On June 13, 2023, the Ways and Means Committee of the U.S. House of Representatives voted favorably on H.R.3937, the Small Business Jobs Act (SBJA). Supporters say the bill would help small businesses and gig economy workers, encourage small business investment and incentivize development in certain designated rural “opportunity zones.” The final two sections of the bill are of particular note. Congress first created qualified opportunity zones (QOZs) in 2017, with the goal of encouraging investment in economically-distressed areas. Most designated QOZs, according to the committee, have been in urban areas. The SBJA would expand the program to include rural areas as well. In addition, the proposed legislation includes increased reporting requirements for the QOZs. This article offers an overview of the SBJA’s provisions.
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The SBJA would amend several provisions of the Internal Revenue Code (IRC) to streamline reporting processes.
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. Therefore, this rule has not been inflation-adjusted in almost 70 years.
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.
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. The IRS commissioner recently stated filers will be able to transmit thousands of these forms via a new platform on the information return intake system (IRIS).
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.
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. According to U.S. Census data, startup companies less than 5 years old create the majority of net new jobs in our economy, creating 1.7 million jobs per year. The section defines “qualified small business stock” as stock in a C corporation that meets the following criteria:
The definition of a “qualified small business” is as follows:
The SBJA would make several important changes to § 1202, including the following:
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. This will allow small businesses to expand business, boost wages, and create more jobs.
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.
In QOZs, if the investment is held for 5 years, there is a 10% exclusion of the deferred gain; if it is held for 7 years, the 10% rises to 15%. The rural QOZs rules are similar to the existing QOZ rules, but allow qualifying investments to be made until December, 2032 (starting December 31, 2023). This change in timing allows investments in rural QOZs to benefit from 5 to 7 year exclusions.
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.
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