Marcum 2021 Year-End Tax Guide

iii. Stock repurchases of less than $1 million within a tax year. iv. A purchase by a dealer of securities in the ordinary course of business. v. A repurchase treated as a dividend. vi. A repurchase by a regulated investment company or a real estate investment trust. The current Build Back Better Act does not propose a rate increase on individuals, trusts, or estates on either ordinary income or long-term capital gain income. Instead, for years beginning after 2021, a new 5% is proposed for individual taxpayers with MAGI in excess of $10 million ($5 million for those filing married filing separate). Further, an additional 3% would apply to those with income in excess of $25 million ($12.5 million for married separate filers). The surtax is not considered part of one’s regular tax for determining the alternative minimum tax liability or for other purposes (e.g., computation of a foreign tax credit). Net Investment Income Tax (NIIT) on “High Income” Taxpayers: The NIIT is expanded to cover net investment income derived in the ordinary course of a trade or business for taxpayers with modified adjusted taxable income greater than $400,000 for single filers, $500,000 for joint filers, and $250,000 for married separate filers. This rule will also apply to trusts and estates without regard to an income level. This tax will not be assessed on wages. This rule is intended to assure that for these “high income” individuals, income is either subject to the Medicare portion of FICA, self-employment tax, or net investment income tax. This eliminates some of the benefits of using S corporations to avoid self-employment tax on business income where the shareholder actively participates in the entity’s activity. This change is effective for tax years beginning after December 31, 2021. INDIVIDUAL TAXES High Earner Surtax For trusts and estates, the 5% surtax applies at MAGI of $200,000 and the 8% applies at MAGI of $500,000.

Effective for tax years beginning after December 31, 2022, certain corporations would be subject to this new AMT, which is 15% of adjusted financial statement income (AFSI). AFSI is financial statement income with some adjustments that prevent omission or duplication of items and account for certain other corporate transactions. For this purpose, an applicable financial statement is defined as a Form 10-K, an audited financial statement, or other similar financial statement. If the AMT is more than the corporation’s regular tax, the excess amount is the alternative minimum tax and is added to the regular tax. The new 15% AMT applies to corporations with AFSI in excess of $1 billion based on any three consecutive year average ending prior to the current year. Once a corporation is subject to this rule (meaning it is an applicable corporation), it remains an applicable corporation for future years — even if average income drops below the threshold. If there is an ownership change or a consistent reduction in AFSI, the IRS may determine that it would not be appropriate to continue such treatment. It is unclear whether the Service would establish guidelines for this or if a request for a change of status would be required. Corporations under common control will be aggregated to determine if the threshold is reached. This includes AFSI of related foreign corporations. However, special rules would apply for foreign-parented corporations and related corporations included in a consolidated financial statement or the filing of a consolidated return. The legislation states that AFSI can be reduced by net operating losses created for tax years ending after December 31, 2019, but the reduction is subject to an 80% limit on AFSI before consideration of the carryover losses. EXCISE TAX ON CORPORATE STOCK REPURCHASES A 1% excise tax would be imposed on a publicly traded U.S. corporation for the value of any stock repurchased by the corporation in excess of stock issued to the public or to employees during the tax year. The excise tax is intended to prevent corporate executives from executing buybacks for their own benefit.

The law provides exemptions for:

i. A repurchase that is part of a tax-free reorganization. ii. Repurchased stock (or comparable value) that is contributed to an employee pension plan or ESOP.

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