Kamala Harris, the current vice president, has suggested various changes to the tax code. She has proposed increasing the top marginal income tax rate to 39.6% for the wealthiest Americans.
Additionally, she supports a 4% income-based premium on households earning more than $100,000 annually to support a healthcare program similar to “Medicare for All.”
Another proposal she backs includes raising corporate tax rates to 35%.
These tax changes are part of the broader Biden-Harris administration’s plans to fund government projects, such as infrastructure and education. They aim to address economic inequality and support public investments.
Small Businesses Face Higher Taxes If Kamala Harris Is Elected
Many small-business owners might find themselves paying more in taxes if Kamala Harris becomes president. Her stance on tax policies has similarities with those of President Biden, including support for ending parts of the 2017 Tax Cuts and Jobs Act (TCJA).
This could have a significant impact on small businesses across the nation.
Changes in Tax Deductions
The end of the Qualified Business Income Deduction (QBI) could be a big blow. This deduction currently allows small businesses to deduct up to 20% of their business income before it passes through to their individual tax returns.
For instance, if a small business makes $100,000 in income with a tax rate of 20%, the QBI deduction allows them to pay only $16,000 in taxes. Without it, they would have to pay $20,000.
Higher Corporate Tax Rates
Small businesses operating as a C-Corporation may see their tax rate increase from the current 21% to 28%. While former President Trump and the GOP aim to reduce this rate to 20%, Harris’s plan would push it in the opposite direction.
Capital Investments
The bonus depreciation provision in the TCJA, which allows businesses to immediately deduct up to $1.1 million of capital equipment costs, is already phasing out.
If it expires, businesses will have to depreciate these costs over the useful life of the assets.
So, instead of deducting $500,000 in the first year for a piece of equipment, businesses would only be able to deduct $100,000 each year over five years.
Research and Development
The ability to deduct research and development costs in the first year has already expired. Businesses now have to spread these costs over five years, which could hinder innovation and growth.
Higher Individual Tax Rates
Individual tax rates for high-earning small-business owners could increase to a maximum of 39.6%, up from the current 37%.
Additionally, their capital gains tax rate could rise to 44.6%, compared to the current 20%.
Medicare Taxes
Medicare taxes might also climb from the current 3.8% to 5%. This could be a substantial hit, especially for those who reinvest much of their earnings back into their businesses.
Decreased Standard Deduction
The individual standard deduction could fall from $12,400 to $6,200, leading to smaller deductions for many small-business owners.
Estate Tax Changes
The individual estate tax exemption may drop from $13 million to about $6.5 million. This increases the amount of assets subject to a 40% estate tax upon death.
More IRS Audits
The IRS has announced plans to focus more on auditing higher earners. This means increased costs and hassle for those selected for audits, even if they have done nothing wrong.
Impact on Small-Business Owners
The tax policies proposed by Harris could lead to significant financial changes for small-business owners. Between losing the QBI deduction, higher tax rates, and reduced deductions, the financial landscape for small businesses could become more challenging.
Each political angle has its own set of economists and supporters. For small-business owners, navigating through these changes will be crucial to maintaining their financial health and sustaining their business growth.
Image credit: Whitehouse.gov under the Creative Commons Attribution 3.0 License.