Bennett Thrasher and Morris, Manning & Martin recently hosted their “New Tax Considerations for the Technology Industry” webinar. During the event, James Parks, Partner and leader of our firm’s International Tax practice; Brian Sengson, a Senior Manager in our State & Local Tax practice; and Anthony Boggs, Varsha Ghodasra and John Yates, of Morris, Manning & Martin, discussed a variety of financial topics relevant to technology companies, including federal tax proposals, executive compensation tax proposals, international considerations and state and local tax considerations.
Federal Tax Proposals
On May 28, 2021, the Biden administration released its fiscal year 2022 budget proposal, which included the Treasury Department’s Green Book. The tax proposals outlined in his budget include:
- Higher corporate income tax rates, with a top rate of 28% from 21%
- Increased individual ordinary income tax rates, with a top rate of 39.6% from 37%
- Reduction of Section 199A qualified business income deduction for pass-through entities
- Higher individual capital gains and dividend tax rates, with a top rate of 39.6% and 3.8%
- End of Medicare tax (3.8%) loophole on business income
As the tax rates increase, investors will likely be focused on securing qualified small business stock (QSBS), more commonly known as Section 1202 stock. This is important to consider given its potentially significant benefits. For each corporation in which the taxpayer sells QSBS, the amount of gain eligible for exclusion is limited to the greater of:
- $10 million ($5 million in the case of married individuals filing separate returns), less the amount of gain excluded by the taxpayer in earlier tax years; or
- 10x the taxpayer’s adjusted basis of the QSBS.
Executive Compensation Tax Proposals
Three of the proposed tax changes that may impact executive compensation, if put into effect, include:
- Increase to the top individual tax rate to 39.6%
- Increase in the individual long-term capital gains rate for households earning over $1M to 39.6%
- Elimination of the carried interest rules for partners with taxable income over $400,000
Given these proposals, companies should consider paying annual bonuses before the 2021 year-end, accelerating the vesting of equity awards before 2021 year-end and exercising stock options before 2021 year-end.
For more of their insights and to listen to a full recording of the webinar, click here.