Small Business Tax Relief Act
The Small Business Tax Relief Act aims to (1) reduce the corporate tax burden for small, income-earning corporations and (2) reform how certain partnership interests—particularly those tied to investment management and “carried interests” in investment funds—are taxed. For small businesses, the bill creates a graduated rate: a general corporate tax rate of 21 percent, but with an 18 percent rate on the first portion of taxable income up to $400,000 for corporations with up to $5 million of taxable income. The rest of the income above $400,000 is taxed at 21 percent. The act also tightens or recharacterizes income in connection with partnership transactions and investment management services, treating certain gains as ordinary income rather than capital gains, and expands the rules governing how such partnership interests are taxed and reported. It applies to taxable years after enactment, with various provisions explicitly tied to specific dates or election mechanics. In short, the bill seeks to lighten taxes for many small operating corporations while closing perceived tax advantages around “carried interests” and certain investment-management partnership arrangements by changing how those incomes are recognized and taxed.
Key Points
- 1Lower graduated corporate tax rate for small businesses
- 2- For corporations with taxable income up to $5,000,000, tax is 18% on the first $400,000 of taxable income, plus 21% on the amount above $400,000.
- 3- For other corporations or for income above the $5,000,000 threshold, the tax rate remains 21% of taxable income.
- 4- Effective for taxable years ending after enactment.
- 5Partnership interests transferred in connection with services (83 amendments)
- 6- When a partnership interest is transferred in connection with providing services, the fair market value of the interest is treated as if the recipient received a distribution from liquidation of the partnership, i.e., generally as ordinary income.
- 7- The recipient can elect to treat this differently under rules similar to those for section 83(b) elections.
- 8- Effective for partnership interests transferred in taxable years ending after enactment.
- 9New rules for investment management services in partnerships (Section 710)
- 10- Creates a new rule set for “investment services partnerships.”
- 11- Net capital gains related to such interests are treated as ordinary income; net capital losses can be treated as ordinary losses (subject to loss-limitation rules).
- 12- Allocations of gains/losses are specified and tied to the partnership’s items of gain and loss.
- 13- Adds detailed definitions (investment services partnership, investment partnership, specified asset, qualified capital interest, etc.) and several antiabuse and reporting requirements.
- 14- Includes special rules for changes in service levels, tiered partnerships, and certain distributions; provides allocations and basis adjustments.
- 15- Domestic C corporations receive an exception per subsection (f): certain investment-service items would not apply to them.
- 16Adjustments to partnership distributions and allocations (Sections 710 and 751)
- 17- Revisions to the treatment of distributions and dispositions involving investment services interests in connection with Section 751.
- 18- Adds a new subsection to Section 751 to align with the investment-services framework (including treatment of gains as ordinary income in certain cases).
- 19Carried interests not qualifying income under certain rules (7704 cross-reference)
- 20- Specifies that certain carried interest income associated with investment services partnerships is not treated as qualifying income under a new rule, with detailed definitions of what counts as “specified carried interest income.”
- 21- Includes coordination provisions with other sections and special rules for partnerships.
- 22Reporting, enforcement, and coordination
- 23- The Secretary is given authority to issue regulations to implement reporting and recordkeeping, to prevent avoidance, and to coordinate with existing tax provisions.
- 24- A 40% penalty underpayment rule is referenced for avoidance of the new section’s purposes.