Marcum 2021 Year-End Tax Guide

SALT Deduction Limitation: Additionally, though not part of previous versions, the current draft would raise the ceiling on the SALT limitation from $10,000 ($5,000 for married filing separate filers) to $80,000 ($40,000 for married separate filers, estates and trusts) for the tax years 2021 through 2030. WHAT’S NOT IN THE CURRENT BUILD BACK BETTER ACT Annual Limitation on the Qualified Business Income Deduction: The TCJA created a new Section 199A which provides for a potential 20% reduction of qualified business income. The prior House bill would establish a maximum deduction limit of $500,000 for joint filers, $400,000 for individual returns, $250,000 for married filing separate, and $10,000 for a trust or estate. This change was to apply to tax years beginning after December 31, 2021. This provision is not part of the Build Back Better Act. Deemed Sale on Asset Transfer by Death or Gift: Neither the prior House bill nor the current proposal included the proposed deemed sale on gift or death rule, which had been suggested under the president’s proposal. Estate/Gift Tax Provisions: The current Build Back Better Act draft does not include changes to estate and gift tax rules that were previously proposed by the STEP Act, by President Biden during the campaign, or by the prior House Bill. It is unclear whether the final version will exclude all of these changes, but changes in the estate and gift tax rules are clearly on the radar and will probably be addressed in the near future. Some of the prior proposals discussed during the year include: • Adjustment of the unified credit: The lifetime unified credit, currently $11.7 million for 2021, would have been reduced to $5 million per individual, indexed for inflation for years after 2021. For 2022, the exemption would have been somewhere between $6 million and $6.2 million. This amount is higher than what was suggested under the “For the 99.5% Act” and even what was suggested by the president during the campaign. However, the American Families Plan presented by the President did not include estate and gift tax revisions. • No valuation discount for the transfer of nonbusiness Assets: IRC Section 2031 was to be “clarified” so that a valuation discount would not apply when a taxpayer transfers nonbusiness assets (i.e., assets held for production of income and not used in the active conduct of a trade or business). Nonbusiness assets would not include assets used in hedging

MISCELLANEOUS PROVISIONS R&D Expenditure Amortization Rule: The Tax Cuts and Jobs Act provided for tax years beginning after December 31, 2021, the rule permitting the current deduction of research and experimental expenditures would no longer apply. For 2022 and later, these costs would be required to be amortized over a 60-month period using a half-year convention. Software development is considered part of research and development costs. For research done outside of the U.S., the amortization period is 15 years. The Build Back Better Act would defer these changes to tax years beginning after December 31, 2025. Section 1202 Exclusion Limited: For stock sales after September 13, 2021, the 75% and 100% exclusion rates on the sale of qualified small business stock will not apply to taxpayers with adjusted gross income of $400,000 or more. For a trust or estate, this rule applies regardless of the amount of AGI. In these situations, the 50% exclusion will apply. The law would include a binding contract exception so that this reduction does not apply to any sale made pursuant to a written binding contract in effect on September 12, 2021, and that is not modified in any material respect thereafter. Limitation on Credit for Clinical Testing of Orphan Drugs: For tax years beginning after December 31, 2021, the credit for clinical testing of orphan drugs is limited to first use or indication. Additionally, clinical testing expense for any drug that has received a marketing approval for any use or indication (either for a rare or non-rare disease or condition) does not qualify for the credit. Modification of Wash Sales Rules: The section expands the scope of the wash sale rules (which limit the ability to take losses on the sale or exchanges of stocks or securities if substantially identical assets are purchased within a 30- day period before or after the date of the sale) to include commodities, currencies, and digital assets for tax years beginning after December 31, 2021. Educational Provisions: The current bill would repeal the prohibition that excludes students convicted of a state or felony drug offense from claiming the American Opportunity Tax Credit. It would also exclude Federal Pell grants from gross income. In addition, qualified tuition and related expenses for computing the American Opportunity tax credit, Lifetime Learning credit, and any exclusion of qualified scholarships from income, shall not be reduced by any amount paid for the benefit of the student as a Federal Pell Grant recipient.

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