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Tax Savings Potentially on the Chopping Block under President Biden’s American Jobs Plan and American Families Plan

Client Alert

Recently, President Biden has proposed several tax law changes in his American Jobs Plan and American Families Plan. Outlined below are a few of the tax savings that could be significantly changed or eliminated under Biden’s plans.

Long-term capital gains and qualified dividends

Under current tax law, when an individual sells an appreciated asset that has been held for more than one year, the gain is taxed at a graduated rate. Generally, the highest tax rate is 20% provided the net investment income tax is not applicable. This rate also applies to qualified dividends.

Under the proposed tax law, long-term capital gains and qualified dividends would be taxed as ordinary income to the extent a taxpayer’s adjusted gross income exceeds $1 million ($500,000 for married filing separately). The effect would generally make the highest tax rate 37% provided the net investment income tax is not applicable.

1031 Like-Kind Exchanges

Under the current tax law, taxpayers that sell appreciated property used in a trade or business can defer paying capital gain tax on the sale if that property is exchanged for the same type or like-kind property. If certain requirements are met, the tax is deferred until a later recognition event.

Under the proposed tax law, taxpayers would still be permitted to defer the gain on a like-kind exchange up to an aggregate amount of $500,000 per taxpayer per year ($1 million for married filing joint returns). Gains in excess of $500,000 ($1 million for married filing joint returns) would be recognized in the year the real property subject to the exchange transfers.

Carried Interests

A partnership is not subject to Federal income tax but instead passes the partnership’s income and losses to the partners. In addition, the items of income and loss retain their character when flowing through to the partners. The partners, in turn, must include the partnership items on their individual tax returns. One of the interests a partner can receive in exchange for services is an interest in future partnership profits, also referred to as “profits interests” or “carried interests.”

Under current tax law, income attributed to a profits interest is generally subject to self-employment tax, except to the extent the partnership generates income that is excluded from self-employment taxes.

Under the proposed tax law, generally, a partner’s share of income on investment services partnership interest (ISPI) in an investment partnership will be taxed as ordinary income regardless of the character of the income at the partnership level if the taxpayer’s taxable income from all sources exceeds $400,000. Additionally, the partner would be required to pay self-employment taxes on such income.

Stepped-up Basis Through Gift or Death

Under current tax law, when a taxpayer donates appreciated assets to a donee during life, neither the donor nor the donee recognizes gain on the gift. The donor’s basis is carried over to the donee and the donee recognizes the gain when the donee later disposes of the asset. In addition, when a donor dies owning appreciated assets, the donor’s heirs inherit the asset with an adjusted, or stepped-up, basis. The stepped-up basis inherited is the fair market value of the appreciated asset on the donor’s date of death.

Under the proposed tax law, a donor would realize the gain on the appreciated asset in the year of donation. The amount realized is the asset’s fair market value on the date of the gift over the donor’s basis. For a deceased owner who owns appreciated assets at death, the amount of gain realized is the fair market value on the owner’s date of death over the owner’s basis.

Social Security Tax Cap

Under current tax law, self-employment earnings and wages are subject to 12.4% social security tax and 2.9% Medicare tax on earnings either through the Self-Employment Contributions Act (SECA) or the Federal Insurance Contributions Act (FICA). The 12.4% social security tax is applicable up to a certain cap. In 2021, the cap is $142,800. An additional 0.9% Medicare tax is imposed on high-income taxpayers with income above certain levels. General partners and sole proprietors pay SECA on their net trade or business income. Limited partners are statutorily excluded from paying SECA on their distributive shares of partnership income but pay SECA on their guaranteed payments that are for services provided to, or on behalf of, the partnership. S-corporation shareholders are not subject to SECA tax. However, S-corporation shareholders must pay themselves a reasonable wage for services provided, which are subject to FICA.

Under the proposed tax law, all trade or business income of high-income taxpayers would be subject to the 3.8% Medicare tax. More specifically, for taxpayers with adjusted gross incomes above $400,000, the definition of net investment tax would be amended to include gross income and gain from any trade or business that is not otherwise subject to employment taxes. In addition, all revenue from net investment income tax, both raised under the current law and proposed expansion, would be directed to the Hospital Insurance Trust Fund. Further, limited partners and LLC members who materially participate in their respective companies and provide services would be subject to SECA tax on their distributive share of income, subject to certain threshold amounts. Further still, S-corporation owners who materially participate in the trade or business would be subject to SECA taxes on their distributive share of business income, subject to certain threshold amounts.

For additional questions related to how the potential tax changes may affect you, please contact BMD Tax Law Attorney Tracy Albanese at tlalbanese@bmdllc.com or (330) 253-9195.


Valley National Bank/Trulieve Loan: A Big Step Out of the Shadows

In a late December press release, Trulieve announced that it had secured a $71.5 million commercial bank loan. In addition to the amount of the loan, which may be the largest commercial bank loan to date to a cannabis company, the release prominently identified Valley Bank and featured both a quote from Valley’s Senior Vice President, John Myers, and a description of the Bank’s service platform and commitment to the cannabis industry.

The End of Non-Competes? The Impact It Will Have on the Healthcare Industry

On January 5, 2023, the Federal Trade Commission (“FTC”) announced a proposed rule that, if enacted, will ban employers from entering into non-compete clauses with workers (the “Rule”), and the Rule would void existing non-compete agreements. In their Notice, the FTC stated that if the Rule were to go into effect, they estimate the overall earnings of employees in the United States could increase by $250 billion to $296 billion per year. The Rule would also require employers to rescind non-competes that they had already entered into with their workers. For purposes of the Rule, the FTC has defined “worker” to also include any employees, interns, volunteers, and contractors.”

2022 Healthcare Recap and 2023 Healthcare Check-Up

As the country begins to return to a new “normal” following the COVID-19 pandemic, there are many healthcare rules changing on both the federal and state levels as a result. Thus, it is important for healthcare providers and their employers to be aware of these changing rules, and any implications they may have on their practice. Look back on healthcare in 2022 and find a checklist for 2023.

Direct Support Professional Retention Payments

On December 15, the Ohio Senate and House passed House Bill 45, which authorizes the Department of Developmental Disabilities (DODD), in conjunction with the county boards of developmental disabilities, to launch their initiative to issue retention payments to Direct Support Professionals (DSPs). These retention payments will be distributed quarterly to participating home and community-based waiver providers to address the workforce crisis in the direct provider sector. Governor DeWine needs to sign the Bill to begin the payments, but he is expected to do so by the end of 2022.

Real Estate Investors Position for 2023 Opportunities

Real estate investors weathered another year in a post-pandemic world, with the year closing with yet another interest rate increase coupled with both uncertainty and heightened interest carrying into 2023. Just last Wednesday, the Federal Reserve raised its benchmark interest rate 0.50 percentage points, shifting the target range to 4.25% to 4.50%. The new level is the highest the fed funds rate has been since December 2007 and marks the seventh rate hike this year. So what does this mean to investors, brokers, lenders, and others in the real estate world? Read a few perspectives below from stakeholders familiar with our BMD clients and the markets in which they do business.