With the transitioning of presidential administrations, small businesses will see a transition as the Biden Tax Plan comes to the forefront in 2021. We have seen many business owners search on Google, “How Does the Biden Tax Plan Affect Small Businesses?”. Consequently, small business owners have been searching on how much will the tax rate for small business go up, or stay the same, with the Biden administration. At Barta Business Group, an accounting and bookkeeping firm in Denver, Colorado, we have compiled some key points for small businesses to prepare for in 2021.
How Does The Biden Tax Plan Affect Small Businesses?
Here are some key statistics to consider from the U.S. Small Business Administration Office of Advocacy’s 2020 Small Business Profile:
- There are over 30 million small businesses (under 500 employees) in the United States
- Of this group, 25 million of these small businesses employ fewer than 20 employees. This group added 1.1 million jobs in 2019 of the total 1.6 million jobs added by all small businesses.
- The medium income for small businesses is $50,000 – $100,000.
For simplicity purposes, to answer the question How Does The Biden Tax Plan Affect Small Businesses, I’ve decided to focus on two areas of the tax plan:
- Raising the corporate income tax rate to 28% from the current 21%
- Phasing out the Qualified Business Income Deduction (QBID) for filers with taxable income above $400,000
Raising the Tax Rate from 28% from 21%
For all businesses, this would be a 33% increase in their taxable net income (after owner salaries are paid). For a business with a net income of $100,000, this would be an additional $5,600 in taxes. There is a possibility that the Biden Tax Plan may not raise this rate on businesses under $400,000 in net income.
For a business with a net income of $400,000, this would be an additional $22,400 in taxes.
No Qualified Business Income Deduction ($400,000 net income and above)
For businesses under the $400,000 threshold, no additional increase in taxes.
For businesses that fall in the $400,000 net income and above, the estimated taxes could be an additional 33%, or an additional $22,400.
What Can Small Business Owners Do Now To Prepare for the Biden Tax Plan?
- Consult with your CPA, before the end of the year, to coordinate your tax strategies and options. An experienced and qualified tax professional, who stays abreast of tax law changes, can save a business owner thousands of dollars.
- Consider changing your LLC to tax it as an S corporation. Completing Form 2553 to elect a S corporation status will give you options of deducting car payments, home office expenses, continuing education tuition, travel and 50% of business meals. Under the S corporation designation, the business owners would avoid paying the self-employment taxes associated with distributions, if they pay themselves a reasonable salary through payroll.
- Consider reinvesting in your business or investing in clean energy. Investing in clean energy and other Biden favored areas may effectively allow 100% deductions for every dollar invested. Reinvesting in your business through equipment, back of the house efficiencies will reduce your taxable income and tax liability.
The first few months of the Biden administration may give small businesses owners insight into how the Biden Tax Plan will affect small businesses. Will you be prepared?
About Barta Business Group
Most businesses are great at their craft, but not great at all the financial back of the house. At Barta Business Group, a small business bookkeeping and accounting firm in Denver, CO, our team of bookkeeping, accounting, and finance professions guide business owners in making better decisions so they can focus on doing what they love in their business. Learn more about us by scheduling a consultation with us today.