With Covid-19 relief measures expiring across the board, taxpayers should be aware that the limitation on “excess business losses” (EBLs) is now in effect. This limitation is expected to impact many taxpayers and hinder their ability to offset taxable income with business losses. The EBL limitation was originally enacted by the TCJA and scheduled to apply to tax years 2018 through 2025. However, the CARES Act retroactively postponed the limitation until 2021, and the ARPA extended the limitation through 2026.

The limitation disallows any EBL of a non-corporate taxpayer. For 2021, EBLs are trade or business losses that exceed trade or business income (without regard to any deduction for Qualified Business Income or Net Operating Losses) by more than $524,000 for married individuals filing jointly or $262,000 for other taxpayers. In the case of a partnership or S corporation, the EBL limitation applies at the partner or shareholder level. Each partner’s or shareholder’s allocable share of trade or business income or loss is taken into account in applying the EBL limitation to such partner or shareholder.

Disallowed EBLs are treated as Net Operating Loss carryovers to the following tax year. Accordingly, the carryforward amount will not factor into the following year’s EBL limitation and the disallowance generally operates as a one-year deferral. (Note, however, that various versions of the Build Back Better Act have contained provisions under which the EBL would retain its character as a trade or business loss and be subject to annual testing under the limitation – potentially postponing deduction of the EBL over multiple years).

Some things to note:

• The EBL limitation applies after the application of (1) the passive activity loss limitation and (2) the at-risk loss limitation. Thus, if a loss is disallowed under either limitation, the loss will not be taken into account in applying the EBL limitation.
• Employee wages aren’t taken into account in computing the EBL, so EBLs cannot shelter employment income. It is unclear whether guaranteed payments from a partnership are taken into account in computing the EBL.
• When calculating the EBL limitation, taxpayers take into account the lesser of: (1) capital gain net income attributable to a trade or business, or (2) capital gain net income. Capital losses are not taken into account.
• It is unclear whether gain or loss from the disposition of an interest in a partnership or S corporation conducting an active trade or business would be taken into account in computing the EBL. We will advise as future guidance becomes available.

If you have any questions or believe that this limitation may impact you, please reach out to an HBK Tax Adviser.

We thought that the 2020 tax year was unique with its challenges, legislative changes, and political strife. However, 2021 has proven to be just as unique, if not more challenging. As of the publication date of this planning letter, the $1 Trillion Infrastructure Investment and Jobs Act was passed, and the Build Back Better Act (BBBA) is making its way through Congress. The potential changes that the BBBA could bring and other legislative changes related to the ongoing pandemic continue to add an additional layer of complexity to our typical year-end tax planning. At HBK CPAs & Consultants, we want to ensure that our clients and colleagues are aware of the current and potential legislative changes, and how these changes may impact your tax situation.

We hope that the information in this letter is helpful, and we encourage you to reach out to your HBK tax advisor to discuss these planning opportunities prior to implementing any changes.

On November 19 the House passed the Build Back Better bill that includes many tax changes by a vote of 220 to 213. The legislation still faces hurdles in the Senate, where it’s unclear whether moderate Senators Joe Manchin and Kyrsten Sinema will agree to some of the provisions included by the House. The debate over President Biden’s signature plan to expand the social safety net is not over yet. Let’s look at the major tax proposals.

Individual Income Taxes

• Raise the cap on the state and local tax (SALT) deduction from $10,000 to $72,500 and extend this cap through 2030. The $72,500 SALT cap amount would also apply to the 2021 tax year. For 2031, the SALT deduction cap would be set at $10,000. The Senate is likely to water down the SALT deduction to those whose income is over $400,000.
• Create a new surcharge on modified adjusted gross income (MAGI), defined as adjusted gross income less investment interest expense, equal to 5 percent on MAGI in excess of $10 million plus 3 percent on MAGI above $25 million.
• Extend for one year the current expanded Child Tax Credit for more than 35 million American households, with monthly payments for households earning up to $150,000 per year and make refundability of the Child Tax Credit permanent.
• The Section 1202 gain exclusion on the sale of eligible C corporation stock owned for more than 5 years would not apply to taxpayers with over $400,000 for sales on 9/13/2021.

Pass-through Business Taxes

• Subject passthrough income from S corporations, LLCs and partnerships to the 3.8% Medicare tax whether they participate or not for single persons with income over $400,000 and over $500,000 for joint filers.
• Make permanent the active pass-through loss limitation enacted in the 2017 Tax Cuts and Jobs Act (TCJA).

Retirement Plans

• No retirement plan and IRA rules to eliminate backdoor Roth conversions and limit those who can make Roth IRA conversions or the limitation on what an IRA can own and accelerated RMDs for IRAs over $10 million.
• IRA contributions AFTER 2028 would not be allowed if an individual has over $10 million in an IRA and other retirement plan and their AGI is over:
  • Single filer $400,000
  • Married filing joint $450,000
  • Head of Household $425,000
  • Married filing separate $400,000
• Eliminate all back door IRA contributions effective after 12/31/2021
• Taxable Roth conversions would be disallowed for those whose income is over the above thresholds AFTER 12/31/2031
• RMDs would be 50% of the balance above $10 million using the above income thresholds and 100% of the amount over $20 million

Corporate and International Taxes

• Impose a 15 percent minimum tax on corporate book income for corporations with profits over $1 billion, effective for tax years beginning after December 31, 2022.
• Create a 1 percent excise tax on the value of stock repurchases during the taxable year, net of new issuances of stock, effective for repurchases after December 31, 2021. Excluded from the tax are stock contributed to retirement accounts, pensions, and employee-stock ownership plans (ESOPs).
• Change the Global Intangible Low-Taxed Income (GILTI) regime, effective for tax years beginning after December 31, 2022, including:
  • Reduce the deduction for GILTI to5 percent, resulting in a tax rate of 15 percent
  • Calculate GILTI on a country-by-country basis
  • Reduce the deduction for Qualified Business Asset Investment (QBAI) to 5 percent
  • Reduce the foreign tax credit (FTC) haircut to 5 percent and allow FTCs to be carried forward for 5 to 10 years and disallow FTC carrybacks
  • Exempt GILTI from expense allocation rules

What’s Not Included

• No individual income tax rate increases.
• No capital gain rate increases.
• No corporate tax rate increase.
• No gift or estate tax provisions meaning the $11.7 million gift and estate tax exemption is not proposed to be cut in half in 2022 and no proposals to cause grantor trusts (such as Spousal Limited Access Trusts (SLATs, ILITs, GRATs, IDGT, QPRTs) to be subject to estate tax and no change to valuation discounts.
• No change to the 20% qualified business income deduction.
• No new tax on billionaires’ unrealized capital gains and a plan to require banks to report annual account flows to the Internal Revenue Service.