September 29, 2021
Lawmakers in the House were expected to vote this week on the Senate-passed $1.2 billion bipartisan infrastructure bill and the $3.5 trillion budget reconciliation bill, which Democrats are working to push forward as a key component of President Biden’s agenda. Adding to the already heightened drama, lawmakers are also facing a possible government shutdown with government funding scheduled to lapse after midnight on September 30.

The reconciliation bill is a top priority for Democrats and the Biden administration, focused on expanding the social safety net and addressing climate change. The package pays for spending on healthcare, retirement, education, families and initiatives to address climate change by increasing taxes on higher-income individuals and large businesses.  However, a number of the tax increases proposed in the bill could impact smaller businesses by modifying or reversing business- friendly provisions from 2017’s “Tax Cuts and Jobs Act.” Republicans uniformly oppose the bill, while some moderate Democrats are concerned by both the price tag and the need for tax increases to cover it.

Jewelers of America, with the help of our legislative counsel, Haake & Associates, has prepared a summary of the key tax proposals in the budget reconciliation bill that could impact small businesses. We urge JA members to use this JA Legislative Alert to contact their representatives in the House and Senate to let them know how increased taxes could hurt their businesses.

Reversal of Pass-Through Benefits

Back in 2017, small businesses that operate as pass-through entities – sole proprietorships, partnerships, limited liability companies and S corporations – saw beneficial changes to the tax code. This had a major impact on jewelry businesses, many of which are structured as pass-throughs. Proposed changes put forth include:
  • Capping the special deduction for pass-throughs to $400,000 for individuals and $500,000 for married couples. The provision from the 2017 tax reform allows most pass-throughs to deduct 20% of qualified business income from their taxes.
  • Expanding the base of the 3.8% Net Investment Income Tax (NIIT) to apply to active business income for pass-through firms. Currently, the tax applies to wages, self-employment income and passive income, but not other types of income.

Increases in the Capital Gains Tax Rate

The current proposal would increase the top capital gains tax rate from 20% to 25% and adjust the top capital gains tax bracket to $400,000 for single filers, $425,000 for head of household filers, and $450,000 for joint filers. Unlike the plan unveiled by President Biden earlier this year, the current proposal doesn’t change the income-tax rules that allow unrealized capital gains to go untaxed at death.

The proposed plan would also increase the holding period for carried interest from three years to five years to receive long-term capital gains treatment. This period is retained for less than $400,000 in income.

The Estate Tax Strikes Back

If passed in its current form, the bill would reverse the doubling of the estate tax exemption that Congress created in 2017. At the time, the estate tax exemption went from $11 million to $22 million per couple (and from $5.5 million to $11 million per individual).

While the increase was set to expire at the end of 2025, under the Democrats’ proposal it would end after 2021. The plan would also limit estate-planning techniques, including some uses of grantor trusts and asset transfers with discounted values.

Jewelers of America has long supported repeal of the estate tax and considered the changes in 2017 to be a win for Jewelers of America members, the majority of whom have revenues below the current threshold.

Corporate and Individual Tax Rate Increases

The proposals are meant to target wealthy taxpayers and larger businesses. For individuals, the top marginal tax rate would rise to 39.6% from 37% starting in 2022. It would kick in at taxable income of $400,000 for individuals and $450,000 for married couples.

Individuals and married couples with adjusted gross income above $5 million would also face a 3-percentage-point surtax under the plan.

The corporate tax rate, which dropped from 35% to 21% in 2017 could see its top tax rate rise to 26.5%, with some Democrats in the Senate seeking a rate of 25%. Smaller companies would get tax brackets with lower rates, at 18% on the first $400,000 of income; 21% on income up to $5 million, and a rate of 26.5% on income thereafter.

Last-In, First Out (LIFO) Remains

While lawmakers on both sides of the aisle have looked to repeal of the LIFO accounting method to raise revenue, businesses can breathe a sigh of relief, as the current proposal does not touch LIFO. That said, we anticipate that repeal remains a threat for businesses and something that we continue to monitor.

You Can Still Affect Change

While Timothy Haake of Haake & Associates expects a budget reconciliation bill will eventually pass in some form, you still have time to speak up about how the proposed budget would impact your business. With the stakes high, Congress closely divided and Democrats trying to bring both their progressive and moderate members together, the proposals are likely to see changes up until the final hour. Learn more about how you can raise the industry’s voice – through the Jewelers of America Political Action Committee (JAPAC) and by using our Legislative Action Center.
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