On July 16, 2021, California Governor Newsom signed Assembly Bill 150, which includes a new elective pass-through entity (“PTE”) tax, to provide tax relief for small businesses facing the economic hurdles due to COVID-19. For taxable years beginning on or after January 1, 2021 and before January 1, 2026, qualified entities may elect to pay an optional entity level state tax, and qualifying electing partners will receive a nonrefundable credit against their resident or nonresident California tax liability. If the allowable credit exceeds the individual’s net tax due, the excess is allowed as a carryover to the following five tax years.

Qualified entities that are taxed as a partnership or an S corporation, and have partners, shareholders, or members all of whom are corporations, individuals, fiduciaries, estates, or trusts are eligible to make the election annually on an original, timely filed return.

The tax is imposed at a rate of 9.3% on qualified net income, which is the sum of the pro-rata shares of distributive shares of income of each qualified taxpayer. For tax year 2021, the PTE tax is due on or before the due date of the original return without regard to any extension. For tax years 2022 through 2025, at least 50% of the elective tax paid the prior taxable year or $1,000, whichever is greater, is due by June 15 of the taxable year of the election, and the balance of the elective tax is due by the due date of the original return without regard to any extension. If an entity does not make the first payment by June 15, it may not make the election for that tax year.

Qualified entities should be aware that this PTE tax election is automatically repealed if the federal limitation on the state and local tax (“SALT”) deductions is repealed. There is an open question at the federal level as to whether the SALT tax deduction can be specially allocated to each partner based upon their contribution to the elective tax or whether the federal tax deduction must be allocated on a pro-rata basis.

Refer to Assembly Bill 150 for additional details.

Mexico Outsourcing Reform Extension

In the 31 July 2021 edition of the Official Gazette, Mexico’s Executive branch extended the 1 August 2021 deadline for complying with the tax provisions in recent labor reform legislation affecting outsourcing services. The extended deadline is 1 September 2021.  The extension also applies to the deadline for registering on the Labor Ministry’s Specialized Services Provider Registry, as well as the deadline for complying with the Social Security Law.

For additional detail, please read the article by Mauricio Monroy Contadores (link below).

 Boletín Reforma Subcontratación - Newsletter on Outsourcing Reform 2021

PPP 대출은 COVID-19 기간동안 중소기업과 일부 비영리단체가 급여를 유지하도록 지원하기 위해 CARES Act 의 일부로 만들어졌다. 일반적으로 고용주가 COVID-19 이전과 비슷한 급여 수준으로 직원을 유지하는 경우 PPP 대출은 탕감이 가능하다. 탕감되지 않는 PPP 대출의 경우 대출 만기는 일반적으로 5년이고 이자율을 1% 이다.

연방 정부 소득세 신고시, 탕감된 PPP 대출은 과세 소득으로 간주되지 않으며, PPP 대출금으로 지불된 비용은 공제 대상이다. 주 정부 소득세의 경우, 대부분의 주에서는 연방 정부를 따라 탕감된 PPP 대출을 과세 소득에서 제외하고 관련 비용에 대한 공제를 허용한다. 하지만, 일부 주에서는 PPP 대출 탕감과 비용 공제를 다르게 취급할 수 있다. 아래 차트는 PPP 대출 탕감 및 관련 비용에 대한 각 주의 조세 처리 방법을 보여준다. (클릭하여 확대)

PPP 대출 탕감 관련 주 정부 세금의 영향과 CARES Act 에 대한 각 주의 대응을 면밀히 검토하는 것이 필요하겠다.

The PPP was created as part of the CARES Act to assist small businesses and eligible nonprofits in maintaining their payroll during the COVID-19 pandemic. Generally, the PPP loan is fully forgivable if employers retain employees at salary levels comparable to those before the pandemic. If there is any remaining non-forgivable PPP loan, the loan generally has a maturity of 5 years and a 1% interest rate.

For the federal purposes, forgiven PPP loans will not count as taxable income, and the expenses paid for by the PPP proceeds are deductible. However, it is not as straightforward for individual states. Many states will exclude forgiven PPP loans from taxable income and allow a deduction for related expenses, following the federal treatment. However, some states may treat the forgiveness and expense deduction differently. The chart below shows each state’s tax treatment of PPP loan forgiveness and related expenses. (Click to enlarge)

It is important to carefully assess the state tax effects of PPP loan forgiveness and closely review the state’s response to the CARES Act.

리스이용자는 ASC 842에 따라 리스의 내재이자율을 할인율로 사용하여야 한다. 리스의 내재이자율이란 리스제공자가 리스이용자에게 부과하는 이자율로 정의 된다. 리스의 내재이자율을 쉽게 산정할 수 없는 경우에, 비상장 기업들은 증분차입이자율 (incremental borrowing rate) 혹은 무위험이자율(risk-free rate)을 사용 할 수 있다. 증분차입이자율은 리스이용자가 비슷한 경제적 환경에서 비슷한 기간에 걸쳐 비슷한 담보로 사용권자산과 가치가 비슷한 자산 획득에 필요한 자금을 차입할 경우 지급해야 하는 이자율로 정의된다. 현재 기준에 따르면, 무위험이자율을 할인율로 사용하는 경우에는 모든 리스들에 이와 같은 할인율이 적용되어야 한다.

미국 재무회계 기준위원회(FASB)가 최근 비상장기업에 대한 관련 회계기준 업데이트를 발의하였다. 이 회계기준이 적용되게 되면, 비상장 기업은 전반적인 리스가 아닌, 리스자산의 종류에 따라 무위험이자율을 적용할 수 있게 된다. 또한 이 회계기준은 리스의 내제이자율이 쉽게 결정 될 수 있는 경우에는 무위험이자율이나 증분차입이자율의 선택여부와 상관없이 해당 내제이자율을 사용할것을 요구하고있다.

일반적으로, 무위험 이자율은 낮은 할인율을 의미하게 되며, 이에 따라 사용권 자산과 리스부채가 커질것으로 예상된다.

자세한 내용은 밑에 Proposed ASU 를 확인하시기 바랍니다:

https://fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176176792230&acceptedDisclaimer=true

Under ASC 842, lessees are required to use the rate implicit in the lease as the discount rate. The rate implicit in the lease is the interest rate the lessor is charging the lessee. It is referred to as the implicit rate because it is not usually specified, or explicit, in the lease agreement and must be inferred by the lessee based on additional information. When the implicit rate is not readily available, private companies are allowed to make an election to use a risk-free rate (rather than the incremental borrowing rate) as the discount rate for measuring the lease liability and the right-of-use asset. Currently, the standard requires this election to be made at the entity-wide level for the entire lease portfolio (and all leases within it).

The Financial Accounting Standards Board ("FASB") proposed an accounting standard update ("ASU") regarding this election for nonpublic business entities.  The proposal would permit lessees to elect to use a risk-free rate as the discount rate for leases by class of underlying asset, rather than at the entity-wide level.

The proposal also would require that when the rate implicit in any lease is readily determinable for any individual lease, a lessee would use that rate (rather than a risk-free rate or an incremental borrowing rate) regardless of whether it has made the risk-free rate election.

Generally speaking, using risk-free rate would mean less discount and therefore large ROU asset and lease liability.

For details, please see the proposed ASU below:

https://fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176176792230&acceptedDisclaimer=true

Treasury Report of Joe Biden’s Tax Proposal

May 28, 2021, the US Treasury released a report providing President Joe Biden’s tax proposal containing corporate and individual tax increase measures.  Most of the tax increase proposals are expected be effective tax years beginning after December 31, 2021 if enacted.  Here are some key corporate and individual tax increase proposals proposed by President Joe Biden:

• Corporate tax rate increase from 21% to 28%.
• Reduce Section 250 deduction from 50% to 25% for GILTI tax computation purpose and remove qualified business asset investment deduction.
• Repeal FDII (foreign derived intangible income) deduction.
• Impose a 15% minimum tax on corporations with book income excess of $2 billion.
• Increase top individual tax rate from 37% to 39.5%.
• Tax capital gains and qualified dividend income at ordinary rate for individuals with gross income in excess of $1 million.
• Impose tax on transfer of appreciated properties by gift or inheritance.
• Broadening application of the 3.8% net investment tax.
• Treat “carried interest” from certain partnership investment as ordinary income.
• Remove like-kind exchange deferral provision for real estate gains in excess of $1 million for joint filer.

Taxpayers should continually monitor legislative progress of the tax proposals and plan in advance to minimize expected tax burden increase.

Click the link below to see the Treasury Department’s Green Book providing additional detail on Joe Biden’s tax proposal.  https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf

President Biden’s Tax Plans for Individuals

With Democrats’ control of both the House and Senate, many of President Biden’s tax policy change proposed during his campaign is likely to sweep through Congress.  Some of the revenue raising proposals affecting high-income individuals are summarized below:

Tax Rate Increase

An increase of top individual tax rate from 37% to 39.6% for taxpayers with adjusted gross income above $400,000.

Increase of Capital Gains Tax Rate

President Biden plans to increase the long-term capital gains and qualified dividend tax rate from 20% to ordinary tax rate of 39.6% for individuals with adjusted gross income exceeding $1 million.

Ultra-Millionaire Wealth Tax

Ultra-Millionaire Wealth Tax Act was introduced by Democratic Senator Elizabeth Warren in March which would impose a 2% annual wealth tax on taxpayers with at least $50 million in wealth and a 3% tax on those with at least $1 billion in wealth.  The Wealth will be determined based on the fair value of properties includable in one’s estate.

Estate Tax Increase

Senator Bernie Sanders and Senator Sheldon Whitehouse introduced the 99.5% Act in March which would significantly increase the estate and gift tax.  If enacted, it will change the current estate and gift tax laws by (1) reducing the estate tax exemption to $3.5 million from $11.7 million per person, pulling vast majority of individuals to subject to the estate tax; (2) reducing the lifetime gift tax exemption to $1 million and annul gift exclusion amount to $10,000 per donee; and (3) increasing estate tax rate from 40% to 65% for estate in excess of $1 billion.

Tax on Unrealized Gain

Under current law, capital gains tax on appreciation of property gifted or bequeathed is postponed in the case of gift or eliminated by the step-up basis.  However, Democrats introduced a bill that would tax appreciated property at the time of transfer by gift or death.

High net worth and income individuals are likely to face significant changes to their income tax and estate tax plans if some of these proposals are enacted.  Therefore, high net worth and income individuals should monitor legislative progress, understand the impact, and consider planning in advance to minimize the impact.