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Yellow Alert: Proposed Tax Provisions Impacting Passthrough Businesses

October 29, 2021

Proposed Tax Provisions Impacting Passthrough Businesses

Yesterday, we communicated with you about the release of the White House’s Build Back Better framework and fact sheet, and how the proposed changes included in the plan could affect our members. As The Council and our partners in the business community sift through the 1,600 pages of the bill, we are identifying additional tax provisions that would impact member firms that are structured as passthrough businesses.

While there are no changes to 199A, there are three other provisions that do impact passthrough owners:

  • Most notably, the bill added a new provision which would expand the ACA’s 3.8% Net Investment Income Tax (NIIT) to apply to any passthrough income that is not subject to Medicare payroll taxes for taxpayers that exceed certain income thresholds ($400k for individual tax filers and $500k for married joint tax filers). While the NIIT is already applied to “investment income,” this new provision would also make business income subject to the 3.8% tax. The purported intent of the provision is to close a perceived tax gap for passthroughs that sometimes treat owner distributions as investment income and not regular income.
  • The bill would make permanent the $500k “excess loss” cap under Section 461 (it had been scheduled to expire in 2026) and only allow any “excess losses” to be deferred for one tax year.
  • The bill also proposes a new 5% surtax on tax payers earning more than $10 million per year and an additional 3% surtax on tax payers earning more than $25 million per year (or 8% total extra taxes) also are projected to have a more significant impact on passthrough owners.

Progressive members of the House continue to hold up passage of the legislation and it’s unclear when a vote on the measure will occur. After a day of political maneuvering, the new deadline is December 3, though leadership is pressing for a vote as early as next week. We continue to work with our allies on these provisions and will keep you posted on further developments as they unfold.