# Let’s Fix This: Build Back Better Plan And Observations On Small Business Provisions

Written by Annette Nellen | Posted in Build Back Better Plan • Small Business Provisions

Tax items in President Biden’s Build Back Better plan were modified a bit by the markup that passed in the House Ways and Means Committee on 9/15/21 (24-19 with one Democrat voting no). I just want to comment now on a few relevant to “small business” including a reminder of the need to apply critical thinking to understand changes and commentary on them including from elected officials.

1. Corporate Rate Change: President Biden proposed to increase the TCJA rate of a flat 21% to 28%. The Ways and Means markup doesn’t go that high and brings back a graduated rate structure which includes a rate cut for corporations with taxable income of $400,000 or less. The markup rate structure is:

$1 to $400,000 18%
$401,000 to $5 million 21%
$5,000,001 and above 26.5%
$10,000,001 and above a surtax applies at 3% to phaseout the benefit of the graduated rates. At almost $20 million or more of taxable income, the corporation has a flat rate of 26.5%.

So, interesting that the markup partially reverses the corporate rate increase of the TCJA that occurred when the graduate rates as low as 15% were replaced with a flat 21% rate. But there are likely not a lot of C corporations with taxable income of $400K or less as they likely operate in as a different business entity type.

2. QBI Deduction: The TCJA temporarily added a qualified business income deduction for non-corporate entities to provide some equity for the rate cut that most C corporations got. This deduction at Section 199A exists for 2018 through 2025. While campaigning, President Biden proposed to reduce this for individuals with income above $400,000 but no change is included in his proposal of earlier this year. The markup caps the 199A deduction at $400,000 ($500,000 if MFJ). At a deduction rate of 20%, that means that once the business reaches $2 million ($2.5 million if MFJ) of qualified business income (income not gross receipts), it gets no more Section 199A deduction.

That is a high level of QBI and likely affects less than 1% of owners of non-C corporation entities. This seems like a high level and helps improve progressivity of our tax rates. That is, if someone in the top rate also gets a 20% deduction against their business income, that does bring the effective tax rate down.

3. A reminder of the need to be critical thinkers: A 9/22/21 press release from the House Ways and Means Republicans offers ten reasons to oppose the markup. Reason #3 says the markup will “hammer” small businesses struggling after COVID. It states:

“Higher 39.6 percent income tax rates (which is where most small businesses pay taxes)…”

I can’t help but say “wow!” That is not the tax rate for the vast majority of small businesses. Less than 2% of individuals are in the top tax bracket. The markup imposes the 39.6% (rather than the TCJA top 37% rate) once a married couple filing jointly has over $450,000 of taxable income. Most small businesses don’t have that much income. If they did, they really don’t fall into the “small” category (as then, what is a medium or large business?). And again, less than 2% of individuals reach the top levels. The IRS reports that the top 1% of individuals had AGI, on average in 2018, of $540,009 (this is before itemized deductions and tax credits). The top 10% had AGI of $151,935.

Note: I realize that misstatements come from members of both parties. It is unfortunate since they have good access to correct data and many people believe they are using that data correctly.

Lets Fix This: There is a lot in the markup including various tax credits. I think there is a lot of new complexity added, perhaps as much as we had with the TCJA (a lot of which we have gotten used to by now though – but not a reason to add more). Missing from the bill, as with the TCJA, are stated goals of what are we trying to do and will this bill meet those goals? I attribute this to the process and having just one party craft the bill and then enact it via budget reconciliation which limits what all can go into the bill, and limits useful discussion and public comment.

Let’s keep pushing for true simplification, neutrality and equity. There are a lot of complex, inefficient and inequitable provisions in our current law and they will still be there after this tax bill is enacted.

#letsfixthis [my new hashtag]

What do you think? Annette Nellen

Annette Nellen

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.