Submission of the president’s budget to Congress is an annual ritual that officially kicks off the Congressional appropriations process. In keeping with tradition, the Biden Administration unveiled its proposed Fiscal Year 2024 budget in March.
As expected, the proposal includes billion-dollar-plus increases for most federal agencies and departments. What attracted our attention, though, is that it also includes some hefty revenue raisers on small and medium-sized Main Street businesses. Among the more egregious provisions is a proposal to expand the Net Investment Income Tax (NIIT) to include the active income of pass-through business owners. Recall that the original NIIT purposefully excluded the business income of active owners because it was seen as a tax on small businesses. The administration is proposing to reverse course on this front by characterizing this exclusion as a “loophole.”
The proposal would increase the NIIT’s rate from 3.8 percent to 5 percent. That would raise the top rate paid on all S corporation income to 42 percent, or twice the current rate on large public companies structured as C Corporations. When tax rates are slated to increase in 2026, the top S corporation rate will rise to nearly 45 percent. The Joint Committee on Taxation scored the NIIT expansion as raising 252 billion dollars over ten years. Combined with the scheduled rate increase on S-Corporations in 2026, it is estimated that it would result in a tax increase on small businesses that exceeds $300 billion. The Hardwood Federation, joining other association representatives of the broader business community, signed a letter to Congressional leaders opposing this proposal.
Also included within the U.S. Department of Treasury’s General Explanations of the Administration’s FY2024 Revenue Proposals, colloquially known as “The Greenbook” (a document to explain the revenue proposals included in the president’s budget) there are other proposed revenue raisers that are worth flagging. While there is no proposed elimination of the “stepped up in basis” that was floated during the Build Back Better legislative exercise, the administration is proposing basically the equivalent. Under the president’s budget, any transfer of wealth or assets at death would be characterized as an income recognition event, meaning that the assets would be considered income and be taxed at fair market value. Under current law, taxpayers may transfer wealth at death without triggering income taxes.
The proposal would also impact the flow of wealth into or out of a grantor trust. Under the president’s budget, any deposits or withdrawals from a grantor trust would be considered a “sale” for income tax purposes and trigger a capital gains tax. Currently, these transactions are tax-free.
On the corporate side, the proposal would increase the corporate tax rate to 28 percent from the current 21 percent rate.
It is important to remember that administration budget proposals are generally messaging documents to signal to Congressional appropriators the president’s policy priorities. The divided nature of this Congress with each party maintaining slim majorities in one chamber, means these proposed revenue raisers will face stiff headwinds on the Hill. The Hardwood Federation will, however, be tracking these proposals closely for any traction they may find in the 118th Congress.
In response to the president’s budget priorities and in response to input from their constituents, Congressional leaders are taking tax-related actions of their own. Rep. Tracey Mann (R-KS) is leading a resolution in the House to highlight the importance of maintaining a stepped-up basis for preserving small businesses. The resolution notes that eliminating a stepped-up basis would threaten the ability of small business owners to make generational transfers of their operations. Rep. Adrian Smith (R-NE), a member of the House Ways and Means Committee, has also lent his name to the resolution.
Earlier this month, a bipartisan group of Senators led by Senators Maggie Hassan (D-NH) and Todd Young (R-IN) introduced legislation to extend the research and development tax credit that expired last year and expand it to apply to more startups and small businesses. Specifically, the bill would roll back a provision of the Tax Cuts and Jobs Act (TCJA) of 2017 law that starting in 2022, requires companies to amortize their research and development costs over five years rather than the year in which they are incurred. It would also expand the eligibility for the refundable research tax credit and would gradually raise the cap for that credit for small businesses and startups.
Extending the credit is a top priority of the business community and was in the mix as part of omnibus appropriations bill negotiations late last year, but an agreement could not be reached. Also in that mix, and arguably more important for our sector, is extending the 100 percent bonus depreciation benefit of the TCJA. Recall that full expensing ratcheted down to 80 percent at the beginning of this year and is slated to decrease by 20 percent each year until fully phased out in 2027. Legislation has not yet been introduced to extend this benefit retroactively to January 1, 2023, but we know this issue is a priority for House Ways and Means Committee Chairman Jason Smith (R-MO). Advocating for retroactive extension of this critical tax benefit will be a centerpiece “ask” during our fly-in.
The Hardwood Federation is also working to push for legislation that will restore the industry’s ability to take full advantage of a tax break, known as the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) deduction, for interest incurred on business loans, a provision which expired last year. Again, this is a broader tax issue of concern to business associations, large and small. Sawmills and other capital-intensive operations rely on tax breaks directed at financing costs to raise capital, hire new workers, and expand operations. During the past year, interest rate hikes have led to higher financing costs and are taking a bite out of revenues. Sen. Shelley Moore-Capito (R-WV) is expected to lead the charge on legislation in the near future.
As always, the Hardwood Federation team is close to the action on Capitol Hill and will continue to educate lawmakers about the need to preserve these key tax benefits as well as our concerns with any tax proposal that may affect our businesses or the ability to transfer them to future generations.
Dana Lee Cole is the executive director at the Hardwood Federation, a Washington, D.C.-based hardwood industry trade association that represents thousands of hardwood businesses in every state in the United States and acts as the industry advocacy voice on Capitol Hill. She can be reached at firstname.lastname@example.org.