Greenbook illuminates tax plan’s potential effect on middle market

VIDEO  | 

Authored by RSM US LLP

The Biden administration on May 28 provided a compass of sorts for its tax plan by issuing its first budget proposal and the corresponding Greenbook, which outlines proposed tax changes and spending initiatives in detail. Several revelations stand out for their potential to affect middle market businesses and how they might shape congressional negotiations as Democrats express urgency in the legislative cycle.

Jim Alex, RSM’s national tax go-to-market leader, and Matt Talcoff, RSM’s national industry tax leader, joined Public Affairs Leader Dan Ginsburg on “Tax Policy Now” to examine what the middle market should take from the Greenbook and what to expect next in the legislative process. Below is a transcript of their conversation, edited for clarity:


Dan Ginsburg: The administration released its first budget and corresponding Greenbook, providing a blueprint for Congress as they now look to increase their focus on actually drafting legislation. While, on one hand, we do need to remember it’s just a proposal, it is a tangible starting point and needs to be taken seriously. The million-dollar question—or, really, the trillion-dollar question—is whether any of this will actually make its way through the legislative process and become law?

The good news is I do believe we’re actually getting closer to a few answers with respect to timing and whether or not a bipartisan deal is viable.

Transportation Secretary (Pete) Buttigieg commented May 30 that time isn’t unlimited and we’re approaching a “fish-or-cut-bait moment.” And while anything is possible, and there are a few in the administration that see bipartisanship as advantageous for Biden and the Democrats, clearly a bipartisan deal will be an uphill battle.

Despite most Republicans expressing genuine support for traditional infrastructure spending, we continue to hear from our friends on the Hill that the two sides do remain pretty far apart. And the likelihood of any Republican supporting an infrastructure package including significant tax increases at this point? Minimal.

Even if they can’t agree and (Democrats) do move toward a reconciliation approach, there is still fairly significant disagreement within the Democratic Party itself—so no guarantee that anything actually progresses there. But for a variety of calendar and political reasons, it’s highly unlikely that anything is going to get done before the September/October time frame. So we’re going to have to be talking about this for the next several months.

Jim, now that we’ve set the stage, based on your Treasury background, give us your thoughts on what we’re seeing. What are your key takeaways?

Jim Alex: Right before Memorial Day, Treasury released what’s called the Greenbook, which is essentially their blueprint for what they want to accomplish from a tax legislative perspective. It’s quite large; it’s over 100 pages long, a lot of detail. But let me call out a couple highlights from that document.

First, they settled the issue of what they would propose for an effective date for long-term capital gains rate increases for certain taxpayers. We’ve talked about different scenarios, and they sort of picked the one in between. That is, they picked a date during 2021 that they’re calling the date of announcement of that tax increase. It’s a bit ambiguous as to what that means. Some are thinking it’s April. Some are thinking it might be May. We’ll have to see. But, nevertheless, they marked it as being an intra-2021 date for raising the capital gains rate on certain taxpayers.

Second, we now have information with regard to this step-up in basis, this gift and estate tax question that we’ve also talked about. We’ve learned that Treasury is proposing that when you gift certain property or property passes via your estate, that’s a taxable moment with regard to that property regarding the appreciated value of that property.

Third, we continue to see a lot of focus in the international space, which is a bit of a surprise as compared to candidate Biden. Particularly, we see a lot of detail concerning GILTI and what they hope to accomplish there with regard to tax legislation.

Dan: What should we expect moving forward?

Jim: Now that we have this blueprint out, we should start seeing—and we’ll start hearing from our conversations up on the Hill—a lot more engagement from the administration and from the White House and Treasury with regard to House Ways and Means and Senate Finance (Committees) to start pushing this plan. We should start hearing that.

For example, this issue of retroactivity or partial retroactivity for long-term capital gains continues to be a difficult political challenge. And so there has to be a lot of engagement from the White House and Treasury with regard to doing something like that. It would require, like we’ve talked about before, a lot of political will to push that through Congress.

Dan: Thank you, Jim. Matt, let’s turn to you. Give us the perspective of what you are hearing from clients, middle market businesses out there. What, if anything, surprised them about what they saw in the president’s budget? What are you hearing? Give us your top three.

Matt Talcoff: Why don’t we start with things that we saw inside the Greenbook? No. 1 is long-term capital gains. As Jim said, that’s a major concern for a lot of business owners and investors. Some deals have already closed during this year. Some are under letters of intent. And some, quite frankly, are being negotiated. So business owners are very concerned about, will the rates go up? And then, what date will the rate go up?

No. 2, let’s go with that appreciated assets scenario. A lot of individuals have done estate planning, or they’re in the middle of doing estate planning. And they’re very concerned about the idea that appreciated assets—that unrealized gain—would be taxed upon a potential gift or at death.

And the third one—I agree with Jim—international tax, is being discussed a lot. But I’m going to throw you a bonus one, Dan: the net investment income tax, as well as the self-employment tax. That’s an additional 3.8% additional tax on many, many individuals. Currently, that does not apply to certain members of limited liability companies or S corporation shareholders. So if you are one of them, it’s possible that you might see an additional 3.8% tax on your income in the future. Those would be the items I would focus on.

Dan: Were you surprised by anything that they didn’t include?

Matt: Absolutely, and these are conversations we’re having every day with our clients. The three things that were not included in the budget that are still being discussed—and, as we’ve said before, these might come back as Congress negotiates: No. 1 is research and development expenses. No. 2, the state and local tax deduction. And No. 3, what’s known as the qualified business income deduction, or section 199A.

On the R&D side, the ability to currently expense R&D costs is about to expire. They’re going to have to be capitalized. But there is bipartisan support for a bill to potentially continue expensing R&D costs. That’s a big deal for corporate taxpayers.

The second one—state and local tax. As we discussed before, there’s a whole caucus of folks up on the Hill that want to have that cap of $10,000 increased or eliminated. We have to watch that. High-tax states like New York and California, the folks that are on Capitol Hill from those states, they are pushing it big-time. We have to follow that.

The last one—that qualified business income deduction—if you are a pass-through business owner and you have income coming to you of more than $400,000, you may be in for a surprise. There is a push by Ron Wyden, the Senate Finance Committee chairman, to either adjust or eliminate that deduction. That would be a really big deal for pass-through businesses, Dan.

Dan: To sum up, it’s feeling like we’re getting a bit closer to clarity on exactly what tax changes will be included in the infrastructure package and when we might see conclusive action, although we’re still not quite there yet.

Meanwhile, our audience can log on to rsmus.com/taxpolicy for the latest tax policy developments, including an upcoming hour-long webcast on Tuesday, June 8, at 2 p.m. Eastern time, that’s going to go into greater detail on the issues we touched on today. Bye for now.

Do you have questions or want to talk?

Call us at (800) 232-9547 or fill out the form below and we’ll contact you to discuss your specific situation.

  • Topic Name:
  • Should be Empty:

This article was written by Dan Ginsburg, James Alex, Mathew Talcoff and originally appeared on 2021-06-04.
2020 RSM US LLP. All rights reserved.
https://rsmus.com/what-we-do/services/tax/federal-tax/a-biden-tax-plan-update-what-when-and-how.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

RSM

Insero & Co. CPAs, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how Insero & Co. CPAs can assist you, please call (800) 232-9547.