On January 20, 2021, Joe Biden was officially sworn in as the 46th president of the United States. But even before he took the oath of office, discussions were swirling in the business community regarding how the new president’s positions on tax matters might affect industry.
Biden’s inauguration comes a little over three years over the passage of the Tax Cuts and Jobs Act of 2017, the landmark tax overhaul that, for the most part, cut rates for corporations and individuals at all levels of income. From the beginning of his campaign, Biden has promised to “eliminate the Trump tax cuts.” But now that he is in office, the President has clarified that he is committed only to a partial rollback of the law, aiming to make permanent the tax cuts that went to lower- and middle-class Americans, while raising taxes on corporations and those earning more than $400,000 per year. With those changes, he aims to recoup tax revenue and raise trillions of dollars to pay for infrastructure, clean energy and education, among other programs.
How might these changes impact tech company earnings? BPM has combed through his platform and highlighted what we think are the five proposals that would have the biggest impact on tech companies’ tax burdens. Read on for a glimpse of what the next four years might have in store for the industry.
1. Corporate Tax Rate Hike
While startups do not generally pay corporate income taxes — being usually in an income-negative position for at least the first few years of their existence — established software and computing firms do tend to pay substantial amounts each year in income taxes. The TCJA established a flat corporate income tax rate of 21%, thus considerably lessoning the burden for businesses that were previously paying the highest marginal tax rate of 34%. Biden has proposed raising the rate once again, though not to the full 34%. Instead, Biden proposes a flat 28% tax rate. That would still put the U.S. at a significantly higher rate than most countries around the world, however: In the U.K., for instance, corporations pay a 19% tax on income, while in China the rate stands at 25%. On this account alone, tech companies can expect materially larger tax bills in years to come should Biden get his way.
2. Changes to GILTI and FIDII
Global intangible low-taxed income, or GILTI, is a category of income introduced by the TCJA that aims to discourage companies from shifting profits out of the U.S. by taxing U.S. companies with foreign subsidiaries on any earnings they receive from those subsidiaries. Similarly, foreign-derived intangible income, or FDII, is also a new category of income created by the TCJA, however its aim is to incentivize corporations to generate revenue by serving foreign markets by applying a 37.5% deduction against taxable foreign-derived income, thus lowering the effective tax rate to 13.125%. Technology firms, whose assets tend to include valuable intellectual property and also tend to do a lot of overseas revenue, naturally are affected by both of these tax code provisions.
In the absence of any new language stating otherwise, the tax code is structured such that any increase in the corporate tax rate would also trigger changes to GILTI. Thus Biden’s plan would increase the tax rate on GILTI from its current rate of 10.5% to 21%. Not only that, Biden’s plan would eliminate the exemption on GILTI for “routine” returns on foreign tangible assets — defined in the tax code as 10% annual returns — that the tax code currently provides for. Finally, GILTI would be calculated on a country-by-country basis, meaning that taxpayers would generally be unable to exploit the disparities between high- and low-tax countries to offset their GILTI amounts.
3. New Alternative Minimum Tax
On the surface, increasing the corporate tax rate would seem to increase the benefits of anything that reduces taxable income, including FDII deductions. However, Biden aims to prevent companies from eliminating their tax liabilities by imposing a 15% alternative minimum tax on book profits (not taxable income) over $100 million. The TCJA repealed the alternative minimum tax on corporations for years beginning after 2017, although it is difficult to compare the two taxes because the pre-TCJA AMT applied to “alternative minimum taxable income” rather than book income.
4. Offshoring Penalty (and “Made in America” Credit)
To encourage the domestic manufacturing sector and discourage offshoring U.S. jobs, Biden proposes imposing a 10% offshoring tax penalty. The penalty would be a 10% surtax — i.e., on top of the 28% corporate tax rate — on the profits of foreign production intended for sale in the United States. The penalty would be applied not only to manufacturing but also to call centers and other services. Between the 28% corporate tax rate and the 10% surtax, companies would pay a 30.8% on profits from foreign production.
The stick is also accompanied by a carrot, however: a “Made in America” credit, to be specific. Biden would offer a 10% tax credit that could be applied to certain expenses associated with returning production back to the U.S., revitalizing closed or closing manufacturing facilities, increasing wages to U.S. workers, and retooling facilities to increase competitiveness or employment. Between the offshoring penalty and the Made in America credit, tech companies will want to take a harder look at where they decide to manufacture their products and host their call centers and other services, should this aspect of Biden’s plan come to pass.
5. New Payroll Tax on Large Salaries
Salaries in tech among are widely acknowledged to be among the highest of any U.S. industry, and higher-ups especially can likely expect their tax burden to go up under Biden’s presidency. The main targets of Biden’s personal income taxes will be affluent individuals, starting with increasing the top marginal tax rate on ordinary income from 37% back to its pre-TCJA level of 39.6%.
Additionally, Biden would like to create an additional payroll tax on wages over $400,000. Currently, a Social Security payroll tax of 12.4%, split between employer and employee, is levied on the first $137,000 of an employee’s salary. (There is also an additional Medicare tax of 2.9% that is not income-capped.) Biden’s plan would establish a threshold of $400,000 above which the Social Security payroll tax would be re-imposed. Commentators have described the resulting arrangement as a “donut hole.”
BPM Corporate Tax Planning for the Technology Industry
At BPM, our tax professionals keep their fingers trained on the pulse of the tax profession. From analyzing potential policy changes and IRS enforcement actions, to incorporating cutting-edge technology and innovative approaches tax planning, BPM’s Corporate Tax Services group possesses the expertise and experience to help you navigate the operational and financial challenges that impact your business. To learn more about how BPM can help your business best prepare for potential tax changes ahead, contact BPM’s Bob Houston today.