On September 13, 2021, the House Ways & Means Committee of the U.S. House of Representatives released the draft text of its proposed budget reconciliation bill (the “Build Back Better Act [First Draft]”), and on September 15, 2021 it approved various sections of the proposal. The Committee released an updated draft on October 28, 2021 (the “Build Back Better Act [Second Draft]). The Second Draft omitted many sections from the First Draft kept the rest with relatively little alteration. The Committee released a further draft on November 3, 2021 (the “Build Back Better Act [Third Draft]”) which returned certain sections from the First Draft. On November 5, 2021, the changes detailed below were approved by the Senate and are going to be voted on in the House of Representatives. This document reflects the potential tax implications for the Third Draft.
It is important for clients to note that as of the date of this article, these proposals are not the law, and are subject to ongoing negotiations. The proposed provisions could change considerably and there is no guarantee that any of the provisions will become law. Nevertheless, this article is to alert clients of the potential changes to individual taxpayers and the resulting consequences of such changes if they are approved. We encourage our clients to be proactive and plan in advance of possible impending changes.
Potential Corporate Tax Impact: Effective – January 1, 2021
- Limitation on Excess Business Losses of Noncorporate Taxpayers (§138202): The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provided relief for taxpayers by eliminating the excess business loss limitation (which disallows excess business loss for noncorporate taxpayers for losses in excess of $500,000 for joint filers and $250,000 for individuals) for the 2018, 2019, and 2020 tax years. This proposal would permanently disallow excess business losses for non-corporate taxpayers and would allow taxpayers whose losses are disallowed to carry those losses forward to the next succeeding tax year as a deduction.
Potential Corporate Tax Impact: Effective – Introduction Date (September 13, 2021)
- Modification to Rules Governing the Sale or Exchange of Qualified Small Business Stock (§138149). Currently, a taxpayer (other than a corporation) who acquired (or acquires) Qualified Small Business Stock (“QSBS”) during certain periods in 2010, and thereafter, and has held the stock for more than 5 years, is able to exclude 100% of any gain from the sale or exchange of QSBS from his or her gross income. Under the proposal, if the taxpayer’s Adjusted Gross Income (“AGI”) equals or exceeds $400,000, or if the taxpayer is a trust or estate, then the 100% exclusion of any gain from the sale of a QSBS is reduced to 50%.
Potential Corporate Tax Impact: Effective – January 1, 2022
- Modification to Treatment of Certain Losses (§138142): Under the proposed legislation, losses realized on certain securities will be treated as being realized on the day that the event establishing worthlessness occurred, rather than on the last day of the taxable year. This potentially limits the instances when such a loss would be treated as a capital loss as opposed to a short-term loss (ordinary loss). Also, under the proposed legislation, partnership indebtedness would be treated the same as corporate indebtedness for the purpose of Section 165 of the Internal Revenue Code (IRC) and worthless partnership interests would be treated as a loss from the sale or exchange of a partnership interest at the time of the identifiable event establishing worthlessness.
- Wash Sale Rules Apply to Related Parties and Digital Assets (§138152): Currently, the Wash Sale Rule provides that a tax loss resulting from the sale of a security is not deductible to the extent the taxpayer acquires a substantially identical security at either 30 days before or 30 days after the loss. The proposed legislation would include digital currencies such as cryptocurrency in the Wash Sale Rule. Also, under the new legislation, related parties whose acquisition of a substantially identical security within 30 days would also implicate the wash sale rules.
Potential Corporate Tax Impact: Effective – January 1, 2023
- Corporate Alternative Minimum Tax (§138101): If passed, an alternative minimum tax of 15% would be imposed upon all income for corporations with an average income over $1 billion. Income is determined through an “adjusted financial statement.” This is a formal financial statement subject to certain rules but may generally be met with a form 10-K filed with the Securities and Exchange Commission.
Potential Corporate Tax Impact: Effective – Enactment Date (January 1, 2022)
- Constructive Sale Rules Apply to Digital Assets (§138150): The Constructive Sale Rule under IRC §1259 provides that when there is a constructive sale of an appreciated financial position the taxpayer shall recognize gain as if such position were transferred at fair market value on the date of the constructive sale. A constructive sale occurs when a taxpayer holds an appreciated financial position and enters into certain designated transactions that substantially reduce taxpayer’s downside risk (such as a short sale). This tax proposal expands the definition of an “appreciated financial position” to include digital assets such as cryptocurrency.
NOTE: This article does not list all of the legislation being proposed in the Build Back Better Act. It is merely a list of the provisions we believe to be most relevant to a majority of our clients. Please contact your business or corporate attorney to discuss the potential legislation and how it may or may not affect your planning needs. Although it is impossible to know which provisions will pass, possible tax-planning strategies may still be available to those who would like to act in advance of the impending change.