Tax increases on businesses are coming, but owners of small businesses have nothing to fear, according to the White House and Treasury.
Just 3 percent of small business owners would see their taxes increase under President Biden’s proposed individual income tax rate change, according to an August 19 fact sheet released by the White House, touting the findings of a new, unreleased Treasury analysis.
The relatively few small business owners whose taxes would increase under Biden’s tax plans would see the increased burden coming from the president’s proposal to raise the individual income tax rate back up to 39.6 percent, according to the fact sheet.
A Treasury official told Tax Notes that it defined small businesses as those that filed as S corporations or partnerships, or on Form 1040, “Individual Income Tax Return,” schedules C, E, or F, with the small business threshold set at $10 million of income or deductions.
The official further explained that small business owners were identified as individuals for whom the active income or loss from business represents at least 25 percent of their total income, disregarding passive income and losses.
The White House is also aiming to take credit for helping small business owners through a child tax credit expansion, both the temporary one currently in effect thanks to the American Rescue Plan Act of 2021 (P.L. 117-2) and the permanent expansion described in Biden’s American Families Plan. Similarly, Biden is proposing to make ARPA’s temporarily increased healthcare premium tax credits permanent.
Through those changes, not only would 97 percent of small business owners escape a tax increase, but more than 3.9 million of them would receive a net tax cut, according to Treasury’s analysis.
When combined with Biden’s other proposals, like a federally funded paid leave program and provisions to increase small business access to federal government contracts, “we’re making investments in the human capital infrastructure of the U.S. that will actually benefit small businesses and help them play on a level playing field going forward,” Treasury Deputy Secretary Wally Adeyemo told reporters during an August 19 conference call.
However, not all of Biden’s tax plan was included in Treasury’s estimate, according to the official. Biden has proposed several more tax increases on individuals, including his proposal to limit section 1031 exchanges to $500,000 in gain or his proposal to tax unrealized gains at death above a $1 million threshold.