Tax Proposals from the Chairman of the Senate Finance Committee

For those anxiously waiting to hear more about possible tax changes through a reconciliation bill, read on! Last week we posted about several of the proposals issued by the House Ways and Means Committee. Senator Ron Wyden, Chairman of the Senate Finance Committee, released a series of tax proposals as well that could be included in a reconciliation bill. The proposals released by Senator Wyden came in a series of acts.

• Small Business Tax Fairness Act
  • Eliminate the qualified business income (QBI) deduction for estates and trusts.
  • Phaseout the QBI deduction for those with income above $400,000 over a $100,000 range. There would be no change in the income level and phaseout range based on filing status.
  • Eliminate the distinction between a specified service trade or business (SSTB) and non-SSBT for QBI purposes.
  • Create an aggregated computation of the QBI deduction for all qualified trades or businesses.
  • Married individuals would need to file a joint return to be eligible for a QBI deduction.
  • Cooperatives would compute W-2 wages for the QBI deduction with respect to wages that are allocable to domestic production gross receipts (DPGR).
• Decent, Affordable, Safe Housing for All (DASH) Act
  • Create several credits such as a renter’s credit, a first-time homebuyer’s credit, and a middle-income housing tax credit.
  • Expand the 9% Low-Income Housing Tax Credit by 50%.
  • Increase basis by 50% to projects that prioritize extremely low-income renters.
  • Expand the 4% credit for rural areas.
  • For a deeper dive on the DASH Act check out the CLA Real Estate Industry Insights blog post – Proposed Changes to Affordable Housing
• Ending the Carried Interest Loophole Act
  • Proposes to end carried interest tax breaks. Generally, carried interest profits are taxed at the top capital gains rate (currently 20%) instead of the top ordinary income rate (currently 37%). This proposal would tax carried interest profits at the ordinary income tax rate and would tax partners on their deemed compensation instead of allowing carried interest to remain in the partnership.  
• Modernization of Derivatives Tax Act of 2021
  • Require investors to pay the ordinary income rate on gains from derivatives instead of the capital gains rate.
  • Combining certain derivatives as “investment hedging units” (IHUs) can trigger taxable long-term or short-term capital gain as if the underlying investment were sold or exchanged at the fair market value immediately before the creation of the IHU.

In addition to the above acts, Senator Wyden also released several partnership tax proposals. I’ve laid out a few of the more significant proposals below.

• If applicable, apply the business interest expense limitation at the entity level.
• Make §743(b) and §734(b) adjustments mandatory and repeal §754.
• Allocate partnership liabilities based on profit allocations.
  • Exception for bona fide indebtedness of the partnership to a partner or related person.
• Only the remedial method under §704(c) would be allowed to be used to determine how and when unrealized gain is taxed when partners contribute appreciated property. Revaluations would be mandatory.
• Require use of the partners’-interest-in-the-partnership (PIP) standard when determining partnership allocations. Related party partnerships (i.e., related parties own 50% or more) would need to use consistent allocations.

We hope to have much more clarity very soon as the the $1 trillion infrastructure bill and $3.5 trillion spending bill will likely go to the House floor this week.