On November 5, 2021, Congress passed a $550 billion Infrastructure Investment and Jobs Act. This bill is separate from the Build Back Better Act, which includes the highly discussed and more significant tax proposal changes. Up until last week, the two bills had been largely negotiated together as a package. Therefore, the passage of the infrastructure bill signifies a likely vote on the Build Back Better Act in the coming weeks. As of the time of this writing, Congress is aiming to have the vote take place sometime after November 15 when the Congressional Budget Office scores the proposed bill and before the Thanksgiving holiday. Tax changes passed by the infrastructure bill and proposed changes from the Build Back Better Act have been summarized here.
Tax Changes Included in the Infrastructure Bill Passed on November 5, 2021
- Employee Retention Credit: The American Rescue Plan Act of 2021 extended and modified the Employee Retention Credit to apply to wages paid after June 30, 2021 and before January 1, 2022. The infrastructure bill reduces the applicable period eliminating the credit for wages paid after September 30, 2021. The American Rescue Plan Act also created a new category for ERC eligibility: the Recovery Startup Business. The ERC for recovery startup businesses remains available through December 31, 2021, even after the infrastructure bill.
- Pension Funding Stabilization: Pension Plan smoothing through further extending and modifying interest rate stabilization period and percentages began when signed into law in 2012. The provision has been extended further to provide funding relief for employers during periods of low interest rates.
- Cryptocurrency: New reporting requirements for brokers of cryptocurrency. The bill expands on the definition of a “broker” to include “any person who is responsible for providing any service effectuating transfers of digital assets on behalf of another person.” The goal of the language is to treat cryptocurrency exchanges more similar to investment brokerages. The reporting requirements are not effective until 2023.
- Water and Sewer Utilities Contributions: Restores an exclusion allowed from corporate income of water and sewer utility corporations for contributions received for the purpose of construction aid.
- Private Activity Bonds: Similar to the tax-exempt interest on state and local bonds, the tax-exempt status can be allowed for certain private activities. The bill adds two private activities to the current list which are qualified broadband internet projects and qualified carbon dioxide capture facilities.
- Extension of Excise Taxes: Excise taxes that were set to expire after September 30, 2022 have been extended through September 2028. This includes excise taxes on fuels, diesel, and special fuels, retail sales of heavy trucks and trailers, and tires.
- Tax Procedural Changes: The determination of the beginning of the mandatory 60-day deadline extension for time-sensitive acts regarding federal disasters has been modified.
Significant Tax Changes Proposed in the Build Back Better Act on the Horizon
- Surcharge Tax: High income individuals, estates, and trusts with modified adjusted gross income (MAGI) above certain thresholds may face a proposed 5% surcharge tax. The threshold for individuals is MAGI exceeding $10 million and for estates and trust $200,000. An additional 3% surcharge tax has also been proposed for individuals with MAGI above $25 million and $500,000 for estates and trusts.
- Net Investment Income Tax (NIIT): Under current law, only passive business income from pass-throughs is subject to the 3.8% NIIT. The proposal would apply the 3.8% NIIT to high-earning active shareholders and partners as well. The high-income threshold for individuals for this new expanded definition to apply would be MAGI of $400,000 (Single), $500,000 (Married Filing Jointly). This is significant because individuals who are active shareholders of S corporations, limited partners, and members of LLCs may now become subject to the net investment income tax.
- Excess Business Loss Limitation: The proposed act would make permanent the excess business loss limitation for losses greater than $250,000. This proposal would eliminate the carryover NOL treatment.
- Sale of Qualified Business Stock: The proposed act would set up an exclusion of gain on sale of qualified small business stock. The exclusion would be limited to 50% for taxpayers with AGI above $400,000.
If enacted, these proposals would change the tax landscape and would require many taxpayers to re-evaluate their tax positions. PBMares will continue to track the development of this significant legislation over the next few weeks and how it will affect our clients.