Alert: Proposed Federal Tax Legislation Would Reduce SAQÉ Benefits and Increase Capital Gain Rates | Cooley LLP

Last week, the House Ways and Means Committee announced its review of federal tax legislative proposals that include reducing the income exclusion from earnings on the sale of qualified small business (QSBS) shares and increasing the rate. long-term capital gains tax, in each case for high-income unincorporated taxpayers.

Section 1202 of the Internal Revenue Code of 1986 (the Code) provides an income exclusion for unincorporated taxpayers on gains from the sale of QSBS held for more than five years. Section 138150 of the bill would eliminate the 75% and 100% earning exclusions for taxpayers with adjusted gross income of $ 400,000 or more, limiting such taxpayers to the 50% earning exclusion that is currently applies to QSBSs issued before February 18, 2009. These changes would increase the maximum effective rate – including alternative minimum tax, if any – on the qualifying gain from the sale of QSBS by 0% (for QSBS acquired after September 27, 2010) or from 9.42% (for QSBS acquired after February 17, 2009, and before September 27, 2010) to 16.88% (without taking into account the proposed 3% surcharge discussed below) .

Section 138202 of the bill would increase the maximum long-term capital gains rates from 20% under the current law to 25% (increased in each case by the 3.8% income tax net of investment). In addition, section 138206 of the bill would impose a tax of 3% on modified adjusted gross income greater than $ 5 million ($ 2.5 million for married people filing separately and $ 100,000 for estates and estates). trusts), which could increase the long-term capital gains rate up to 31.8%.

Some of these provisions, if enacted, would have effective dates retroactive to the date the legislation was proposed – September 13, 2021. An exception to this retroactive effective date applies to enforceable written contracts in force from September 12, 2021 (in the case of the 50% ceiling of the exclusion of capital gains for QSBS) or September 13, 2021 (in the event of an increase in the capital gains rate) Long term), provided that the contract is not subsequently changed significantly. Therefore, taxpayers should exercise caution when considering amending contracts entered into on or before September 13, 2021, if they plan to take advantage of the current exclusion applicable to earnings from QSBS or current rates of earnings from QSBS. long-term capital.

Other notable changes proposed to national taxation in the bill include:

• Increase of the maximum corporate tax rate to 26.5% compared to the current flat rate of 21% (article 138101).
• Increase of the highest marginal rate on individual income from 37% to 39.6% (article 138201).
• Respond to calls for a “deferred interest” tax reform, typically increasing the holding period required for the gain attributable to “applicable partnership interest” from three to five years to qualify for long term capital gains treatment. term, delaying the start date of this holding period until a fund has invested “substantially all” of its committed capital, and extending this provision to all eligible assets at long-term capital gain rates. term, including the gain of Article 1231 of the Code (Article 138149).
• Expand the 3.8% tax on net investment income to include business income passed on to shareholders of “active” S corporations and “limited partners” whose modified adjusted gross income exceeds $ 400,000 for filers single or $ 500,000 for joint filers (article 138203).
• Limit on the deduction for eligible business income under article 199A of the code (article 138204).
• Make permanent the rejection of article 461 (l) of the Code of “excessive business losses” (article 138205).
• Expand withholding tax obligations for US borrowers who pay interest to non-US lenders who hold 10% or more of the voting rights or stock value of those borrowers (section 138145).
• Allow any corporation that was an S corporation on May 13, 1996, and at any time thereafter, to reorganize as a tax-free partnership during the two-year period beginning December 31, 2021 (Section 138509 ).