There are numerous miscellaneous provisions in the tax proposals currently before the U.S. Federal Government and as we have learned from recent headlines the outcome is uncertain. As many of these provisions are likely to be signed into law, it is important that individuals and businesses are prepared. The information below is based on the most recent version of HR 5376 – the Build back Better Act – released October 28,2021.

This briefing was assembled by the team of tax experts and specialists at Mercadien. We help our clients navigate through disruption, and proposed changes to tax law will be disruptive for many individuals and businesses. For assistance or consultation, contact Mercadien online or by calling 609-689-9700.

Excess Business Losses: Disallowed Loss Treated as a Deduction

Currently, there is a temporary provision to treat excess business losses not as an NOL but as a deduction attributable to the taxpayer’s business. The same EBL thresholds will be in place, but the temporary provision will become permanent.

Section 1202 – Qualified Small Business Stock Gain Exclusions

Individual taxpayers with Adjusted Gross Income (AGI) in excess of $ 400,000 and all trusts and estates will lose the ability to exclude 75% and 100% of the sales of Qualified Small Business Stock (QSBS) for stock acquired after February 17, 2009 and sold after September 13, 2021. This means that 50% of the gain is taxed at 28% and the excluded remaining gain of 50% becomes a tax preference item subject to the Alternative minimum tax (AMT).

Constructive Sale Rule to Apply to Appreciated Digital Assets

The constructive sale rule will be expanded to apply to the constructive sale of appreciated digital assets. It appears this will apply to cryptocurrencies and some virtual or digital assets. The provision would be effective after the date of enactment.

Wash Sale Rule More Broadly Applied

The wash sale rule will be expanded to include digital assets, foreign currency, and commodities. It will be applicable for sales and dispositions that occur after December 31, 2021, when there is matching acquisition during the wash sale period as well as to publicly traded properties in the aforementioned categories (digital, foreign, etc.).

Key Personal Casualty Loss Provisions

The proposed legislation would eliminate the Tax Cuts and Jobs Act limitation, which limited personal casualty losses unless they were attributable to a federally declared disaster. This would be effective for tax years beginning after December 31, 2017. It also would not tax the money received from the state or a subdivision of the state to improve a residence after damage from a natural disaster. This would be effective for tax years beginning on or after December 31, 2020.

New Internal Revenue Code: Qualified Wildfire Mitigation Expenses

A new section in the Internal Revenue Code would provide relief for wildfires, taking the form of a credit of 30%.

Key Foreign Provisions

Several changes are proposed to the foreign tax credit (FTC):

• New rules for dual capacity taxpayers, with differing FTC rules for respective countries, including income and loss based on the taxable unit of the taxpayers who reside in those countries.
• The FTC carryforward period would decrease from 10 years to 5 years, and the current 1 year carryback period would be eliminated.
• The deduction of foreign derived intangible income earned by domestic corporations would be reduced from 37.5% to 21.875%, and the deduction for global intangible low-taxed income would be reduced from 50% to 37.5%.

Other Provisions

Miscellaneous provisions within the latest tax proposals also include:

• A repeal of the temporary limitation on personal casualty losses.
• It is noteworthy that these proposals do not include a repeal of the $10,000 state and local tax deduction limit for individual taxpayers.

If you want to learn more about how tax law changes will impact individuals or estates/trusts, visit our latest resources.

If the laws pass, it is important that you are prepared: our team at Mercadien is well-equipped to assist you through these changes. Contact us to learn more.

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.