Small Business Taxes & ManagementTM--Copyright 2021, A/N Group, Inc.
President Biden has proposed major changes in the tax law. The proposals are part of the American Jobs Plan and the American Families Plan. It would clearly not pass in its present form, but reviewing the points that would affect most taxpayers is illustrative because some parts might pass in whole or in part at some time. In the discussion below we've generally excluded issues pertaining to taxation of overseas entities or operations.
What stands a chance of becoming law and what doesn't? An increased tax rate on high-income taxpayers is possible. A bump in the tax rate on corporations is likely at some point. Taxing capital gains at ordinary income tax rates would have difficulty passing. Some of the enhanced tax credits for individuals may pass, but the child and dependent care credit is likely to be cut back. The repeal of the like-kind exchange provisions would be hard fought, but it could pass.
More or extended tax credits for renewable energy could emerge. But elimination of fossil fuel tax preferences could generate a fight exceeded only by gun control. The elimination of the step-up basis provisions would be hard fought.
The best tax planning suggestion is to stay flexible and watch the legislation. Avoid complex strategies that could backfire or be made illegal by the law or the IRS regulations. Talk to your tax advisor.
American Families Plan
Increase Top Marginal Income Tax Rate. The proposal would increase the top marginal individual income tax rate to 39.6 percent. This rate would be applied to taxable income in excess of the 2017 top bracket threshold, adjusted for inflation. In taxable year 2022, the top marginal tax rate would apply to taxable income over $509,300 for married individuals filing a joint return, $452,700 for unmarried individuals (other than surviving spouses), $481,000 for head of household filers, and $254,650 for married individuals filing a separate return. After 2022, the thresholds would be indexed for inflation using the C-CPI-U, which is used for all current tax rate thresholds for the individual income tax. The proposal would be effective for taxable years beginning after December 31, 2021.
Tax Capital Gains at Ordinary Income Tax Rate. Long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income tax rates, with 37 percent generally being the highest rate (40.8 percent including the net investment income tax), 1 but only to the extent that the taxpayer's income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022. This proposal would be effective for gains required to be recognized after the date of announcement.
Under the proposal, the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer. For a donor, the amount of the gain realized would be the excess of the asset's fair market value on the date of the gift over the donor's basis in that asset. For a decedent, the amount of gain would be the excess of the asset's fair market value on the decedent's date of death over the decedent's basis in that asset. That gain would be taxable income to the decedent on the Federal gift or estate tax return or on a separate capital gains return. The use of capital losses and carry-forwards from transfers at death would be allowed against capital gains income and up to $3,000 of ordinary income on the decedent's final income tax return, and the tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent's estate (if any).
The first $1 million of gain per person would be excluded as would $250,000 on a principal residence (%500,000 per couple). The exclusion under current law for capital gain on certain small business stock would also apply. Payment of tax on the appreciation of certain family-owned and -operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and operated. In addition a 15-year fixed rate payment plan for the tax on appreciated assets (other than liquid assets such as publicly traded stock) would apply.
Net Investment Income Tax and Self-Employment Tax. S corporation shareholders only pay Social Security taxes on salaries; partners in a partnership may pay the self-employment tax on all subject income, or if limited partners, on none of their income. The net investment income tax (NIIT) is based on passive income. The proposal would (i) ensure that all pass-through business income of high-income taxpayers is subject to either the NIIT or SECA tax, (ii) redirect NIIT funds to the Hospital Insurance Trust Fund, (iii) make the application of SECA to partnership and LLC income more consistent for high-income taxpayers, and (iv) apply SECA to the ordinary business income of high-income nonpassive S corporation owners. A high income individual threshold would be $400,000.
Make the Higher Premium Tax Credits Permanent. The proposal would make permanent the American Rescue Plan (ARP) decrease in the applicable contribution percentages of household income used for determining the PTC. The proposal would also make permanent the ARP expansion of PTC eligibility to taxpayers with household income above 400 percent of FPL.
Make Permanent Expanded Earned Income Tax Credit for Workers Without Qualifying Children. The proposal would make permanent the increase in the EITC parameters for workers without children that was enacted in the ARP. The end of the phase-in and the end of the plateau income ranges would be indexed for inflation in the same manner as other EITC parameters (by the C-CPI-U). The proposal would also make permanent the ARP expansion of age-eligibility. As under ARP law, taxpayers who could be claimed as a qualifying child or a dependent would not be eligible for the EITC for childless workers.
Make Permanent Higher Child and Dependent Care Credit. The American Rescue Plan (ARP) significantly expanded the amount of the expenses qualifying for the credit, the percentage rate applicable to the expenses and the threshold for phaseout of the credit for high-income taxpayers. The ARP also made the credit refundable. The proposal would make permanent the changes to the CDCTC enacted in the ARP for taxable year 2021. In addition, the proposal would establish reporting requirements appropriate for an expanded refundable tax credit.
Extension of Higher Child Tax Credit. The ARP increased the child tax credit (CTC) to $3,000 (from $2,000) and to $3,600 for children under age 6). The credit is phased out for higher income taxpayers. The proposal would extend the expanded CTC to taxable years beginning before January 1, 2026. It would also continue the advance payments instituted with the ARP.
Increase the Employer-Provided Childcare Tax Credit for Businesses. Under current law employers who provide childcare facilities or contract with an outside facility for the provision of care may claim a nonrefundable credit of 25 percent of qualified care expenses and 10 percent of referral expenses, for a maximum total credit of $150,000 per year. Qualified expenses include the acquisition, construction, rehabilitation or expansion of qualifying properties, operating costs, or contracting with a qualified childcare facility to provide services for the taxpayer's employees. The proposal would increase the existing tax credit to 50 percent of the first $1 million of qualified care expenses for a maximum total credit of $500,000 per year. The portion of the tax credit related to referral expenses would remain at 10 percent with a maximum amount of $150,000.
Tax Carried Interests as Ordinary Income. In a partnership an item of income or loss of the partnership retains its character and flows through to the partners who must include such item on their tax returns. Generally, certain partners receive partnership interests in exchange for contributions of cash and/or property, while certain partners (not necessarily other partners) receive partnership interests, typically interests in future partnership profits referred to as "profits interests" or "carried interests," in exchange for services. Accordingly, if and to the extent a partnership recognizes long-term capital gain, the partners, including partners who provide services, will reflect their shares of such gain on their tax returns as long-term capital gain. The proposal would generally tax as ordinary income a partner's share of income on an "investment services partnership interest" (ISPI) in an investment partnership, regardless of the character of the income at the partnership level, if the partner's taxable income (from all sources) exceeds $400,000.
Repeal Deferral of Gain From Like-Kind Exchange. The 2017 tax law changes repealed the like-kind exchange rules for all property other than real estate. The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing a joint return) each year for real property exchanges that are like kind. Any gains from like-kind exchanges in excess of $500,000 (or $1 million in the case of married individuals filing a joint return) during a taxable year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange.
Make Permanent Excess Business Losses Limitation of Noncorporate Taxpayers. Current law limits the extent to which pass-through business losses may be used to offset other income. In particular, for taxable years beginning after December 31, 2020, and before January 1, 2027, noncorporate taxpayers may not deduct an "excess business loss" from taxable income. Instead, these losses are carried forward to subsequent taxable years as net operating losses.
Excess business loss is defined as the excess of losses from business activities over the sum of (a) gains from business activities, and (b) a specified threshold amount. In 2021, these thresholds are $524,000 for married couples filing jointly and $262,000 for all other taxpayers; these amounts are indexed for inflation thereafter. The determination of excess business loss is made at the taxpayer level, aggregating across all business activities. However, gains or losses attributable to any trade or business of performing services as an employee are not considered.
The proposal would make the current rules permanent rather than letting them expire as current law would allow in 2027.
Improve tax compliance. The first part of this initiative would increase the IRS budget for auditing (compliance) and concentrate compliance activities toward taxpayers with the highest income.
The second part would create a comprehensive financial account information reporting regime. Financial institutions would report data on financial accounts in an information return. The annual return will report gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner. This requirement would apply to all business and personal accounts from financial institutions, including bank, loan, and investment accounts, 2 with the exception of accounts below a low de minimis gross flow threshold of $600 or fair market value of $600.
The third initiative would amend the law to provide the IRS with explicit authority to regulate all paid preparers of Federal tax returns, including by establishing mandatory minimum competency standards. It would also increase penalties for "ghost preparers" (preparers who don't sign returns) to the greater of $500 or 100 percent of the income derived from preparing the return.
In addition \electronic filing would be required for returns filed by taxpayers reporting larger amounts or that are complex business entities, including: (1) income tax returns of individuals with gross income of $400,000 or more; (2) income, estate, or gift tax returns of all related individuals, estates, and trusts with assets or gross income of $400,000 or more in any of the three preceding years; (3) partnership returns for partnerships with assets or any item of income of more than $10 million in any of the three preceding years; (4) partnership returns for partnerships with more than 10 partners; (5) returns of REITs, REMICs, RICs, and all insurance companies; and (6) corporate returns for corporations with $10 million or more in assets or more than 10 shareholders. Further, electronic filing would be required for the following forms: (1) Forms 8918, "Material Advisor Disclosure Statement"; (2) Forms 8886, "Reportable Transaction Disclosure Statement"; (3) Forms 1042, "Annual Withholding Tax Return for U.S. Source Income of Foreign Persons"; (4) Forms 8038-CP, "Return for Credit Payments to Issuers of Qualified Bonds"; and (5) Forms 8300, "Report of Cash Payments Over $10,000 Received in a Trade or Business."
Return preparers that expect to prepare more than 10 corporation income tax returns or partnership returns would be required to file such returns electronically.
Expand Broker Information Reporting with Respect to Crypto Assets. The proposal would expand the scope of information reporting by brokers who report on crypto assets to include reporting on certain beneficial owners of entities holding accounts with the broker. This would allow the United States to share such information on an automatic basis with appropriate partner jurisdictions, in order to reciprocally receive information on U.S. taxpayers that directly or through passive entities engage in crypto asset transactions outside the United States pursuant to a global automatic exchange of information framework.
The proposal would require brokers, including entities such as U.S. crypto asset exchanges and hosted wallet providers, to report information relating to certain passive entities and their substantial foreign owners when reporting with respect to crypto assets held by those entities in an account with the broker.
Extend Statute of Limitations for Listed Transactions. The proposal would increase the limitations period under section 6501(a) of the Internal Revenue Code (Code) for returns reporting benefits from listed transactions from three years to six years. The proposal also would increase the limitations period for listed transactions under section 6501(c)(10) from one year to three years. This proposed change would be effective on the date of enactment.
Impose Liability on Shareholders to Collect Unpaid Income Taxes of Applicable Corporations. The proposal would also add a new section to the Code that would impose on shareholders who sell the stock of an "applicable C corporation" secondary liability (without resort to any State law) for payment of the applicable C corporation's income taxes, interest, additions to tax, and penalties to the extent of the sales proceeds received by the shareholders. The proposal applies to shareholders who, directly or indirectly, dispose of a controlling interest (at least 50 percent) in the stock of an applicable C corporation within a 12-month period in exchange for consideration other than stock issued by the acquirer of the applicable C corporation stock. The secondary liability would arise only after the applicable C corporation was assessed income taxes, interest, additions to tax, and penalties with respect to any taxable year within the 12-month period before or after the date that its stock was disposed of and the applicable C corporation did not pay such amounts within 180 days after assessment.
Reform Corporate Taxation
Corporate Tax Rate Increase.The provision that's been talked about the most is the rise in the corporate income tax rate. This would apply to C corporations only. Originally the increase would have been from 21 percent to 28 percent. That's been rejected, but a small increase would be less painful and a way to raise revenue. The 21-percent rate is vulnerable, either now or in the future. If you're doing business through some other type of entity, you should look a the numbers hard before switching to a C corporation.
15-percent Minimum Tax on Book Earnings of Large Corporations. This provision would impose a 15-percent minimum tax on the book earnings for corporations with income in excess of $2 billion. The tax would be equal to the excess of the tentative minimum tax over the the regular income tax.
Domestic Job Incentives. The proposal would create a new general business credit equal to 10 percent of the eligible expenses paid or incurred in connection with onshoring a U.S. trade or business. For this purpose, onshoring a U.S. trade or business means reducing or eliminating a trade or business (or line of business) currently conducted outside the United States and starting up, expanding, or otherwise moving the same trade or business to a location within the United States, to the extent that this action results in an increase in U.S. jobs.
Low-Income Housing Tax Credit. The proposal would create an additional type of HCDA (housing credit dollar amount), called an "Opportunity HCDA" (OHCDA). HCAs would have a separate ceiling for OHCDAs from their existing allocation ceilings of HCDAs. HCAs would continue to receive annual infusions of regular HCDAs, without change to the allocation and ceilings for those HCDAs under current law. HCAs would be required to allocate the majority of their OHCDAs to projects in Census Tracts of Opportunity (CTOs). The proposal would define a CTO as a tract which is entirely in one or more DDAs or which has low poverty or other advantages, as determined by the Secretary of the Treasury in consultation with HUD.
New Markets Tax Credit. The proposal would permanently extend the NMTC, with a new allocation for each year after 2025. These annual amounts would be $5 billion, indexed for inflation after 2026.
Eliminate Fossil Fuel Preferences. The proposal would repeal: (1) the enhanced oil recovery credit for eligible costs attributable to a qualified enhanced oil recovery project; (2) the credit for oil and gas produced from marginal wells; (3) the expensing of intangible drilling costs; (4) the deduction for costs paid or incurred for any tertiary injectant used as part of a tertiary recovery method; (5) the exception to passive loss limitations provided to working interests in oil and natural gas properties; (6) the use of percentage depletion with respect to oil and gas wells; (7) two-year amortization of independent producers' geological and geophysical expenditures, instead allowing amortization over the seven-year period used by integrated oil and gas producers; (8) expensing of exploration and development costs; (9) percentage depletion for hard mineral fossil fuels; (10) capital gains treatment for royalties; (11) the exemption from the corporate income tax for publicly traded partnerships with qualifying income and gains from activities relating to fossil fuels; (12) the Oil Spill Liability Trust Fund excise tax exemption for crude oil derived from bitumen and kerogen-rich rock; and (13) accelerated amortization for air pollution control facilities.
Renew and Enhance Renewable and Alternative Energy Incentives. The proposal would extend the full production tax credit for qualified facilities commencing construction after December 31, 2021 and before January 1, 2027. Starting in 2027, the credit rate would begin to phase down to zero over five years. The credit rate would be reduced by 20 percent for facilities commencing construction after December 31, 2026 and before January 1, 2028, 40 percent for facilities commencing construction after December 31, 2027 and before January 1, 2029, and so on until the credit rate reaches zero.
The proposal would extend the credits for investments in solar and geothermal electric energy property, qualified fuel cell power plants, geothermal heat pumps, small wind property, offshore wind property, waste energy recovery property, and combined heat and power property. Starting in 2022, the investment credit would be expanded to include stand-alone energy storage technology that stores energy for conversion to electricity and has a capacity of not less than five kilowatt hours. The credit would be restored to the full 30 percent rate for eligible property that begins construction after December 31, 2021 and before January 1, 2027. After 2026, the credit rate will begin to phase down to zero over five years. Eligible property commencing construction after December 31, 2026 and before January 1, 2028 will receive 80 percent of the full credit, property commencing construction after December 31, 2027 and before January 1, 2029 will receive 60 percent of the full credit, and so on until the credit rate reaches zero in 2031.
Establish New Credits for Qualifying Advanced Energy Manufacturing. The proposal would modify and expand Section 48C of the Code. The definition of a qualifying advanced energy project would be revised to include: industrial facilities; recycling in addition to production; and expanded eligible technologies, including but not limited to energy storage and components, electric grid modernization equipment, carbon oxide sequestration, and energy conservation technologies. Selection criteria would be revised to include evaluating wages for laborers and additional consideration for projects that create jobs in communities impacted by the closure of coal mines or coal power plants.
Establish Tax Credits for Heavy-and Medium-Duty Zero Emissions Vehicles. The proposal would provide a business tax credit for new medium- and heavy-duty zero-emission vehicles, including battery electric vehicles and fuel cell electric vehicles, to promote consumer choice and vehicle adoption. These vehicles would be in Classes 3 through 8, as defined by the Federal Highway Administration's vehicle classification system. The amount of the credit would vary depending on the class of the vehicle and the year of purchase (with the credit decreasing each year after 2024. The credit would begin at $25,000 for a Class 3 vehicle and rise to $120,000 for a Class 7-8 vehicle.
Production Credit for Low-Carbon Hydrogen. The proposal would implement a low-carbon hydrogen production tax credit. For the purposes of the proposal, "low-carbon" refers to hydrogen produced using zero-carbon emissions electricity (renewables or nuclear) and water as a feedstock, or hydrogen produced using natural gas as a feedstock and with all carbon emitted in the production process captured and sequestered.
Extend and Enhance Energy Efficiency and Electrification Incentives. The proposal would extend the section 25C tax credit five years and increase the lifetime limit to $1,200 for property placed in service after December 31, 2021 and before January 1, 2027. For qualified energy efficiency improvements, the credit rate would be increased to 15 percent and the credit amounts for certain types of residential energy property expenditures would also be increased. Also, the proposal would modify the definitions of eligible qualified energy efficiency improvements and residential energy property expenditures and update the required energy efficiency standards for such property. Roofs, advanced circulating fans, and certain equipment, such as water heaters and furnaces, powered by fossil fuels, would no longer be eligible for the tax credit; however, certain geothermal and load center equipment would be eligible for the tax credit.
Disaster Mitigation Tax Credit. The proposal provides a nonrefundable tax credit for homeowners and businesses equal to 25 percent of qualified disaster mitigation expenditures capped at $5,000. For individual taxpayers, the credit begins to phase out at an adjusted gross income of approximately $85,000 for single tax filers and approximately $170,000 for joint filers. For businesses, the credit begins to phase out when the business has gross receipts above $5 million. The credit is only available to homeowners and businesses in areas where a Federal disaster declaration has been made within the preceding 10-year period or in areas adjacent to where a Federal disaster declaration has been made within the preceding 10-year period.
Copyright 2021 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 06/18/21