WASHINGTON — An estimated 43,000 millionaires will receive an average tax cut of more $1.6 million thanks to changes quietly approved by Congress in its massive coronavirus stimulus bill.
The changes allow all businesses with net losses in 2018, 2019 or 2020 to seek refunds on previously paid income taxes, among other similar reforms. While the changes will provide some relief to smaller businesses, most of the benefits will flow to wealthy business owners and partners, at great expense to the federal government.
According to the nonpartisan Joint Committee on Taxation, 82 percent of the benefits will go to owners of pass-through business owners who make $1 million or more in annual income. The millionaires who will benefit the most are hedge fund investors and real estate professionals, the Tax Policy Center found.
“I get relief for businesses, especially to the extent that we’re trying to keep businesses afloat so they can keep employees retain,” said Steven M. Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute. “However, in some instances we stretched to fix problems that exclusively effect the highest of income [earners].”
Although they voted for the $2.2 trillion stimulus bill that included this tax provision, now some Democrats, including Sen. Kirsten Gillibrand of New York, and Rep. Paul Tonko of Amsterdam, say they want to repeal it. Many Democrats have sponsored legislation to change the provisions, but it’s unclear if such a measure could pass the Republican-led Senate. Some have signed a letter asking leadership to repeal the provisions in the next coronavirus bill.
Democrats have claimed they didn’t know the tax break was in the nearly 900-page stimulus bill at the time they voted. It is estimated the tax break will cost the government more than $150 billion this year.
“It is deeply unfortunate that an emergency provision meant to help small businesses was expanded and abused to provide massive tax cuts to those who are literally least in need,” Gillibrand said.
Tonko called it a “corrupt provision.”
Chair of the Finance Committee, Sen. Chuck Grassley, R-Iowa, said lawmakers opposing the measures were “pandering for votes” and “driven by class warfare.”
Expanding the ability of companies to use net operating losses to reduce their taxes is a bipartisan method to aid businesses that was used in 2002 after the Sept. 11 attacks, in 2005 for taxpayers affected by Hurricane Katrina and in 2009 after the financial crisis, Grassley said. Over 90 percent of American businesses are pass-through entities — the business structure most likely to benefit from the changes — the Tax Foundation found.
“These businesses are facing cash-flow catastrophes,” Grassley wrote in an op-ed for Fox News. “What’s more, they employ more than half of the U.S. workforce. And yet, the partisan critics don’t want to allow some Main Street businesses to get a tax break for their losses if the losses are too great.”
Kevin P. O’Leary, a certified public accountant and managing director at Marvin and Company, P.C. in Latham, said he is working with many clients — a mix of privately held pass-through businesses, S-corporations and some C-corporations — to see which would benefit from carry back losses after these changes.
“I’ve had some clients who said that the losses were pretty immaterial so I’ll just let it flow forward to the 2019 return, not a big difference,” O’Leary said. “But for the larger ones, we are definitely carry back.”
Congress lifted a cap that had limited refunds for business losses. The cap was at $250,000 for individuals or $500,000 for joint filers. Individual business owners would have to had to have over $250,000 in other taxable income and over $250,000 in losses to take advantage of the lifting of the cap.
“You take a small restaurant, they are not in the excess business loss situation,” said Richard Pomp, professor of Law at the University of Connecticut and expert in federal taxation. . “The small restauranteur or the hairstylist, or whoever else you want to focus on, they may have only business income, business losses. They don’t have a lot of dividends and capital gains. They haven’t been subject to this cap to begin with.”
“Let’s take a wealthy person who is a hedge fund manager,” he added. “They’re the ones who are going to have other income which they can offset with this business loss, and they’re the ones that they’re going to have some much other income that they were caught by the cap. … Most ‘mom and pop shops’ won’t have enough excess business losses or other income to benefit significantly from the changes.”
The tax break may reap benefits for many New York residents. New York had the seventh highest share of households earning $200,000 or more in 2018. New York accounts for just under half of all U.S. hedge fund industry assets and has more hedge fund managers and investors than anywhere else in the country, according to Preqin, a financial data company.
The tax break includes changes that allow companies to carry back net operating losses for five years to get refunds on taxes they paid prior to 2017, when higher corporate tax rates were in effect. The reforms also permit companies to deduct 100 percent of business losses, not limited by 80 percent of taxable income. Finally, it also includes changes for a certain kind of property, something that may allow some companies to claim more losses.
The changes allow some businesses to get “a benefit right now” while the pandemic is ongoing, O’Leary said, if they had 2018 or 2019 net operating losses to claim. For companies that only had losses during the coronavirus in 2020, they will have to wait until they file taxes in 2021 to see tax relief flow to them.
“For companies in 2020 right now, there is nothing you can do,” he said. “If you had profits in 2018 and 2019, but you’re really struggling right now in 2020 … you’re not going to be able to tap into the net operating loss … until you file your 2020 return and carry back.”
Carry backs on businesses’ net operating losses were prohibited by the 2017 Tax Cuts and Jobs Act, passed by a Republican-majority Congress, as on offset to a large reduction in corporate tax rates.
“It has been on their agenda to get that reinstated,” Pomp said. “Now it has been reinstated with a vengeance.”
Tonko pinned the blame on the provision on Senate Minority Leader Mitch McConnell, R-Ky.
“As it turns out, he was also busy cutting back room deals that included a money grab for his wealthiest friends and political donors,” Tonko said. “This is beyond unacceptable. It is vulgar.”
Ashley Schapitl, a spokesperson for Democrats on the Senate Finance committee, said the provision was included “in Republican proposals from the beginning” of negotiations on the CARES Act and while Democrats blocked other “corporate tax giveaways,” they did not block this one.
The Joint Committee on Taxation projects the tax break will cost the federal government roughly $154 billion this fiscal year. In the next fiscal year, the federal government will lose about $73 billion from the changes.
In their legislation to repeal the provision, Democrats would replace it with a narrower provision that would allow companies with less than $15 million in receipts to carry back net operating losses from 2020 for two years would offer taxpayers advanced refunds of up to $100,000.
The tax changes in the stimulus bill are among many ways Congress and the administration have aided businesses and corporations during the coronavirus pandemic. The federal government created a tax credit for companies that retain their employees during coronavirus-related closures and delayed payments of payroll taxes.
It created the Paycheck Protection Program to issue small businesses loans that can be forgiven if used mostly to cover the cost of payroll and has other loans for small businesses. For large corporations, the U.S. Treasury is distributing hundreds of billions in loans and relief to airlines and other companies.
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