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What the Biden Tax Plan Means for Your Business – and Why Strategic Planning for 2021 is Critical NOW not Later!
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All politics aside, with the apparent likelihood of dramatic changes to corporate and personal tax laws coming in 2021, what can a proactive business owner do as early in 2021 as possible to prepare? You must understand that the practice of simply doing things the same thing year in and year out will definitely cost you money in 2021, 2022 and beyond. And business owners definitely need to act NOW – NOT later in the year. Remember business planning must be put in place during year if you expect to realize any benefits during the year and at the end of the year. The biggest mistake we see business owners make is waiting for law and tax code changes to be enacted to act.
That is a huge mistake – tax law changes (ie Revenue Raisers for the government) have always limited our ability to make changes to save money after the legislation is enacted. Not to be pushy, but to be proactive and minimize the impact of higher taxes you must act now, while opportunities for key strategic business planning are still available.
We are expecting some dramatic increases to personal and corporate income and capital gains rates. Quite simply, if you are a business owner, the target is back on you to pay more and more money now and in the future.
Are You and Your Business Ready?
Get the Facts - Plan My Business Exit will help you bridge the gap from where you are today to where you and your business want to be.
6 AREAS OF PLANNING OPPORTUNITY . . . and NECESSITY FOR BUSINESS OWNERS
Under the proposed Biden plan, the top personal income tax rate returns to at least the previous top rate of 39.6%.
High income business owners and individuals will see a dramatic increase to the capital gains rates – from the current max of 23.8% to a top rate of 43.8% (39.6% plus 3.8% of net investment income)
S-Corps, partnerships, and sole proprietorships can expect a dramatic increase to their flow-thru income taxes rates with the elimination of the Qualified Business Income deduction. Effective tax rates would go from 29.6% to 39.6% That’s a lot more money out of your pocket!
Corporate income tax rates will increase from the current 21% to 28%. His plan also includes a new alternative corporate minimum tax of 15% of worldwide book income to address the perceived issue of C-Corps paying less than their fair share.
The Biden Tax plan would also increase payroll tax rates to total of 16.2% (12.4% + 3.8%) and also instead of phasing out the payroll tax at $137,700, the payroll tax would continue to apply to income in excess of $400,000. So if you’re a business owner that’s paying attention, your total effective federal tax rate would jump to 55.8% (39.6% income plus 16.2% payroll). So yes, more than half of your income is gone before you’ve paid any applicable state taxes!! How’s that for an incentive plan??
And, if death and taxes are truly the only certain two things in this world – the Biden plan will also make increases to the estate tax rate while greatly reducing the individual exemption amount. The most important aspect of the estate tax changes reduce the individual lifetime gifting exemption and exemption at death from $11,580,000 down to $3,500,00. This change makes advanced strategic planning critical for any business owner, high net worth individual or anyone that owns real estate. What’s the market value of your business, real estate, investments, assets, etc. – you may already be well over the exclusion amount. When’s the last time your business, tax, legal and estate planning was reviewed and updated to deal with all of these changes? Out-dated and ineffective estate planning is one of the biggest issues that we see with busy business owners – now you have no room for error.
What’s abundantly clear is this - the proposed Biden Tax Plan is not business friendly. Business owners can expect significant increases.
The critical importance of proactive strategic tax planning cannot be emphasized enough. There will again be dramatic differences and competitive disadvantages between those businesses that simply plug their numbers into someone’s tax compliance software as compared to those businesses – like the “Big” companies – that actually engage in value-added strategic business, tax, and legal planning. The Big companies are already moving their planning to the next level – Act Now!!!
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We are business transition specialists. We help owners, family members, and advisors evaluate exit and succession options and implement plans to successfully transition businesses.
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