Larry's Tax Law

In this fifth installment of my multi-part series on the One Big Beautiful Bill Act, Steve Nofziger and I discuss a provision of the Act that impacts certain business owners who are contemplating a sale of their shares, Code Section 1202.[1]

Background

Code Section 1202 has a rich history.  It was originally enacted over three decades ago as part of the Revenue Reconciliation Act of 1993.  It was one of many provisions of that legislation aimed at stimulating the investment in closely held businesses.  Congress tinkered with Code Section 1202 over the following years, enhancing the benefits it offered small business owners.  In 2009, as part of the American Recovery and Reinvestment Act of 2009, Congress temporarily increased the amount of gain exclusion offered under this provision.  The next year, as part of the Small Business Jobs Act of 2010, Congress temporarily increased the gain exclusion in limited circumstances to 100%.  Impetus for that amendment to Code Section 1202 (increasing the benefit to 100%) was recognition by lawmakers that many taxpayers that otherwise qualified for gain exclusion under Code Section 1202 were not able to take advantage of it due to other provisions of the Code (e.g., the individual alternative minimum tax). The 100% exclusion, however, enhanced the benefit so that taxpayers subjected to the alternative minimum tax would see some benefit from the application of Code Section 1202.  Accordingly, as part of the Protecting Americans from Tax Hikes Act of 2015, Congress made the 100% exclusion permanent.  Consequently, the selling shareholders of a closely held corporation and their tax advisers today need to evaluate the application of Code Section 1202.            

The One Big Beautiful Bill Act (the “Act”), signed into law by President Trump on July 4, 2025, made several significant changes to the existing framework for the exclusion of capital gains from the sale of qualified small business stock (“QSBS”) under Code Section 1202.

In this fourth installment of my multi-part series on the One Big Beautiful Bill Act (the “Act”), Steve Nofziger and I discuss a provision of the Act that impacts pass-through business entities and their owners, Code Section 199A.[1]

Background

Code Section 199A, commonly referred to as the Qualified Business Income (“QBI”) deduction, was enacted during President Trump’s first term in office as part of the Tax Cuts and Jobs Act (“TCJA”).  As you may recall, the TCJA changed the C corporation tax rate landscape that came with a top tax rate of 35% to a flat rate structure pegged at 21%.  Meanwhile, pass-through entities (S corporations, partnerships and sole proprietorships), which are predominately owned by individuals, were left with a graduated tax rate structure that quickly rises to a rate of 37%.  

To create more of an even playing field between pass-through entities and C corporations, the TCJA created a new deduction for pass-through entities with the enactment of Code Section 199A.  This provision allows owners of certain pass-through entities a 20% deduction of “qualified business income” (“QBI”).

Like many provisions of the TCJA, Code Section 199A was scheduled to sunset at the end of 2025.  The Act, signed into law by President Trump on July 4, 2025, made Code Section 199A a so-called permanent provision.  It also made several changes to its deduction framework.

I am taking a short break between the third and fourth installment of my multi-part series on Subchapter S.  Before I publish the fourth installment on that topic, my colleague Steven Nofziger and I want to alert our readers to some recent developments relative to the Corporate Transparency Act (“CTA”).

CTA

As previously reported, the CTA is a new federal law that requires most U.S.-based companies, including corporations, partnerships and limited liability companies, to report information regarding their “beneficial owners” to the federal government through the Financial Crimes Enforcement Network (“FinCEN”) and a new FinCEN IT system known as the Beneficial Ownership Secure System (“BOSS”).  The intent of the CTA and the reporting to FinCEN is to combat money laundering, tax fraud and other illegal activities.

On August 8, 2020, President Trump issued an executive order, directing the U.S. Treasury to grant employers the ability to defer the withholding, deposit and payment of certain payroll taxes as further COVID-19 tax relief.  The deferral applies only to the employee portion of Social Security taxes and Railroad Retirement taxes (i.e., 6.2 percent of wages) required to be withheld and paid under Internal Revenue Code (“Code”) Sections 3101(a) and 3201(a) from September 1, 2020 to December 31, 2020. 

PRACTICE ALERT:  The deferral does not apply to required employee Medicare tax withholdings under Code Section 3101(b) (either the standard 1.45 percent on all wages or the additional 0.9 percent tax on wages in excess of $200,000).  Further, the deferral is not available for the employer’s share of Social Security (6.2 percent) or Medicare (1.45 percent) taxes.

IRS NOTICE 2020-65

On August 28, 2020, the IRS issued Notice 2020-65, providing guidance relative to the president’s executive order.  It provides answers to several important questions.

Notice 2020-65 defines employers required to withhold and pay Social Security and Railroad Retirement taxes as “Affected Taxpayers.”  It goes on to provide that the due date for withholding and payment of the employee portion of Social Security taxes and Railroad Retirement taxes for the period September 1, 2020 to December 31, 2020 is postponed until the period commencing January 1, 2021 through April 30, 2021. 

During the special session, the Oregon legislature passed House Bill 4202 (“HB 4202”), which Governor Kate Brown signed into law on June 30, 2020.  The legislation, which makes several technical and policy changes to the Oregon Corporate Activity Tax (the “CAT”), becomes effective on September 25, 2020.

The Oregon Legislative Revenue Office estimates that the modifications to the CAT resulting from HB 4202 will cost the state approximately $500,000 per year in lost tax revenue for each of the next six years.  The CAT was projected to raise approximately $1 billion per year in tax revenue.  Consequently, assuming these projections turn out to be accurate, the revenue losses attributable to HB 4202 should amount to less than one-tenth of 1 percent.

HB 4202 brings good news to farmers and provides some clarity for a small subset of Oregon taxpayers.  Unfortunately, the legislature did not repeal the CAT, and our lawmakers’ curiosity was not enough to cause them to look closely at the law and make the monumental changes that many taxpayers have been pleading for these past months.

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act waives the requirement that taxpayers take required minimum distributions (“RMDs”) for 2020 from IRAs, 401(k) plans and other defined contribution plans.  Taxpayers who already took 2020 RMDs may be able to return them to their retirement plans or IRAs and avoid paying income tax on the distributions.  The timing, however, is critical.

Notice 2020-51, issued by the IRS last week, provides needed clarity about this provision of the CARES Act.

Up until this past Wednesday, the Paycheck Protection Program (“PPP”) loan forgiveness application issued by the Small Business Administration (“SBA”) had not been updated since May.  New guidance was issued in the interim (and anyone who has been following this area knows that guidance is constantly evolving).  Most taxpayers have some breathing room before they must file their forgiveness applications; so, it may behoove them to wait to file their applications until they digest the most recent guidance.

On Friday, May 22, 2020, the Small Business Administration (“SBA”), in conjunction and consultation with the U.S. Department of the Treasury (“Treasury”), published an interim final rule (“IFR”) containing new guidance on the treatment of bonuses, prepayments, and the loan forgiveness application and process for Paycheck Protection Program (“PPP”) loans.

Loan Forgiveness Process 

Loan forgiveness under the PPP is not automatic.  Rather, borrowers must apply for forgiveness using the SBA’s Loan Forgiveness Application (SBA Form 3508) or their lender’s equivalent form, if any.  The process is somewhat streamlined:

• • The application is submitted to the lender for review and approval.
  • The lender will review the application and make a decision regarding loan forgiveness.
  • The lender has 60 days from receipt of a complete forgiveness application to issue a decision to the SBA.
  • The lender is responsible for notifying the borrower of the amount approved for forgiveness.
  • The lender will then request that the SBA repay the amount forgiven.
  • Within 90 days from the lender’s request for payment, the SBA will pay the lender the amount forgiven, plus any accrued interest. (If applicable, the SBA will deduct the amount of advances under the Economic Injury Disaster Loan program from its payment to the lender.) 

New guidance from the Oregon Department of Revenue (the “DOR”) with respect to Oregon’s Corporate Activity Tax (“CAT”) was issued yesterday.

Specifically, the DOR announced that: 

• • Certain forgivable federal loans and advances, including Paycheck Protection Program (“PPP”) loans, are excluded from the definition of commercial activity under the CAT;
  • The DOR is scheduling a public hearing to discuss the first set of permanent rules promulgated under the CAT; and
  • The DOR released a draft temporary rule regarding the sourcing of commercial activity for financial institutions.

In Notice 2020-32, issued yesterday, the IRS emphatically pronounced that taxpayers receiving Paycheck Protection Program (“PPP”) loans do not get to have their cake and eat it too!

As we discussed in a recent blog post, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), signed into law on March 27, 2020, created the PPP under which the Small Business Administration is authorized to make up to $349 billion in forgivable loans to small businesses to enable them to meet payroll costs, benefits, rent and utility payments.  On April 24, 2020, Congress increased the amount of available funds under the PPP to $659 billion when the Paycheck Protection Program and Health Care Enhancement Act was signed into law.

The CARES Act expressly excludes from gross income any amount forgiven under the PPP.  The question left unanswered by the CARES Act is whether the amounts forgiven that were spent by borrowers on otherwise allowable business expenses (i.e., payroll costs, rent, utilities, transportation and interest) are deductible under Code Section 162.

Notice 2020-32 quickly points out to taxpayers and tax advisers – not so fast – there are no free lunches.  In essence, if the loan is forgiven and, as a result of the CARES Act, a taxpayer has no cancellation of debt income as he/she/it would otherwise have under Code Section 61(a)(11), the taxpayer certainly does not get to deduct the business expenses for which it used the forgiven loan proceeds.