Activity in Washington has ramped up the last couple of months, and if you haven’t checked out the tax changes (and potential changes), we invite you to learn the latest. New and proposed regulations are likely to affect your M&A transactions, but have no fear – we’ve recapped the really important changes for you below.
What Congress Has Passed So Far
Mid-November, the President signed the bipartisan infrastructure bill. While most of this bill impacts the transportation, roads and bridges industry (if that’s you, great! Here’s a really informative article about the bill and all its changes), there’s $550 billion in new funding that you might be able to capitalize on. This includes $73 billion to cover grid reliability and supply chain for clean energy and $46 billion for cybersecurity with infrastructure, waste/flood mitigation, etc.
Now, the nitty-gritty. We know you’re asking how this will be funded. Fortunately (for now), there will be no major business or individual income tax changes. The largest revenue item in the bill is about $28 billion projected to be collected from enhanced cryptocurrency reporting. Honestly, who knew dogecoin would be so popular?
This wouldn’t be a tax article if we didn’t make a plug for the Employee Retention Credit (ERC). The infrastructure legislation repealed the ERC for the fourth quarter of 2021. The window of opportunity is quickly closing; however, the new start-up business form under the ERC is still available for the fourth quarter of 2021.
The last few changes we wanted to mention included in the infrastructure bill include the reinstatement and modification of superfund excise taxes on chemicals and a modification of the tax treatment of contributions to corporations’ capital (§ 118) for utilities. Plus, the extension of interest rate smoothing options for defined benefit plans and some modifications to private activity bond provisions.
No, we aren’t stammering – the next item to address is the BBB. The Build Back Better Act.
What Congress Might Potentially Pass
The reconciliation bill, or the Build Back Better (BBB) Act, is entirely controlled by the democratic party. It is partisan, meaning a simple majority vote is needed for it to pass in both the House and Senate. The cost of this bill is currently around $1.8 trillion and would fund many social programs, such as families, the climate and healthcare.
The BBB passed in the House before Thanksgiving and awaits action in the Senate. While the bill is not finalized nor signed, the potential tax impact on corporations and individuals would be quite significant. Here are some of the possible changes in the bill as it stands now:
- Increase in the corporate tax rate with a new corporate Alternative Minimum Tax (AMT) for companies with over $1 billion of financial statement income
- An excise tax of 1% on certain stock buybacks of publicly traded companies
- Increase in taxes for businesses with foreign operations
- No changes in individual tax rates, but there would be a new surtax of 5% on income over $10 million and another 3% for income over $25 million
- No change in the capital gains tax rate, but see our comments below on proposed changes with Section 1202 stock sales
- Please note there are no changes in estate tax provisions
It’s likely that anyone earning less than $400,000 would not be impacted by tax increases. Those in a higher threshold would be. Again, this is all hypothetical until legislation is passed.
Impact to Sellers
So, what does this mean for sellers? Any Section 1202 stock sales after September 13, 2021 will be subject to capital gains increases under the proposed legislation. Further, new surtaxes of 3 and 5% are imposed on high-income individuals (> $10 million in income). Lastly, some individuals will have to pay a 3.8% net investment income tax. At the onset of the tax change proposals, many business owners were anxious to accelerate the closing of their transactions – luckily though, perhaps you can slow down. An accelerated sale may not be necessary unless the Senate imposes increased capital gains rates for everyone.
The installment sales method currently provides flexibility for taxpayers with large sales transactions. If the BBB Act is passed without a change in capital gains rates, and an individual receives an installment payment, then this sales method will offer a deferral. Individuals can also elect out of the installment method and elect it on their tax return. You have options!
Impact to Buyers
On the buyer’s end, now is the ideal time to focus on getting your deals done. There are countless deal opportunities and possibly less urgency felt by sellers as we wait for news on tax changes in Congress.
We’re advising buyers to keep an eye on Senate activity, since new rules on limiting interest expense deductions could be enacted, impacting highly leveraged deals. There might also be new reporting and calculations at the individual level, not the business level, for interest changes from the Tax Cuts and Jobs Act. Be aware of the impact this could have.
In some cases, buyers can incur large losses in the first year or two following a transaction. These losses historically would have been deductible for buyers; however, under the proposed BBB Act changes, the deductibility of excess losses could be limited back in 2022.
What the Future Holds
At this point, Congress may not deliver us a neatly wrapped bill with a bow in time for the holidays. We can look to 2022 for the real action and try to dream of sugar plum fairies for now.