Earlier this summer, the House Committee on Ways and Means introduced a tax relief package (the “Proposals”), which establishes a framework for potential tax changes. The Proposals are not expected to be enacted as currently drafted, and these should be viewed as opening positions for further negotiation. Regardless, the prospect of a potential tax relief package is worth monitoring.
This Memorandum focuses primarily on the certain components of the Proposals that may be of interest to our Investment Management clients. Certain aspects of the Proposals provide tax relief to individuals and small businesses; other aspects impact investments into real estate by amending the opportunity zone rules and imposing additional tax on certain foreign investments into United States real estate. A bullet point summary of these proposals follows:
Qualified Small Business Stock
- The Proposals would reduce the holding period requirement from five (5) years to three (3) years for partial gain exclusion.
- If enacted and the three (3) year holding period is satisfied, a taxpayer can exclude the “applicable percentage” of gain recognized from the sale of Section 1202 qualified small business stock.
- After three (3) years, the applicable percentage is 50%; after four (4) years, 75%; and after five (5) years, 100%. Currently, taxpayers meeting a five (5) year holding period may exclude 50% of the gain realized from the sale of qualified small business stock if certain requirements are met.
- The Proposal would also tack a taxpayer’s holding period of qualified convertible debt to the holding period of the stock post-conversion.
- Qualified small business status would include S corporations as well as C corporations.
Real Estate and Opportunity Zone Proposals
- The Proposals would expand the opportunity zone program to include investments into “qualified rural opportunity funds” (“rural QOFs”).
- The Proposals would defer recognition of capital gains as late as the end of 2032 to the extent such gains are reinvested into rural QOFs.
- The original tax benefits for satisfying a five-year or seven-year holding period would be renewed under the Proposals for rural QOFs.
- A taxpayer that invests into a rural QOF can exclude 10% or 15% of the deferred capital gain to the extent the taxpayer satisfies the five-year or seven-year holding period in the rural QOF prior to the end of 2032.
- The Proposals would impose a 60% excise tax on the purchase of agricultural land in the United States by certain “disqualified” foreign investors. The excise tax would apply to certain investors from China (but not Taiwan), Russia, North Korea, Iran, Cuba and Venezuela under the rule of the Maduro regime. Entities with disqualified investors as minority owners may be subject to a prorated amount of this tax.
- The Proposals require disclosure of beneficial ownership of a buyer to the seller or the seller’s agent.
Business Interest Deductibility
- Extending preferable rules for interest deductibility allowable for depreciation, amortization, or depletion (i.e., earnings before interest, taxes, depreciation, and amortization) under section 163(j) beginning after December 31, 2022 (and, if elected, for taxable years beginning after December 31, 2021), and before January 1, 2026.
Individual and Small Business Relief
- The term “standard deduction” is replaced by “guaranteed deduction,” and the guaranteed deduction would be in increased up to $4,000 for tax years 2024 – 2025.
- The Proposals would increase the information reporting threshold on Form 1099-K for third party network transactions, such as Venmo and PayPal type payments. The Proposals would also repeal a prior reduction to the threshold to $600 and eliminate the transaction threshold. The amendment applies retroactively to returns for calendar years beginning after December 31, 2021.
Seward & Kissel LLP actively monitors changes to the legislative landscape and how any changes may impact the investment management industry. For additional information on recent income tax changes, please contact a member of Seward & Kissel’s Tax Department.