Tripp Scott Tax Team Raises Flag On Proposed Tax Law Changes
The United States House Ways and Means Committee recently released a proposed legislative bill that would make substantial changes to current tax law that will significantly affect corporations, partnerships, and high-income individuals. The newly proposed tax legislation is part of the larger budget reconciliation bill that is actively being considered by Congress. If the bill is passed, two key changes to current tax law would become effective retroactively to September 13, 2021, with the vast remainder of changes becoming effective as of January 1, 2022, or upon passage of the bill. As we await the negotiation and finalization of the bill, here are some of the crucial changes and potential ramifications:
New Limitations on Section 1202 Gain Exclusion
If you are thinking that selling your business by December 31, 2021 may save you money on your income taxes, it may not be true. The new proposals in the tax bill significantly change the ability to exclude gain from the sale or exchange of qualified small business stock. Section 1202 was enacted to create an incentive for taxpayers to invest in small businesses. As the law currently stands, Section 1202 provides the ability to exclude from income any gain from the sale or exchange of C-Corporation "qualified small business stock," which is stock acquired from a domestic C-corporation that qualifies as a small business. Note, there are limitations on what is considered "stock acquired," as Section 1202 does not apply to S-Corporation stock. Gain can be excluded up to 50% for stock issued before February 18, 2009, and up to 75% for stock issued between February 18, 2009 and September 27, 2010. In 2010, the gain exclusion was increased to 100% for all original stock issued after September 27, 2010, for corporations with under fifty-million ($50,000,000) in gross assets.
The newly proposed legislation would remove the 75% and 100% gain exclusion for taxpayers with adjusted gross income that equals or exceeds $400,000, or taxpayers that are trusts and estates, and would reduce the gain exclusion back down to 50% for all other taxpayers. Based on the current language in the bill, this amendment to Section 1202 will apply to any sales or exchanges of stock that occur after September 13, 2021, unless a written binding contract was in effect on or before September 13, 2021.
Capital Gains Rate Increase from 20% to 25%
Under the newly proposed House bill, the top long-term capital gains rate would increase from 20% to 25%. As currently written, this change would be effective for tax years ending after September 13, 2021, with a transition period in effect for any portion of the taxable year that begins prior to September 13, 2021. The only exception to stave off this rate increase for gains recognized later in 2021 is if you had already entered into a written binding contract recognizing the transaction on or before September 13, 2021.