Pub. 10 2021 Issue 5

26 Update From the Hill: Preparing for Upcoming Changes By Col l in Thompson, BKD CPAs & Advisors W e may not always enjoy change, but we seem to always be preparing for it. Preparing for proposed changes to tax laws and other compliance issues can be especially frustrating due to the constant changes in what is being proposed versus what is later signed into law. However, implementing proactive tactics and planning in response to key proposals can result in fewer headaches and potential tax savings if implemented correctly. On Sept. 13, 2021, the House Committee on Ways and Means (HCWM) released a multitude of tax proposals as part of the $3.5 trillion tax and spending package that Democrats and the White House hope to pass this fall. While there are several proposals being pushed through Congress, perhaps the most notable for C corporation banks is the proposed change to the corporate tax rate. The HCWM is proposing an increase in the corporate tax rate from 21% to 26.5% for corporations with income exceeding $5 million, maintaining the 21% rate for those with $400,000 to $5 million of income and decreasing the rate for those with $400,000 or less of income. The change is intended to be effective for tax years ending after Dec. 31, 2021. Regarding S corporation banks and their shareholders, the following two proposals are perhaps the most notable: • The maximum deduction under Section 199A would be $500,000 for a joint return, $400,000 for an individual return, and $10,000 for a trust or estate. Under current law, there is no cap, and the bank shareholder was potentially receiving a 20% deduction on every dollar earned by the bank, which drove down the shareholder’s effective tax rate. • The net investment income tax (NIIT) would be expanded to cover net investment income derived in the ordinary course of a trade or business for taxpayers with modified adjusted gross income greater than $400,000 for single filers or $500,000 for joint filers, as well as for trusts and estates with income subject to the highest tax bracket. Essentially, this change would subject all earnings from pass-through businesses to either the 3.8% of self-employment Medicare tax or the 3.8% NIIT, regardless of whether the income is from a passive or nonpassive activity. As the old saying goes, “In this world, nothing can be said to be certain except death and taxes.” With the mentality that all income will eventually be taxable, the short-term concept