Democrats are in the Rule. What’s the Plan?
The Democrats now in charge of Washington are aiming for higher taxes for most high-income earners. Now that Covid relief has slowed down, CPAs are refocusing to a Democrat-controlled Presidency and Congress. We are being asked by our clients “How much will my taxes go up next year?” and “What do you propose I do about it?” Without new tax law, answering these questions is more like being on a game show. Would you like door number 1 or door number 2?
Did you see Carrie Christensen’s article in the Summer 2021 edition of The KT Addition regarding President Biden’s proposed tax increases? If you missed it, click here: https://www.ktllp.cpa/provisions-in-bidens-tax-proposal-that-may-cost-you-money/. To summarize, if you make more than $400k per year you could be looking at tax increases. The important part to remember here is these are proposed tax increases. No bill has been signed into law and this is all speculation. President Biden has provided a wish list to Congress, and it may take an act of God for the entire wish list to become law. The one thing we can count on is that the tax bill for higher income folks will not decrease.
In a time of uncertainty, it is important to do two things: First, pay attention to the big picture. The proposed tax increases range from 2.6% to 20%. If you are only subject to the 2.6% increase, that is less than inflation currently and no planning may be needed. However, if you are looking at a 20% tax increase, we should develop a plan. Second, we should stay flexible. Flexibility can give your accountant the options and tools needed to play the tax code like a banjo.
If you’re concerned about higher future tax rates, there are a few topics we can address. We can review your business’s accounts receivable collections or billing. Likewise, we can also discuss your accounts payable payments and accruals. Pulling the right levers can influence your 2021 and 2022 taxable income levels. If you have appreciated assets or installment contracts, we could also discuss methods to trigger gains now but leave your appreciated assets intact.
Everyone knows they can get a tax write off from buying business equipment and certain other business assets before year end, but did you know you can also elect new accounting methods that could increase or decrease your 2021 and/or 2022 business taxable income? We can review your position and determine if a different accounting method would generate more favorable outcomes during a time of higher tax rates. If we are talking accounting methods, maybe it is a good time to also review the type of entity the business is being operated out of. Could a different entity type help you reach your goals faster?
No one likes to throw around the “E” word, but extensions could be our best friend next year. Imagine you are on a game show to win a new car and the game show host asks you to pick door number 1 or door number 2. The only trick is the host will open both doors in 5 minutes and you can wait 6 minutes to answer. Seems silly not to wait right? If we turn the calendar over without new tax law, the game plan should be to get the 2021 data in and the 2021 tax forms worked up. From there we can create door 1 and door 2, wait 5 minutes and see what the host has behind door number 1.
Please contact the KTLLP Team if you have any questions about future tax rates and how planning may be able to save tax dollars for you and/or your business.