administration also wants tax reform, arguing that there is tax inequity between the very rich and the middle class. So Biden’s tax plan includes changes in tax laws, particularly those that affect larger corporations and wealthier Americans. The proposed tax reform legislation is seeking changes in the areas of:
Overall, the proposed plan would likely reverse many of the 2017 tax cuts with the intention of creating a fairer tax system for everyone. In addition, many experts feel that the Build Back Better Agenda incentivizes businesses and corporations to keep jobs and profits in America rather than ship them overseas.
According to a Treasury Department analysis, 97% of small businesses would not see a tax increase if President Biden’s tax plan received bipartisan approval and created new tax laws. Should the bill pass through, it’s safe to say that the bill would probably have less of an impact on companies at the bottom of the revenue spectrum, while those earning more taxable income might end up paying more taxes. As a small business owner, you may or may not be impacted. Much of that is dependent on how your business is structured, how much revenue your business brings in, and other key factors. A central promise of Biden’s tax plan is that no one with a gross income of less than $400,000 will have a federal tax hike or increase. But there could be a substantial tax liability increase for those earning more if the proposal becomes official. There also seems to be some tax provisions that would directly impact small businesses, however, there won’t be any real answers until a final tax bill has been approved by Congress and signed by the President.
Some of the proposed tax law changes during negotiations of Biden’s Build Back Better Plan include:
Initially, the Biden administration had proposed a long-term capital gains tax of as much as 43.4%. However, the rate has come down after Democrats proposed a 5% increase from the current 20%, placing the proposed capital gains tax rate at 25%. The increase would be applicable for single-wage earners bringing in more than $400,000 in taxable income or married couples who make more than $450,000. It’s safe to say that many small business owners fall within this taxable income range. If you earn less than the targets mentioned above, your capital gain tax rate will likely remain unchanged.
Current law states that American wage earners making more than $1 million per year have a tax liability rate of 37%. But, the new plan proposes a tax increase to 39.6% for households that make over $1 million.
The administration has several objectives it hopes to accomplish, including improving the U.S. transportation and utility infrastructures, clean energy initiatives, affordable housing projects, the revitalization of U.S. manufacturing and supply chains, and more. Many of the nation’s leading economists agree that creating and launching these projects will open the doors for tens of thousands of jobs for American workers. This is good news for many of America’s small businesses. These projects can help create a booming economy that potentially leads to a domino effect that fuels success for many businesses. In addition, small businesses that work within these industries and are resourceful are poised to benefit from the initiatives.
Overall, it seems like it might be. According to the White House, the Build Back Better Agenda will offer small businesses more fairness regarding their tax liabilities. Meanwhile, larger corporations would seem more likely to feel the brunt of many of the plan’s proposed reforms should they result in new tax laws. Contrary to what many believe, small business owners are mostly comprised of the middle class, not the super-wealthy. Thus, should the Build Back Better Plan eventually make it through legislation, the majority of small business owners might not be targeted for higher taxes. Some other good news is that there doesn’t seem to be any change in payroll taxes through Biden’s tax plan. Understandably, many business owners feel as though they’re in a vulnerable place. Any potential dramatic change in the tax law, one way or another, can profoundly affect your business and make it more challenging for you to determine the wisest course of action for your business.
Any new tax legislation won’t happen overnight. As Biden’s proposed tax plan has shown, there are many challenges ahead before any reform is likely to get the bipartisan support it needs. Significant parts of the bill might not ever receive approval or become part of the tax code. On the other hand, it might. The truth is, there’s no way of knowing at this point. While it’s a good idea to stay apprised of current events surrounding the Biden administration’s tax plan, try not to make any big changes for your business based on what might occur. No amount of legislation is likely to erase all of the tax benefits of owning your small business. At the same time, look at your industry, understand how consumer demand impacts it, and see where you are with your business right now. Take Maryam Zadeh, for example. She fulfilled her dream of opening a fitness studio in Brooklyn. Within a few months, her business had grown exponentially, and in order to grow and continue to thrive, she needed to relocate to a larger location. With funding from Biz2Credit, she moved and expanded her business while taking advantage of the current market conditions for her business. The result was that she quadrupled her business and stayed relevant, and she is seeing more success than she ever dreamed was possible. The moral of Maryam Zadeh’s story is that a change in your business might be just the thing needed to take it to the next level.
No one can predict what the future holds. It can sometimes take years for new tax laws to replace older ones. Biden’s tax plan may not make it through Congress. In the meantime, what matters for small business owners like you is that you seize viable opportunities that set the stage for your business’s success. So if you’ve been thinking of expanding your business or opening a new one and applying for small business financing to get the capital you need, consider taking your first step instead of worrying about a tax law change that may never happen.
