The Infrastructure Investment and Jobs Act, passed by the Senate earlier in August, will affect taxes in ways that are not yet decided or fully comprehended — and that has many taxpayers reaching out to their advisors.
“It’s really a great time to be us,” said Jim Guarino, a managing director at Top 100 Firm Baker Newman Noyes. “I don’t usually talk to clients that much during the summer. Now we’re not only getting calls from the usual suspects — high-net-worth families — but the smaller clients are also contacting us. These are folks that we normally don’t hear from until we do their tax returns, but they’re calling us now and asking what they need to know to rebalance their portfolio.”
Fully $550 billion of the $1 trillion bill is slated for typical infrastructure, including highways, bridges, waterways, transit, airports, the electric grid, and broadband, according to Robert Conzo, a former CPA, and CEO and managing director of The Wealth Alliance, an RIA based in Melville, New York. “That’s why it’s considered to be bipartisan,” he said. “Everyone can get on board with that. But as soon as it passed the Senate, the debate started on a budget reconciliation bill. The two bills go hand in hand to fund infrastructure. The bottom line is this will cost taxpayers money.”
The bill includes both tax offsets and nontax offsets, Conzo indicated. “Non-tax offsets are simple: rescinding unused funding from COVID relief bills, with any unused money available for infrastructure, and delaying a scheduled change in the Medicare prescription drug rebate plan for three years. This will cost taxpayers money because they’ll be paying more for their drugs. They also project the revenue growth effects of improved infrastructure — another way of saying we can ‘grow our way out of debt.’”
“The ‘monster’ offset is blowing up the cryptocurrency world,” he said. “Any cryptocurrency transaction of more than $10,000 will be taxed, and they want stricter tax reporting requirements for brokers. Using the infrastructure bill to further regulate cryptocurrency firms and generate large tax revenues could potentially negatively affect the cryptocurrency industry — it’s the largest offset in the infrastructure bill.”
The Superfund excise tax would return as one of the offsets under the Senate bill, according to Conzo. “The Superfund tax was passed in 1980 as an excise tax on chemical companies to clean up hazardous sites across the county,” he said. “They’re proposing to double what the tax originally was on companies that produce things like benzyne, potassium hydroxide, butane and other common fuels, so any products made with those will increase in costs which will be passed on to consumers.”
Another offset involving defined-benefit plans would extend and modify interest rates, Conzo noted. “It’s a smoothing option going forward, which extends the provisions of a 2012 Act,” he said. “It means the pension requirements will continue to be lower, allowing companies to have lower mandatory contributions for their defined-benefit plans. That lowers their deduction, meaning that the government gets more tax revenue.”
More for the IRS?
Other provisions would move the sunset of the COVID-generated Employee Retention Credit up from Dec. 31, 2021, to Sept. 30, 2021, and would increase IRS tax enforcement by doubling the size of IRS staff by 87,000 workers, according to Conzo. “This would very much increase audits, and increase tax revenue,” he said.
“President Biden originally proposed $80 billion in IRS funding,” explained Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. “The initial negotiations on the Senate infrastructure bill included the other $40 billion in IRS funding, which was projected to raise approximately $100 billion in new revenues. When Republicans objected to that piece of the infrastructure bill, it was removed and other funding sources were found. Democrats may now try to include $80 billion in IRS funding in the budget reconciliation bill.”
Luscombe explained the political parameters of the proposed legislation as follows. “Democrat moderates insist that the infrastructure bill be passed right away or they won’t approve the budget resolution,” he said. “When the House returns from its August recess they will see if they can pass the budget resolution with or without the infrastructure bill.”
“The budget resolution basically sets a dollar amount that is approved under budget reconciliation for passing without a filibuster. They come along later and fill up the beaker with the total,” he said. “Reconciliation starts with the congressional budget resolution. The Senate needs the House bill as a vehicle to substitute its own provisions.”
The biggest pay-for is the use of unused COVID funds, Luscombe noted. “A number of states decided not to use federal funding for unemployment benefit expenses because some thought that people were not going back to work because the benefits were too generous.”
There are a few other nontax provisions that often appear as revenue-raisers, according to Luscombe. “These include the sale of oil from strategic reserves, the sale of broadcast spectrum rights, and the extension of some fees. The two main tax provisions — although modest compared to the use of unused COVID funds — are crypto and ERCs.”
Luscombe agreed that the crypto tax provision could have a huge impact on the industry. “The infrastructure act provides an expansive definition of ‘broker,’” he observed. “Some say that it might apply to people who wouldn’t have the information to comply. A Senate amendment to narrow the definition of broker failed to be adopted but is likely to be addressed again by the House.”
Regarding the Employee Retention Credit, the American Rescue Plan Act extended the COVID-related credit to Dec. 31, 2021. “The IRS has just published guidance on handling the credit for the last two quarters of 2021,” Luscombe commented. “However, the Infrastructure Investment and Jobs Act legislation would terminate the credit for employers that shut down due to the COVID-pandemic after Sept. 30, 2021.”
“The earlier sunset for the ERC is the one most relevant to us,” said Roger Harris, president of Padgett Business Services. “Now the ball is in the House’s court. Depending on what they do, the reconciliation bill has to go back to the Senate, so we don’t know at this point how long it will take to get one or both bills passed.”
“We have more concerns about what ends up in the reconciliation bill in terms of tax increases,” he added.
Beyond the bill
Baker Newman Noyes’ Guarino said he is fielding numerous calls from clients who are not really interested in the infrastructure bill, but in what will come later.
“It’s like going to a concert and listening to the opening band play in anticipation of the headline band,” he said. “Everyone is looking at the infrastructure bill and that’s great, but tell us more about the Biden proposals. That’s the main act — what we’re waiting for in terms of tax law changes.”
As it stands, the infrastructure bill by itself contains very little regarding the administration’s tax proposals, Guarino noted: “That’s why a number of Republicans in the Senate signed off on it. The reconciliation bill is where the tax reform proposals are.”
“Everyone agrees that at some point we’ll see tax law changes effective Jan. 1, 2022. The feeling is that when push comes to shove, they’ll be able to push through some kind of tax bill before the end of the year,” he continued. “There’s not 100 percent support among Democrats for every Biden proposal. For example, the capital gains rate will go up, but it’s unlikely that it will go up as high as the proposed 39.6% for taxpayers that earn over $1 million. Enough Democrats think that’s too high, so it will probably settle in at 25% to 28%.”
“The fun part is getting people in a position so that they are exposed to the least amount of tax,” he continued. “In this case they want to take advantage of the market uptick, and cash in their chips. They want to know how much they can afford to report in capital gains this year without crossing the tripwire, because they heard that a capital gain change could be retroactive to April or May. It’s got people concerned[,] and they want to make sure they don’t accidentally put themselves over a million dollars and therefore [be] subject to the highest capital gains rate.”
As an example, Guarino talked about a client who is looking to sell their business for over $1 million: “One of the things we’re considering for him is an installment sale. In this case it would give him the ability to sell the business this year, and make the decision which year or years he wants to report the sale. If the capital gains rate goes up, he has the option, using the installment sale, to report 100% in this year when the tax rates are still at their current level, or spread it out. And he doesn’t even have to make the decision on what to do until next April. … By considering this option, we give him an option he can control even after the end of the year.”
And that’s ultimately what being a tax advisor is all about, according to Guarino: “We give them the knowledge and the tax boundaries they need to know before they pull the trigger on a transaction,” he said.
