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On March 11, 2024, President Biden unveiled his proposed budget for the fiscal year 2025, which included a series of impactful tax proposals outlined in the Treasury’s “Greenbook.” While these are merely proposals and not laws, they clearly indicate the administration’s legislative priorities, especially in terms of taxation, which could significantly affect corporations if enacted.

Key Proposals Affecting Businesses

1. Increased Corporate Tax Rates: The proposal to raise the corporate income tax rate from 21% to 28% marks a significant shift towards increasing tax burdens on corporations. This move would reverse some of the cuts implemented by previous administrations and could affect corporate profitability and investment strategies.
2. Expansion of the Corporate Alternative Minimum Tax (CAMT): By raising the CAMT rate to 21% from 15%, the administration aims to ensure that corporations pay a minimum amount of tax irrespective of deductions and credits, thereby increasing tax revenue from highly profitable companies that otherwise might pay little.
3. Changes to Stock Transactions and Dividends: Increasing the corporate stock buyback excise tax from 1% to 4% could discourage companies from buying back shares, a common method of returning wealth to shareholders. Similarly, changes in the treatment of dividends and other distributions could alter corporate financing decisions, particularly in structuring and executing intra-corporate dividends and stock purchases.
4. Limitations on Deductions and Losses: Proposals such as eliminating deductions for compensation over $1 million and making the excess business loss limitation permanent are designed to target high-income individuals and profitable businesses, ensuring they contribute a fairer share to tax revenues.
5. Taxation of Carried Interests: By taxing carried interests as ordinary income for certain high earners, the administration aims to close a well-known loophole that has allowed hedge fund and private equity managers to offer their earnings as capital gains, subject to lower tax rates.

Way Forward

Corporations should proactively address the potential impacts of President Biden’s FY 2025 budget proposal by engaging with tax professionals to assess and model the financial implications of increased corporate tax rates and alternative minimum tax requirements. Strategic reviews of corporate policies regarding dividends, stock buybacks, and compensation structures are essential to adapt to proposed tax changes. Additionally, companies should consider the strategic realignment of their global operations in response to international tax adjustments and explore advocacy efforts to influence legislation in ways that may benefit the corporate sector. These steps will help corporations navigate the changing tax landscape and maintain financial stability.

Implications for Individual Taxpayers

The budget also proposes significant changes for high-earning individuals, such as increasing the top income tax rate and eliminating preferential treatment for certain types of income. This includes a new minimum tax on unrealized capital gains for ultra-wealthy individuals, which could affect investment strategies and asset management.

International Tax Changes

Internationally, the focus is on increasing the taxation of foreign earnings and aligning U.S. tax law more closely with global standards, such as the OECD Pillar Two proposals. This includes eliminating deductions for foreign-derived intangible income and increasing the global low-taxed income rate, potentially affecting multinational corporations’ global tax strategies and reducing incentives for offshoring.

Real Property and Housing

The real estate sector faces potential changes, such as capping like-kind exchanges and requiring full recapture of depreciation, which could impact real estate investment structures and tax planning. Proposed enhancements to housing-related tax credits aim to stimulate investment in economically distressed communities and affordable housing.

Digital Assets and Energy Consumption

New proposals targeting digital assets and the taxation of energy used in digital asset mining indicate a regulatory intent to encompass the growing digital economy within the tax net, reflecting broader trends of increasing oversight and taxation of digital transactions.

Conclusion

While not all proposals in President Biden’s FY 2025 budget are likely to become law, the direction and intent are clear: to increase tax revenues from corporations and high-income individuals, adjust the taxation landscape to modern economic realities, and incentivize certain behaviors such as investment in community development and affordable housing.