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  • Tax Rate Increases Probable: A Preview of The American Families Plan

    Congress is currently debating numerous tax and benefit details of President Biden’s American Families Plan (AFP). Significant changes to the federal individual tax system are in the offing, with most taking effect beginning with the 2022 year.

    As the close of the 2021 third quarter nears, a small window of time remains to strategically plan for these potential tax changes. Our clients, and veterinary practice owners in particular, may want to act on specific tactics before yearend in the face of rising tax rates and lowering tax brackets.

    While the specifics of proposed law changes are cloudy, we do know, in general, what the changes will entail should the current plan released by the House Ways and Means committee on 9/15 become law. Be aware that changes are definitely coming and will continue to evolve rapidly over the next few weeks and months leading to year end. Before you take any substantive tax actions, please consult with your tax accountant to confirm that they make tax-sense for your specific unique circumstances.

    Individual Tax Rates
    As a general premise of the AFP, tax rates will increase for higher income Americans. The latest proposal includes an increase in the tax rate and a possible addition of an additional surtax at income greater than one million dollars. It also outlines lower tax brackets which will result in higher tax rates at lower income levels. These changes generally indicate that in most cases higher income Americans who can do so should accelerate income into 2021 and defer expenses until 2022 and beyond.

    This strategy will be very compelling for business owners who may be adversely affected by increases in self-employment tax, the net investment income tax surcharge, and reduction of the 20% QBI deduction (QBID). The interplay of income acceleration with the QBID will prove a difficult planning choice for some veterinary practice owners.

    Capital Gains Rates
    Capital gains rates will steeply increase, under current proposals. Some suggestions have been made to make these changes retroactive, but assuming they do not go into effect until 2022, a prudent tax move would be to recognize gains on investments (including practice sales) and real estate in 2021 in order to minimize the income tax burden. The rate changes proposed are varied, as are tax brackets, but the bottom line is that the rates will increase. Additionally, taxpayers can expect broader application of the 3.8% net investment income tax (NIIT) surcharge on capital gain transactions.
    The existing high credit amounts for children and child-care would continue under this plan, so no action is required to benefit from these changes.

    Energy credits such as solar and wind investment are expected to go up. Stalling 2021 project completion until 2022 may be a good tactic to investigate.

    Small Business Owners
    Of particular concern are the massive changes proposed for small business owners, with large increases for self-employment tax at all income levels, not just high-income levels. A concern for many years has been the threatened self-employment taxation of pass-through entity distributions, such as from SubChapter S Corporations and real estate entities. It appears this fear may now come to pass.

    The proposals will affect taxable income from operations as well as business asset sales, so it is incredibly important for business owners to plan in advance with tax advisor assistance as soon as possible while there is still time. To illustrate the potential impact to veterinary practice owners, we just attended a class where the instructor depicted an average business yielding $100,000 of profit would likely cause its shareholder to pay another $7,650 in 2022 tax as compared to 2021 tax.

    Home and Property Sales
    Homeowners and property owners who are considering the sales of their home, building, land or farm at a large profit may wish to accelerate sales into 2021 before the proposed, increased capital gains rates take effect. A looming concern is that of retroactive application of law changes to sales in 2021, but this is still up for negotiation by lawmakers.
    Taxes will be increasing in 2022 for wealthier Americans, including small business owners like veterinarians. You may be able to blunt some of the pain; work with your tax advisor before the end of the year. Don’t wait, as accountants will be heavily engaged helping clients through December 31.

    Each situation is different and requires planned thought and action. The cost of 2021 planning actions should be more than offset with 2022 and future tax savings.

    Give your practice the advantage of working with the only CPA firm led by a DVM.

    Talk with us! Our integrated consulting, accounting and tax services safeguard your practice and your family. Call Now! (440) 926-3800