On September 13, 2021, the House Ways & Means Committee of the U.S. House of Representatives released the draft text of its proposed budget reconciliation bill (the “Build Back Better Act [First Draft]”), and on September 15, 2021 it approved various sections of the proposal. The Committee released an updated draft on October 28, 2021 (the “Build Back Better Act [Second Draft]). The Second Draft omitted many sections from the First Draft kept the rest with relatively little alteration. The Committee released a further draft on November 3, 2021 (the “Build Back Better Act [Third Draft]”) which returned certain sections from the First Draft. On November 5, 2021, the changes detailed below were approved by the Senate and are going to be voted on in the House of Representatives. This document reflects the potential tax implications for the Third Draft.

It is important for clients to note that as of the date of this article, these proposals are not the law, and are subject to ongoing negotiations. The proposed provisions could change considerably and there is no guarantee that any of the provisions will become law. Nevertheless, this article is to alert clients of the potential changes to individual taxpayers and the resulting consequences of such changes if they are approved. We encourage our clients to be proactive and plan in advance of possible impending changes.

Potential Corporate Tax Impact: Effective – January 1, 2021

• Limitation on Excess Business Losses of Noncorporate Taxpayers (§138202): The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provided relief for taxpayers by eliminating the excess business loss limitation (which disallows excess business loss for noncorporate taxpayers for losses in excess of $500,000 for joint filers and $250,000 for individuals) for the 2018, 2019, and 2020 tax years. This proposal would permanently disallow excess business losses for non-corporate taxpayers and would allow taxpayers whose losses are disallowed to carry those losses forward to the next succeeding tax year as a deduction.

Potential Corporate Tax Impact: Effective – Introduction Date (September 13, 2021)

• Modification to Rules Governing the Sale or Exchange of Qualified Small Business Stock (§138149). Currently, a taxpayer (other than a corporation) who acquired (or acquires) Qualified Small Business Stock (“QSBS”) during certain periods in 2010, and thereafter, and has held the stock for more than 5 years, is able to exclude 100% of any gain from the sale or exchange of QSBS from his or her gross income. Under the proposal, if the taxpayer’s Adjusted Gross Income (“AGI”) equals or exceeds $400,000, or if the taxpayer is a trust or estate, then the 100% exclusion of any gain from the sale of a QSBS is reduced to 50%.

Potential Corporate Tax Impact: Effective – January 1, 2022

• Modification to Treatment of Certain Losses (§138142): Under the proposed legislation, losses realized on certain securities will be treated as being realized on the day that the event establishing worthlessness occurred, rather than on the last day of the taxable year. This potentially limits the instances when such a loss would be treated as a capital loss as opposed to a short-term loss (ordinary loss). Also, under the proposed legislation, partnership indebtedness would be treated the same as corporate indebtedness for the purpose of Section 165 of the Internal Revenue Code (IRC) and worthless partnership interests would be treated as a loss from the sale or exchange of a partnership interest at the time of the identifiable event establishing worthlessness.

• Wash Sale Rules Apply to Related Parties and Digital Assets (§138152): Currently, the Wash Sale Rule provides that a tax loss resulting from the sale of a security is not deductible to the extent the taxpayer acquires a substantially identical security at either 30 days before or 30 days after the loss. The proposed legislation would include digital currencies such as cryptocurrency in the Wash Sale Rule. Also, under the new legislation, related parties whose acquisition of a substantially identical security within 30 days would also implicate the wash sale rules.

Potential Corporate Tax Impact: Effective – January 1, 2023

• Corporate Alternative Minimum Tax (§138101): If passed, an alternative minimum tax of 15% would be imposed upon all income for corporations with an average income over $1 billion. Income is determined through an “adjusted financial statement.” This is a formal financial statement subject to certain rules but may generally be met with a form 10-K filed with the Securities and Exchange Commission.

Potential Corporate Tax Impact: Effective – Enactment Date (January 1, 2022)

• Constructive Sale Rules Apply to Digital Assets (§138150): The Constructive Sale Rule under IRC §1259 provides that when there is a constructive sale of an appreciated financial position the taxpayer shall recognize gain as if such position were transferred at fair market value on the date of the constructive sale. A constructive sale occurs when a taxpayer holds an appreciated financial position and enters into certain designated transactions that substantially reduce taxpayer’s downside risk (such as a short sale). This tax proposal expands the definition of an “appreciated financial position” to include digital assets such as cryptocurrency.

NOTE: This article does not list all of the legislation being proposed in the Build Back Better Act. It is merely a list of the provisions we believe to be most relevant to a majority of our clients. Please contact your business or corporate attorney to discuss the potential legislation and how it may or may not affect your planning needs. Although it is impossible to know which provisions will pass, possible tax-planning strategies may still be available to those who would like to act in advance of the impending change.

Please contact The Burton Law Firm at 916.822.8700 or info@burtonlawfirm.com for more info.

In October of 2021, as a result of the largest leak of documents in history, 11.9 million files from over 2.94 terabytes of data were publicly released by the International Consortium of Investigative Journalists [ICIJ].

Concerning assets and individuals across the globe, this leak identified the financial affairs of more than 100 billionaires, 30 world leaders and 300 public officials. This leak is reminiscent of the Panama Papers released back in 2016 [ICIJ].

The Pandora Papers were published under the script of providing transparency on the use of “offshore” tax havens, which are utilized in order to mitigate taxes and secure privacy around one’s financial affairs. Included in the data were several high-profile individuals mired by controversy [Reuters].

Though the scope of this leak concerned “offshore” locations, the United States was likewise implicated in several tax-friendly jurisdictions. The most prominent of these was South Dakota, but they also included Florida, Delaware, Texas, and Nevada. The Pandora Papers identified 206 U.S. trusts linked to 41 countries holding assets worth more than $1 billion [ICIJ].

As the ICIJ notes, being named in the Pandora Papers is in no way synonymous with alleging the individuals identified conducted illegal activity. The use of offshore or domestic tax-friendly jurisdictions is both legal and accepted, if done correctly. Even so, being named in the Pandora Papers is bound to create controversy, and invites public and government speculation. Of the trusts named in the Pandora Papers, nearly 30 of the ones based in the U.S. have been identified as connected to individuals or companies accused of fraud, bribery or human rights abuses.

As specialists in Estate Planning and Trusts, The Burton Law Firm is actively monitoring the Pandora Papers and staying abreast of any changes in the law that may come from this leak. Please note that The Burton Law Firm represents individuals of all backgrounds and walks of life, having a firm foothold in both domestic and international communities. In short, none of The Burton Law Firm’s clients were affected by the data leak, and we continue to maintain the highest grade of professional responsibility and upholding attorney-client confidentiality.

For more information, visit the source of the leak at: https://www.icij.org/investigations/pandora-papers/ or email the Burton Law Firm at info@lawburton.com.

Every new business must decide its form of ownership. From sole proprietorship to corporation, there are several ways to organize your business, each with its own advantages and disadvantages. California recently provided a new advantage for limited liability companies (LLCs), limited liability partnerships (LLPs), and limited partnerships (LPs). Normally, a minimum franchise tax of $800 is imposed annually on the aforementioned entities. However, California will now waive the minimum tax for the first year of the entity’s existence, under two conditions.

First, the LLC, LLP, or LP in question must be registered with the California Secretary of State on or after January 1, 2021 but before January 1, 2024. Second, the waiver applies only to business entities with gross receipts of less than $250,000 for the year (rounded to the nearest dollar). The tax is scaled to gross receipts (not net income or profits), with $900 incurred for gross receipts from $250,000 to $499,999, $2,500 for gross receipts from $500,000 to $999,999, $6,000 for gross receipts from $1,000,000 to $4,999,999, and $11,790 for gross receipts of $5,000,000 or more.

To summarize:  If the LLC was registered on or after January 1, 2021, and has annual gross receipts of $249,999 or less, the minimum tax of $800 would be waived.  However, if the same LLC happened to have annual gross receipts of $250,000, it would owe a minimum tax of $900.  

In a 6-3 vote, the US Supreme Court struck down a California law that forced non-profits to annually disclose their major contributors (i.e. those who contribute more than $5,000). The case, Americans for Prosperity Foundation v Bonta, was split down liberal/conservative lines, where Chief Justice Roberts wrote for the plurality, holding that the disclosure requirement infringed on the Freedom of Association found under the First Amendment.

Drawing from history, Chief Justice Roberts pointed to how states such as Alabama had previously used similar laws to punish contributors to nonprofits that enriched the lives of minorities, such as the NAACP. Even though sent to the state government confidentially, Chief Roberts highlighted the potential that these records could be accidentally leaked or posted online, and therefor risked reprisal to those who contributed to unpopular organizations. He acknowledged these laws were created in California to fight fraud; however, he then pointed to the alleged lack of evidence that California’s law alone had successfully assisted with any “investigative, regulatory or enforcement efforts.”

Dissenting opinions stressed the incompatibility with using judicial precedent meant to protect civil-rights offences to those created to assist with financial fraud, as well as the impossibility to provide evidence that this law, as one tool of many, to fight fraud was not helpful. However, the Court was obviously not swayed. Therefore, for now, non-profits will not need to provide California with their list of donors. Even so, this list will still likely be required for the federal government, i.e. the IRS. As such, the administrative perks of having this law struck down is so far seen to be minimal.