The most active piece of tax legislation right now bears the name American Jobs and Closing Tax Loopholes Act of 2010. Congress is working on other tax legislation as well, including tax breaks for small business and a permanent fix for the estate tax. Here’s where things stand.
The motivating force behind the AJCTLA is the need to extend various popular tax benefits that expired at the end of 2009, including the deduction for state and local sales taxes, the additional standard deduction for real property taxes, and the above-the-line deduction for qualified tuition and related expenses. It became a vehicle for other provisions, however, including an extension of a program providing emergency unemployment compensation benefits.
One of the key provisions of this law would impose a higher rate of tax on “carried interests.” Current law allows the managers of investment partnerships (hedge funds, venture capital funds and others) to treat much of their compensation as capital gain, paying a fraction of the tax they would pay if it were treated as compensation. It appears that the law will partially close this loophole, but intense lobbying continues on efforts to weaken the measure.
Another key provision would make it more difficult to use S corporations to avoid paying social security tax (see prior coverage). There’s talk that this provision will be changed in some way but no details have been released.
This legislation does not include the annual patch required to prevent expansion of the individual alternative minimum tax (AMT). Congress will deal with the AMT later.
Estate tax
Senator Jon Kyl (R-Ariz) announced June 10 that he’s close to having 60 votes for his proposed compromise on estate tax, which would exempt $5,000,000 from the tax and impose a maximum tax rate of 35%. It’s unclear whether this approach would be acceptable to the House, where most Democrats favor a $3,500,000 exemption and maximum tax rate of 45%. Also unclear is the vehicle for this proposal: it may be included in the small business tax bill . . . or it may not.
Small business
Speaking of which, the Small Business Jobs Tax Relief Act of 2010 is moving forward in the House of Reprentatives. A key provision would temporarily boost the exclusion of gain from certain sales of small business stock (Section 1202) to 100%. Another provision would make it easier to claim deductions for expenses financed with nonrecourse loans that are guaranteed by the Small Business Administration. Provisions designed to pay for this relief include a requirement that grantor retained annuity trusts (GRATs) have a minimum term of at least 10 years. This change appears likely to occur in any event as it was included in President Obama’s fiscal 2011 budget.
Tags: GRAT, S corporations, wrapup
