Impact of the Home Ways and Means Tax Proposal on Domestic Businesses | Bowditch & Dewey

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On September 13, 2021, the Congressional House Ways and Means Committee presented more than 880 pages of legislative tax proposals to help fund the $ 3.5 trillion stimulus package proposed by the House. Below are tax proposals for US domestic businesses in the bill, labeled JCX-43-21. In the following blogs, we will discuss the tax proposals relating to trusts, estates and companies with international operations.

The House Ways and Means Committee has proposed the following changes that impact domestic businesses:

  • Corporations with income over $ 5 million would be taxed at a rate of 26.5% rather than the current 21% corporate tax rate.
  • Individuals would be taxed at 39.6% on income if their adjusted gross income (“AGI”) exceeds $ 450,000 (for married people filing jointly) or $ 400,000 (for unmarried people), rather than the rate current 37% higher.
  • Capital gains would be taxed at a rate of 25% rather than the current 20% rate for capital gains.
  • Individuals with net investment income (whether or not they participate in a trade or business that generates such income) would be subject to a 3.8% surtax on that income if their AGI exceeds $ 500,000 (in the case of married spouses) or $ 400,000 for single persons.
  • Taxpayers who receive partnership interests in exchange for services would generally be entitled to receive long-term capital gains treatment on the sale or exchange of such partnership interests. only if the partner retains these interests for at least five years. Taxpayers with an AGI of less than $ 400,000 and real estate partnership partners would retain the long-term capital gain treatment on a sale or trade after three years from the grant date.
  • Taxpayers with worthless interests in partnerships could only claim a capital loss (rather than an ordinary loss) under section 165 of the Code. Currently, a taxpayer with a worthless partnership interest (which has no share of the partnership’s liabilities) can claim an ordinary loss under the Code.
  • Taxpayers with an AGI of $ 400,000 or more and all trust and estate taxpayers would only benefit from a 50% capital gains exclusion on the sale of shares of qualifying small businesses under Article 1202 of the Code. Currently, taxpayers benefit from a 100% exemption from capital gains tax if they hold these qualifying small business shares for at least five years.
  • Taxpayers with an AGI of $ 400,000 or more (or $ 500,000 or more in the case of joint filers) will no longer receive the qualifying business income deduction. The qualifying business income deduction is a 20% deduction from income for trading or businesses active in the United States (structured as a partnership or as an S corporation). For service companies, the deduction is further limited to a percentage of wages paid to employees.
  • S corporations that were incorporated before May 13, 1996 would be eligible to reorganize as partnerships without incurring tax. May 13, 1996 was the publication date of the current “tick the box” regulation. The qualifying S corporation is expected to liquidate and transfer its assets and liabilities to a domestic partnership within the two-year period beginning December 31, 2021.
  • IRS employees would no longer need to seek approval from a supervisor before assessing penalties imposed on taxpayers. The proposal would repeal a legal requirement under Section 6751 (b) of the Code that any assessment of penalties by an IRS employee must be approved by their supervisor. The amendment would apply to notices issued and penalties imposed after December 31, 2000.
  • Public companies would no longer be able to deduct compensation payments over $ 1,000,000 made to their ten highest-paid executives, including the chief executive officer and chief financial officer. This proposal was currently scheduled to take effect in the tax year beginning after December 31, 2026.
  • The employer credit for wages (12.5% ​​of wages) paid during family and medical leave would expire in the tax year beginning after 2023. The Taxpayer Certainty and Relief Act 2020 disaster event provided for the expiration of this credit for the tax year beginning after 2025. In lieu of the tax credit, the House proposed a twelve-week paid universal family and medical leave.
  • The work opportunity credit would be increased to 50% for the first $ 10,000 of salary until December 31, 2023 for all groups targeted by WOTC, with the exception of young summer employees. The credit would apply to the employee’s first and second years of employment. WOTC groups include families receiving TANF or additional security income, skilled veterans, skilled ex-criminals, some community residents of Empowerment Zones, some vocational rehabilitation referrals, and some others receiving benefits. federal. The current credit is limited to $ 2,400 per beneficiary (and $ 1,200 for some young summer employees).

The House has not yet voted on the legislation proposed above. The proposed incremental changes remove many of the structural changes made to the 2017 Tax Cuts and Jobs Act and would create a fair amount of instability for companies that had relied on the 2017 tax legislative changes for structure their operations.

Please consult your tax advisor if you have any questions about any of the above proposals.


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