New Tax Bill Proposed

You’ve likely seen news surrounding a deal to revive a Democratic reconciliation tax package.  The bill provides investment in clean energy, promotes reductions in carbon emissions, and extends popular ACA premium reductions.  The bill will be paid through the implementation of a 15 percent corporate minimum tax, budget increases for the Internal Revenue Service to close the “tax gap,” the closing of a loophole called carried interest, and changes to Medicare rules.

The provisions are further detailed as follows:

  • Corporate Minimum Tax – A 15% tax would apply to corporations with average annual adjusted financial statement income in excess of $1 million for the three prior tax years.  That threshold is reduced for certain foreign-parented corporations.  The tax would be applied to the corporations “adjusted financial statement income” for all relevant years.
  • Carried Interest – The bill asserts the existence of a “carried interest loophole” it endeavors to close.  Under the loophole, managers of hedge funds and other private equity funds share in the profits of the fund by receiving a share of the profits interest.  Prior to the passage of the Tax Cuts and Jobs Act, those interests could then be sold as capital assets, meaning they were subject to reduced long term capital gains treatment if held for longer than a year, despite being compensation for labor, which would normally be taxed at higher ordinary income rates.  Under the TCJA, these mangers must hold the interest for a minimum of three years to enjoy the long-term capital gains treatment.  The proposed bill the holding requirement would be lengthened to five years, both only for those with incomes in excess of $400,000.
  • IRS Funding – The bill endeavors to improve the IRS service by closing the “tax gap.”  The tax gap is the different between what should be collected by the IRS and what is actually collected by the IRS.  In many cases, the lack of resources by the IRS to enforce the nation’s tax laws can be leveraged by taxpayers to lower their tax bills, and it is believed that a small investment in IRS resources can lead to an outsized increase in revenue.
  • Research Credit for Small Businesses – The bill proposes that in years beginning after 2022, taxpayers will be limited on the amount of Research Credit can be claimed to offset payroll taxes.  The limitation is moving from $500,000 to $250,000

The majority of the outlays in the bill are devoted to incentives for green energy.  Individuals and businesses can expect to enjoy tax incentives for engaging green initiatives:

  • Electricity produced from Renewable Resources – The bill extends the credit for electricity produced from certain renewable resources through 2024.  An increased credit may be claimed if the entity meets certain workforce and wage requirements in construction or operation of the facility.
  • Energy Investment Credit – Extended through 2024, the bill enhances the credit for solar facilities placed in service in connection with low income communities.
  • Residential Energy Incentives – The credit applies to energy efficient windows and doors, as well as certain HVAC systems and heat pumps.  The lifetime maximum credit is replaced by an annual limit of $1,200.
  • Clean Vehicles – The credit for the purchase of clean vehicles is extended through 2032.  The proposal eliminates the current credit’s limitation on the number of vehicles produced by a specific manufacturer.  The maximum credit remains at $7,500, but includes income limitations.  A new credit of up to $4,000 is also available for the purchase of a previously-owned clean vehicle, subject to income limitations.
  • Any many other small energy initiatives…

The bill does not contain many of the original proposals that impacted state and local income tax deductions, capital gains, income tax rates, and other initiatives.

If you have any questions, please reach out to your Cooper Norman representative.

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