The U.S. House of Representatives on November 19, 2021 passed the “Build Back Better Act,” without a single Republican vote.  With House passage of the bill, the legislation now moves to the Senate, where further changes may be expected. Changes by the Senate would require further House action, given that the House and Senate ultimately must approve the identical version of legislation before sending that legislation to the president.

The tax revenue provisions in the House bill differ in significant respects from the proposals approved by the Ways and Means Committee in September.  Most significantly, the pending House version of the Bill does not include increases in rates—corporate, individual, or capital gains. Those changes were necessary to address concerns raised in the Senate.

Here are some key changes included in the Bill:

SALT deduction cap

The bill would increase the Sec. 164(b) limitation on the deduction for state and local taxes from $10,000 to $80,000 ($40,000 for married taxpayers filing separately and for trusts and estates) but would extend the limitation through 2031.

 

Net investment income tax

The bill would amend Sec. 1411 to apply the tax to net investment income derived in the ordinary course of a trade or business for taxpayers with taxable income over $400,000 (single filers), $500,000 (married taxpayers filing jointly or surviving spouses) or $250,000 (married taxpayers filing separately).

 

Excess business losses

The bill would make permanent the Sec. 461 limitation on excess losses of noncorporate taxpayers. The excess business loss (EBL) limitation, codified in Internal Revenue Code section 461(l), was originally created by the Tax Cuts and Jobs Act of 2017 (TCJA). Appling to taxpayers other than corporations, this provision limits the amount of trade or business deductions that can offset nonbusiness income. The limitation for the 2018 tax year was $250,000 (or $500,000 in the case of a joint return), with these threshold amounts indexed for inflation in subsequent years.

 

High-income surcharge

The bill would create a new Sec. 1A, imposing a surcharge (in addition to any other income tax imposed) on high-income individuals, estates, and trusts. The surcharge tax would equal the sum of 5% of the amount of the taxpayer's AGI that exceeds $10 million ($5 million for married taxpayers filing separately; $200,000 for an estate or trust), plus 3% of the amount of the taxpayer's AGI that exceeds $25 million ($12.5 million for married taxpayers filing separately; $500,000 for an estate or trust).

 

Electric vehicle tax credits

The bill provides for a refundable income tax credit of up to $8,500 for new qualified plug-in electric drive motor vehicles. The credit would be available for qualified electric vehicles that cost up to $80,000 (for vans, SUVs, and trucks) or $55,000 (for other vehicles). The bill would also provide a credit of up to $7,500 for two- or three-wheeled plug-in electric vehicles. The credit would phase out for taxpayers with AGI over $500,000 (married taxpayers filing jointly) or $250,000 (single taxpayers). A smaller credit would be available for the purchase of qualifying used electric vehicles. The bill also provides a credit for the purchase of certain new electric bicycles.

The bill would provide a credit for any qualified commercial electric vehicle placed in service by a taxpayer. The credit would equal up to 30% of the basis of a fully electric vehicle or 15% of the basis of a hybrid vehicle.

 

Wash-sale rules

The bill would amend Sec. 1091 to make commodities, foreign currencies, and cryptoassets subject to the wash-sale rules.

 

15% minimum tax on profits of large corporations

The bill would impose a 15% minimum tax on the profits of corporations that report over $1 billion in profits to shareholders. Any corporation (other than an S corporation, regulated investment company, or real estate investment trust) that for any three-year period has average annual adjusted financial statement income (as defined in new Sec. 56A) over $1 billion and, in the case of corporations with foreign parents, has annual adjusted financial statement income in excess of $100 million, would pay a tax of 15% of its adjusted financial statement income for the year over the amount of its corporate AMT foreign tax credit.

 

1% surcharge on corporate stock buybacks

The bill would impose a tax equal to 1% of the fair market value of any stock of a corporation that the corporation repurchases during the year, effective for repurchases of stock after Dec. 31, 2021. The provision would apply to any domestic corporation the stock of which is traded on an established securities market.

 

Limitation on interest expense deduction

The bill would add a new Sec. 163(n) that limits the amount of net interest expense of certain domestic corporations (or foreign corporations engaged in a U.S. trade or business) that are members in an international financial reporting group. The provision limits the interest expense deduction to an "allowable percentage" of 110% of the domestic corporation's net interest expense.

 

FDII and GILTI changes

The bill would reduce the applicable percentage in Sec. 250(a) for the foreign-derived intangible income (FDII) deduction from 37.5% to 24.8% and the applicable percentage for the global intangible low-taxed income (GILTI) deduction from 50% to 28.5%, resulting in an effective FDII rate of 15.8% and an effective GILTI rate of 15%. The bill would also allow the FDII deduction to be taken into account when determining a net operating loss deduction.

Sec. 951A would be amended to have the GILTI provisions apply on a country-by-country basis, based on controlled foreign corporation taxable units.

Foreign tax credit limitation

The bill would amend Sec. 904 to apply the foreign tax credit limitation on a country-by-country basis, by taxable unit. Taxable units would include the taxpayer corporation itself, each foreign corporation of which the taxpayer is a shareholder, interests held by the taxpayer in a passthrough entity, and any branch of the taxpayer. The bill would also repeal the carryback of the foreign tax credit. The foreign tax credit changes will apply to tax years beginning after Dec. 31, 2022.

 

Small business stock deduction and high-income taxpayers

The bill would amend Sec. 1202 to disallow the 75% and 100% exclusion of gain from the sale of stock if the taxpayer's AGI is over $400,000 or if the taxpayer is a trust or estate.

 

The Senate vote is expected to be made in early December.  However, the Bill faces hurdles in the equally split (50-50) Senate, and taxpayers should continually monitor the legislative development.  Republicans are united in their opposition and there are two Democrat Senators, Manchin and Sinema, expressed their concerns that the levels of new government spending could fuel higher inflation and create new welfare entitlements.

IRS 가 Rev. Proc. 2019-48 을 적절하게 적용하여 일일경비 공제비용 (per diem rate) 을 사용하고 있는 납세자를 위하여 business meal 비용의 일시적 100% 공제에 관한 추가 지침을 발행했다.

이전에 IRS 는 Taxpayer Certainty and Disaster Tax Relief Act of 2020 에 따른 Notice 2021-25 를 발행했으며, 이는 업무 접대 비용에 대한 50% 공제에 임시 예외 규정을 추가하여 2021년 1월 1일부터 2022년 12월 31일까지 식당에서 발생하는 업무용 식사 또는 음료 비용에 대해 일시적으로 100% 공제를 허용하도록 했다. Notice 2021-25 와 “식당” 의 정의에 대한 자세한 내용은 다음 링크를 통해 확인할 수 있다. 100% Deduction for Meals

Notice 2021-63 은 Rev. Proc. 2019-48 의 규정을 적절하게 적용하고 있는 납세자를 위한 특별 규정을 제공한다. Internal Revenue Code § 274(n)(2)(D) 에 따르면, 2020년 12월 31일 이후 및 2023년 1월 1일 이전에 발생한 일일경비 (per diem) 의 식비 부분은 100% 공제가 허용된 식당에서 제공하는 업무용 식사 또는 음료 비용과 같이 처리할 수 있다. 납세자는 Rev. Proc. 2019-48 의 section 6.05 를 참고하여 일일경비 (per diem) 의 식비 부분을 계산하여야 한다.

자세한 내용은 Rev. Proc. 2019-48 과 Notice 2021-63 을 참고하기 바란다.

The Internal Revenue Service (“IRS”) has issued Notice 2021-63 to make clear how the temporary 100% business deduction for food or beverages from restaurants applies to taxpayers properly applying the rules of Rev. Proc. 2019-48 for using per diem rates.

Previously, the IRS issued Notice 2021-25 providing guidance under the Taxpayer Certainty and Disaster Relief Act of 2020, which added a temporary exception to the 50% limit on the amount that businesses may deduct for food or beverages. The temporary exception allows the full cost to be deductible if incurred after December 31,2020, and before January 1,2023, for food or beverages "provided by a restaurant." Refer to the following article for more information on Notice 2021-25 and the definition of “provided by a restaurant”: 100% Deduction for Meals

Notice 2021-63 provides a special rule for a taxpayer that properly applies the rules of Rev. Proc. 2019-48. For purposes of Internal Revenue Code § 274(n)(2)(D), a taxpayer may treat the meal portion of a per diem rate or allowance paid or incurred after December 31,2020, and before January 1,2023, as being attributable to food or beverages provided by a restaurant. Taxpayers should refer to section 6.05 of Rev. Proc. 2019-48 to determine the meal portion of a per diem rate or allowance paid or incurred.

For additional detail, please see Rev. Proc. 2019-48 and Notice 2021-63.

Democratic lawmakers on the House Ways and Means Committee have advanced legislation containing the tax elements of President Biden’s Build Back Better agenda. The draft legislation could be modified by the House Rules Committee before moving to the House floor and may differ from what Senators are preparing.  Outlined below is a high-level overview of some key tax provisions affecting businesses and individuals:

Tax provisions affecting individuals

• Individual Tax Rate – the proposal would increase the top marginal individual rate to 39.6% from 37%. If enacted, the new rate would be applied to tax years beginning after December 31, 2021.

• Capital gain and qualified dividend tax rate – tax rate on long term capital gains realized and qualified dividends received after September 13, 2021 would be increased to 25% from 20%.

• 3% surcharge – Individuals with modified adjusted gross income in excess of $5M ($2.5M for MFS) will be imposed to a new 3% surcharge. If enacted, the new surcharge applies to tax year beginning after December 31, 2021.

• Estate and gift tax exemption – the unified credit would be reduced back to $5M from $10M (indexed for inflation) for estate and gift transfer made after December 31, 2021.

Tax provisions affecting businesses

• Corporate tax rate – The proposal would introduce a graduated federal tax rate for corporations: 18% applies to first $400,000 of income, 21% applies to income in excess of $400,000 and up to $5M, 26.5% applies to income in excess of $5M.  A surcharge of lesser of 3% of the excess or $287,000 applies if the corporation has more than $10M of income.  If enacted, rate increase is effective January 1, 2022.

• FDII deduction decrease – the proposal would reduce the section 250 deduction for FDII from 37.5% to 21.875% and the section 250 deduction for GILTI from 50% to 37.5%. If enacted, the change is effective for tax years beginning after December 31, 2021.

• GILTI inclusion – the bill would provide for country-by-county application of the GILTI and reduce qualified business asset investment deduction from 10% to 5%.

Additionally, the proposal contains provisions substantially changing the Foreign Tax Credit and Subpart F inclusion regime.  The proposal must be approved by the Congress and taxpayers should continually monitor legislative process.

New Employee Retention Credit Guidance

IRS 는 Notice 2021-49 를 통해 Employee Retention Credit (ERC) 프로그램에 대한 추가 규정을 발표했다. 이는 2021년도 3분기와 4분기에 적용되는 American Rescue Plan Act of 2021 (ARP) 의 개정된 ERC 규정들을 다루고있다. 새로운 규정 중에 눈여겨봐야할 사항은 자격을 갖춘 고용주의 정의를 “recovery startup businesses” 를 포함하도록 확장되었다는 점이다.

과거 규정에 따르면, 자격을 갖춘 고용주란 COVID-19 으로 인한 정부의 명령으로 사업장이 폐쇄된 경우나 전년 동기 대비 매출액이 감소했을 경우에 해당되었다. 개정된 규정은 이에 추가로 2021년도 3분기와 4분기동안 recovery startup business 자격을 갖춘 고용주도 해당 분기에 대해 ERC 혜택을 받을 수 있도록 바뀌었다.

고용주는 다음 세가지 조건을 충족시킬 경우 recovery startup business 의 자격을 갖추게 된다.

1. 과거 규정에 따른 사업장이 폐쇄됐거나 매출액이 감소된 경우에 해당되지 않는 고용주.
2. 2020년 2월 15일 이후에 사업을 시작한 고용주.
3. ERC 를 청구하는 분기 이전의 3개 과세 연도에 대한 평균 연간 매출액이 100만 달러를 초과하지 않는 경우.

기본 ERC 금액은 자격을 갖춘 고용주가 자격을 갖춘 직원에게 지급하는 임금의 첫 $10,000 의 70% 로 계산된다 (즉, 분기당 직원 1인당 최대 $7,000). 또한, recovery startup business 에 해당되는 고용주는 $10,000 임금 제한 적용 후 분기당 최대 $50,000 의 총 ERC 금액으로 제한된다. Recovery startup business 의 자격은 분기별로 결정된다.

2020년도에 사업을 시작한 고용주 중, 과거 ERC 규정의 조건에 해당되지 않았을 경우, recovery startup business 자격을 통해 ERC 혜택을 받을 수 있는 기회가 될 것이다.

개정된 규정은 2020년도와 2021년도에 대한 ERC 계산에 적용되는 여러가지 문제에 대한 지침을 제공한다. 자세한 사항은 Notice 2021-49 에서 확인할 수 있다.

https://www.irs.gov/pub/irs-drop/n-21-49.pdf

New Employee Retention Credit Guidance

IRS issued further guidance on the employee retention credit (ERC) program via Notice 2021-49. The new notice addresses changes made by the American Rescue Plan Act of 2021 (ARP) to the ERC that are applicable to the third and fourth quarters of 2021. Those changes include, among other things, expanding the definition of eligible employer to include “recovery startup businesses”.

According to the previous guidance, employers are eligible to claim the ERC for a quarter during 2020 or 2021 if their business operations were fully or partially suspended due to a government order relating to COVID-19 or they experienced a decline in gross receipts. Under the new guidance, employers that qualify as a recovery startup business during the third and fourth quarters of 2021 are also eligible to claim the ERC for such quarters.

Employers qualify as a recovery startup business by meeting all three of the following:

1. An employer is not otherwise eligible employer via the business suspension test or gross receipt test.
2. An employer began carrying on a trade or business after February 15, 2020.
3. Average annual gross receipts do not exceed $1 million for the three tax years preceding the quarter in which it claims the ERC.

The basic ERC amount for all eligible employers during 2021 is calculated as 70% of up to $10,000 of an employee’s qualified wages per eligible quarter. Additionally, employers eligible as a recovery startup business are also subject to an overall credit limitation of $50,000 per quarter (after application of the $10,000 wage limit). Eligibility as a recovery startup business is made separately for each quarter.

If an employer started business in 2020 and did not meet the conditions of the previous ERC guidance, it would be an opportunity to be qualified as a recovery startup business to receive ERC benefits.

The new notice also provides guidance on several miscellaneous issues applicable to all ERC calculations for 2020 and 2021. Refer to Notice 2021-49 for more details.

https://www.irs.gov/pub/irs-drop/n-21-49.pdf