On March 31, 2021, President Biden introduced a $2 trillion “American Jobs Plan.” The American Jobs Plan, as outlined by the Biden Administration in a simultaneously-released fact sheet, contains a sweeping set of proposals to increase investment in infrastructure while offsetting the costs of these proposals with a “Made in America Tax Plan” (the “Tax Plan”). The changes proposed in the Tax Plan are primarily directed at corporate taxpayers, so they may not directly affect partnership taxpayers but could significantly affect a taxpayer’s decision whether to conduct business through a C corporation or an entity taxed as a partnership, including limited liability companies taxed as partnerships.
Although the plan is light on details, the Tax Plan proposes to increase the corporate income tax rate, create a new corporate minimum tax regime, and incentivize corporations to remain organized in, and keep their earnings and profits in, the United States. For a more detailed discussion of the proposals affecting C corporations, click here. Several of the proposals would unwind some of the changes made by the 2017 Tax Cuts and Jobs Act (the “TCJA”).
The TCJA’s reduction of the corporate tax rate from 35% to 21% significantly reduced the double tax disadvantage of C corporations as compared to partnerships, at least in the case of partners who do not qualify for the TCJA’s 20% deduction for passthrough income under section 199A. The Tax Plan’s proposed increase in the corporate tax rate, from the current level of 21% to a new 28% rate, could cause more businesses to decide to operate as tax partnerships rather than C corporations.
However, the higher corporate tax rate is only one piece of the puzzle. In the coming weeks President Biden is expected to announce proposed changes to the tax rules for noncorporate taxpayers as part of his American Families Plan, which may include higher tax rates for individuals with income in excess of $400,000 per year and the repeal of section 199A.
The partnership and limited liability company form of organization is often used for businesses in the fossil fuels and clean energy industries. For a discussion of provisions of the Tax Plan impacting the fossil fuels business click here; for a discussion of the provisions of the Tax Plan and the American Jobs Plan affecting clean energy click here.
The Made in America Tax Plan includes limited details regarding these proposals, but the Treasury Department is expected to release its “Greenbook” containing specifics regarding these proposals in a matter of weeks. We will continue to monitor developments and will provide further updates as more details are released. In the meantime, Baker Botts would be pleased to assist you in your analysis of these proposals.
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