Changes to Threshold Reporting Amounts
The SBJA would amend several provisions of the Internal Revenue Code (IRC) to streamline reporting processes
1099-NEC Forms
Under current law, businesses and others must report payments to independent contractors of $600 or more. They may do this using Forms 1096 and 1099, particularly Form 1099-NEC. According to Ways and Means, this threshold amount has not changed since 1954.
The SBJA would amend §§ 6041 and 6041A of the IRC to state that taxpayers do not need to file a Form 1096 or send out 1099-NEC forms unless they have paid an independent contractor at least $5,000. It would also add provisions that adjust this amount based on inflation starting in 2025. These changes would take effect at the beginning of 2024.
Third-Party Network Transactions
Section 6050W of the IRC requires individuals and entities that receive payments on behalf of others to file Form 1099-K if the amount of payments received for a payee is at least $600. This includes many “gig economy” apps like Uber, as well as online marketplaces that allow people to list products for sale.
If the SBJA becomes law, a Form 1099-K would not be necessary unless a payee has engaged in at least 200 transactions and earned at least $20,000. This would be effective for all returns beginning with calendar year 2022, as the bill is currently written.
Tax Incentive for Startup Investments
Under § 1202 of the IRC, taxpayers who have held “qualified small business stock” for at least five years may exclude 50 percent of any gain from the sale of that stock from their taxable income. The percentage is greater for stocks purchased at certain times since 2009.
This encourages investors to buy and hold small business stock for a significant period of time. The section defines “qualified small business stock” as stock in a C corporation that meets the following criteria:
• The stock’s original issuance date was after August 10, 1993.
• At the time the stock was issued, the corporation met § 1202’s definition of a “qualified small business.”
• With some exceptions, the stockholder acquired the stock either in exchange for money or property other than stock, or “as compensation for services provided to such corporation.”
The definition of a “qualified small business” is as follows:
• C corporation
• Aggregate gross assets of no more than $50 million since August 10, 1993, including both before and after the issuance of the stock
• Agreement to submit reports to the IRS as required
The SBJA would make several important changes to § 1202, including the following:
• The minimum length of time required to hold the stock would be three years, not five.
• The percentage of gain that would be excluded from taxable income would increase over time, starting at 50 percent after three years and 75 percent after four years. For qualified small business stocks held for five or more years, none of the gain would be taxable.
• Investments would not be limited to C corporations, meaning that S corporations could qualify.
Expensing of Depreciable Assets
Businesses typically cannot claim the entire value of major assets as tax deductions in the year they acquire those assets. Instead, the asset becomes a capital account and they write off the asset’s value over time in a process known as “depreciation.” Currently, § 179 of the IRC allows taxpayers to claim up to $1 million of a new asset’s value as an expense, rather than a capital account, during the year they place the asset in service. The SBJA would increase this amount to $2.5 million.
Qualified Opportunity Zones
In 2017, Congress added Subchapter Z to Chapter 1 of the IRC. This subchapter establishes standards for designating areas as QOZs and provides tax incentives for making investments in those areas.
Investors may defer gains on the sale of investments in QOZs until December 31, 2026. The amount of tax savings increases if an investor holds onto the investment for five or more years. People may create qualified opportunity funds (QOFs) to help others invest in QOZs.
The SBJA would add a section to Subchapter Z that allows the designation of rural QOZs with similar tax incentives for investments, as well as the creation of rural QOFs. The proposed new section largely mirrors existing provisions but keeps them in a separate section that specifically addresses poverty-stricken communities in rural areas.
The bill would also add a provision requiring both QOFs and rural QOFs to submit annual returns to the IRS. The returns would include information about assets held by the QOFs, their value and information about employment and other improvements to the QOZ.
Contact Frankel to learn more about how we can support your business at www.frankel.cpa or call us at (402) 469-9100.
