From the proposed elimination of stepped-up basis to new grants for restaurants and live venues harmed by the COVID-19 pandemic, we have recently seen significant developments in estate planning and business law. To ensure that you stay abreast of these legal changes, we have highlighted a few noteworthy developments and analyzed how they may impact your estate planning and business law practice.
Biden Administration Proposes Elimination of Stepped-Up Basis at Death
On April 28, 2021, the Biden administration proposed eliminating stepped-up basis on gains for many taxpayers when stocks, real estate, and other capital assets are passed down to heirs. The proposal would modify Internal Revenue Code section 1014, which currently provides that the basis of inherited assets is reset to the present fair market value as of the date of the decedent’s death, exempting heirs from paying taxes on unrealized capital gains.
Under the proposal, the step-up in basis would no longer apply to gains over $1 million—or $2.5 million per couple when combined with real estate exemptions that exist under current law. It is unclear whether the proposal would create deemed sales at death. The reform would (i) not apply to transfers to charity, and (ii) would provide protections to family-owned businesses and farms, exempting them from the payment of taxes when given to heirs who plan to continue to run the business or farm.
On March 29, 2021, Senate Democrats proposed a discussion draft for the Sensible Taxation and Equity Promotion (STEP) Act of 2021 and House Democrats introduced H.R. 2286, a corresponding bill that would eliminate the step-up in basis allowed under current tax law and create deemed sales at death or when gifts are made. One major difference in the two congressional proposals is that the STEP Act would apply retroactively to gifts made and estates of decedents who died after December 31, 2020, whereas H.R. 2286 would apply to those after December 31, 2021.
The STEP Act would provide an exclusion from tax of $100,000 for gifts and of up to $1 million for transfers at death (reduced by any exclusion used for gifts) for unrealized capital gains. The capital gains tax applicable to illiquid assets such as farms or businesses could be paid in installments over fifteen years. In addition, the current exclusions of up to $250,000 for individuals and $500,000 for spouses filing jointly for personal residences and assets held in retirement accounts would still apply under the STEP Act. Gifts and bequests made to charitable organizations would be exempt from capital gains tax as well. Income tax paid pursuant to the STEP Act would be deductible for estate tax purposes, partially mitigating the effect of the estate tax. Nongrantor trusts would be required to pay tax on capital gains every 21 years, with trusts created in 2005 or earlier having their first “deemed realization” in 2026.
Takeaways: In addition to creating additional tax liability at death, the elimination of stepped-up basis at death would make estate administration considerably more complicated because of the need to establish the historical tax basis of assets after the original owner’s death—particularly for assets that have been owned for decades or even multiple generations. Some clients should consider purchasing additional life insurance to provide heirs with the liquidity to pay capital gains taxes due upon the clients’ death.
IRS’s Publication 590-B Causes Concern and Confusion
I.R.S. Pub. 590-B (Mar. 25, 2021)
The SECURE Act, passed December 2019, shortened the period that nonspouse beneficiaries of inherited individual retirement accounts (IRAs) are allowed to withdraw assets from the account from their entire lifetime to ten years from the date of the grantor’s death. This requires beneficiaries to pay more in income taxes during a shorter distribution period. It has widely been thought that beneficiaries could take distributions of any amount at any time during the ten-year period as long as all funds in the account were withdrawn by December 31 of the tenth year. This would allow beneficiaries to take distributions strategically in an effort to minimize their taxes, for example, by taking distributions during years in which they were in a lower tax bracket.
However, Internal Revenue Service (IRS) Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), released in April 2021, contains some examples suggesting that beneficiaries must take required minimum distributions (RMDs) each year. Many commentators have speculated that the examples were mistakenly included. There have been reports that the IRS has admitted that these examples are incorrect and that beneficiaries may withdraw funds at any time during the ten-year period, as long as the account is empty by the end of the tenth year.
Takeaways: Some advisors recommend that clients delay taking RMDs this year and instead wait for a clarification or a revised version of Publication 590-B—hopefully with corrected examples reflecting that beneficiaries have flexibility regarding when to take distributions rather than RMDs. Learn more about this topic by registering for the webinar, Beneficiary Options for Retirement Accounts: A Discussion about the SECURE Act Changes and IRS Explanations in Pub-590-B. Discussion will be led by Denise Appleby, MJ, CISP, CRC, CRPS, CRSP, APA and Edward A. Renn, JD on May 20th.
Senate Republicans Propose Estate and Generation-Skipping Tax Repeal
- 617, 117th Cong. (2021)
Senator John Thune introduced the Death Tax Repeal Act of 2021, which would repeal the estate and generation-skipping transfer tax and modify the computation of the gift tax. If the bill is passed, the gift tax rate would begin at 18 percent on transfers of less than $10,000 and increase incrementally to 35 percent on transfers over $500,000. In addition, the estate tax would continue to apply to distributions from qualified domestic trusts made after enactment for the surviving spouse of a decedent who dies before the date of enactment.
Takeaways: With Democrats in control of the legislative and executive branches, a repeal of the estate tax is unlikely. Although the Biden administration has indicated an intention to increase the estate tax rates and lower the exemption amount, it has chosen to omit changes to the estate tax from its April 28, 2021, American Families Plan proposal. At present, the current estate tax exemption amount ($11.7 million for individuals for 2021) is due to sunset on December 31, 2025, returning to the previous rate of $5 million for individuals (adjusted for inflation).
PPP Flexibility for Farmers, Ranchers, and the Self-Employed Act Introduced in the Senate
- 1249, 117th Cong. (2021)
The PPP Flexibility for Farmers, Ranchers, and the Self Employed Act (Act), introduced in the Senate on April 20, 2021, would allow Paycheck Protection Program (PPP) borrowers who are sole proprietors, independent contractors, or self-employed to calculate their PPP loan amounts based on their gross income rather than their net income retroactively. Small Business Administration (SBA) guidance issued March 3, 2021, had indicated that borrowers could use their gross income rather than their net income to obtain higher loan amounts, but specified that those who applied for a PPP loan prior to the change could not take advantage of the new rule retroactively. Under the Act, newly eligible applicants would be allowed to request a recalculation of the amount of a covered loan based on gross income back to December 27, 2020, which was the date of enactment of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act.
In addition, the Act allows farming and ranching partnerships with gross farming income from self-employment to use an alternative, more generous formula for calculating their PPP loan amount based upon gross revenue rather than net income. This relief would be extended retroactively to March 27, 2020 (the date of enactment of the CARES Act). Thus, even farmers and ranchers who received a PPP loan calculated based on net income that was already forgiven are eligible to receive a PPP loan for the difference between the gross and net income amounts.
The Act also provides more flexibility in the calculation of revenue losses by allowing borrowers to use any contiguous ninety-day period to determine eligibility for second-draw PPP loans rather than requiring them to calculate it based on year-over-year or quarter-over-quarter losses.
Takeaways: Business owners who would be eligible for additional funds under this legislation should stay tuned for further developments and be poised to apply for the additional funds in the event the bill is passed, as the PPP is currently set to expire on May 31, 2021, with $44 billion in funding still available for PPP loans as of late April 2021.
Biden Administration Proposes Increase in Corporate Tax Rate
On March 31, 2021, the Biden administration released its Made in America Tax Plan, a tax proposal designed to generate enough revenue to pay for the American Jobs Plan, its $2.3 trillion infrastructure spending proposal. The following are several of the proposed changes under the Biden plan:
- The corporate income tax rate would increase from 21 to 28 percent
- A 15 percent minimum tax would be imposed on the book income of large corporations with high profits but little taxable income
- The global adoption of higher minimum tax rates would be encouraged
- The global minimum tax on foreign profits of multinational corporations headquartered in the United States would increase from 10.5 percent to 21 percent
Takeaways: For smaller businesses, the proposed increase in the federal corporate income tax rate, which would partially undo the 2017 reduction from 35 to 21 percent, would make incorporation less attractive. The other aspects of the Biden proposal are unlikely to have a direct impact on small domestic businesses.
SBA Opens Applications for Restaurant Revitalization Fund and Shuttered Venue Operators Grant Program
On March 11, 2021, President Biden signed into law the $1.9 trillion stimulus package called the American Rescue Plan Act of 2021, which includes funding for the Restaurant Revitalization Fund and the Shuttered Venue Operators Grant (SVOG) program.
Eligible applicants may now register for Restaurant Revitalization Awards, which are grants from a newly established Restaurant Revitalization Fund administered by the SBA. Applications opened on May 3, 2021. Restaurants, food stands and trucks, pubs, and other similar businesses where patrons or the public assemble for the primary purpose of being served food or drink will be eligible for the grants of up to $10 million. The amount of each grant may not exceed the applicant’s “pandemic-related revenue loss,” which is generally the difference between the applicant’s 2019 and 2020 gross receipts. The grants may be used for payroll costs, mortgage principal and interest, rent payments, utilities, maintenance expenses (including the construction of outdoor seating), supplies (including protective equipment and cleaning supplies), food and beverage expenses, supplier costs, operational expenses, paid sick leave, and other expenses determined by the SBA to be essential. Small businesses owned and controlled by women, veterans, and the socially and economically disadvantaged are prioritized for the initial twenty-one-day period during which the SBA awards the grants. In addition, $5 billion is reserved for applicants who had $500,000 or less in gross receipts during 2019. Applicants must make a good faith certification that the uncertainty of current economic conditions makes the grant requested necessary to support their ongoing operations and that they have not applied for or received a grant under the SVOG program.
Eligible venue operators may also apply for an additional $1.25 billion to the SVOG program, which was established by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act signed into law on December 27, 2020. The program provides relief for eligible live venue operators and promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, and talent representatives that have been significantly impacted by the COVID-19 pandemic in the amount of the lesser of $10 million or 45 percent of their 2019 gross earned revenue.
Takeaways: Funding for these programs is limited, so eligible businesses must apply as soon as possible.