Things to Consider
With current and upcoming governmental spending packages likely to be financed to an extent by tax increases, there are many things to consider. For example:
Should you still use the old tax stagey to defer taxable income?
Do you need to review your estate and/or succession planning?
Should you update long term business plans?
Should land and other appreciated assets be reviewed?
Overview
U.S. Treasury Secretary Janet Yellen, in an interview with CNBC, stated in reference to paying for the spending packages,
"[c]ertainly part of the package, the parts that are permanent, will be paid for in order to not raise long-term deficits... and probably tax increases to pay for at least part of it would probably phase in slowly over time."
Yellen also downplayed the potential risk of inflation from trillions of dollars in new stimulus and infrastructure spending, saying that inflation has been low for a decade and the Federal Reserve has tools to deal with it. History points to higher interest rates as its main inflation control option.
Non-tax considerations
In a recent article, we talked about the tax credits available on alternative energy equipment. Based the administration’s desire to expand that sector of the economy, it might be advisable to wait until their proposals are enacted into law before making expenditures in that sector. Note: do not allow delayed spending to impede operations.
A business owner should update their long-term business plan to reflect the possibility of higher taxes and interest rates. Review the forecast to consider whether there will be adequate cash in the forecast to pay higher taxes and fund the forecasted operations. Consider the impact of possible higher operating cost due to inflation. Is there a long-term “fixed rate” credit line in place? If not, can one be established? Should a long-term loan like a home loan be secured at the current low rates to assure low-cost funds in the future. The warning here is that aggressively leveraging in certain business sectors is not recommended. However, with the current rates as low as they are, (2.3% for a 30 year home loan), a prudent leverage might be beneficial. If money is tightened by the Federal Reserve to combat inflation, any funds that might be available to borrow will be at a higher interest rate. Review your long-term financial commitments for assets like land and equipment to identify any that might be subject to increases triggered by higher prime rate. Use the home loan as a hedge against rate increases and payoff variable loans tied to the prime rate. Do not use added loans for additional expansion of operations. Too much leverage has killed many businesses. Look for existing operational needs for cash. Remember: cash is king, treat it wisely.
Tax considerations
Is the old tax plan to defer taxable income as long as possible still the best long term tax strategy? Currently the capital gains tax and income tax are at a historically low rate. There is an open intention to raise certain tax rates. Tax planning to possibly trigger some capital gains and/or to accelerate taxable income might be in order to take advantage of the current rates. Land and other appreciated assets should be reviewed to identify areas that might be useful in selective triggering of the desired type and amount of taxable income.
Any triggering of taxable income should be done with a long-term outlook. Review of estate and/or succession planning should be included in this process where appropriate. Reduction in the current estate tax exclusions might be target for government revenue enhancement. Accelerating planned gifting and other estate or succession tax planning strategies should be considered. This acceleration could help limit the impact of any increases in the taxation of accumulated wealth. Identifying those opportunities and reviewing the processes that are needed to implement them should be done sooner than later.
Summary
This year will be a tough year to do tax planning. However, a business should take some time to review his operations to identify areas that might be impacted by higher tax and interest rates. Be ready for more new tax laws in 2021 and future years to pay for the stimulus and the other agendas. Hopefully, changes will be prospective to allow some time for tax planning and none will not be retroactive. Identifying the planning opportunities early will help in responding to changes that impact your operation. Your tax adviser should be able to help with identifying the planning opportunities.