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In 2018, during former President Trump’s tenure, the corporate tax rate was significantly lowered from 35% to 21%. This change was met with enthusiasm by many companies.
Since then, President Biden has pledged to increase this rate again, but implementing this change has proven difficult. In the latest budget proposal from Biden’s administration, the goal was to raise the corporate tax rate to 28%.
Recently, Vice President Kamala Harris has reiterated this plan as part of her campaign, aiming to bring the rate back up to 28%.
The implications of this rate hike are substantial. According to some estimates from the Committee for a Responsible Federal Budget, Harris’s proposed increase could potentially reduce the U.S. deficit by over $1 trillion over a decade.
The Congressional Budget Office has also noted that each percentage point increase in the corporate tax rate could represent about $100 billion in revenue over the same time span.
Additionally, Harris has suggested ending the use of foreign tax shelters by ensuring that offshore corporate income is taxed at the same rate as domestic income.
These proposals are likely to face resistance in Congress but highlight the clear policy differences between the political parties. There are also concerns about how these changes will affect small businesses and emerging startups.
A key factor to consider for small businesses is the choice between different business structures. For years, many individuals naturally transitioned from a proprietorship to a corporation.
More recently, limited liability companies (LLCs) have become popular due to their single level of tax. The 21% corporate tax rate that has been in place since 2018 has led to a reevaluation of these choices.
A tax rate increase to 28% would prompt even more careful decision-making.
All corporations default to C corporation status under subchapter C of the tax code unless they elect to be treated as S corporations by filing a specific form with the IRS.
S corporations, by contrast, are taxed more like partnerships or LLCs, where income is only taxed once at the shareholder level. This is in contrast to C corporations, where income is taxed twice—first at the corporate level, and then again when distributed to shareholders.
Choosing between an S or C corporation depends largely on tax implications. An S corporation, which limits the number of shareholders to 100 and requires them to be U.S. citizens or resident aliens, offers limited liability and simplified tax treatment, more akin to an LLC or partnership.
A C corporation’s earnings face double taxation, which can deter small businesses from choosing this structure, even with protective measures like the $10 million qualified small business stock exclusion still in place.
For startups, particularly in tech hubs like Silicon Valley, the initial preference may be for LLCs to allow for personal claim of losses, with the potential to switch to a C corporation later if the business grows enough to take advantage of specific tax benefits.
Regardless of business size, all eyes remain on the discussions surrounding corporate tax rates. The potential increase to 28% carries significant implications for both corporate finances and broader economic outcomes.
