Two major developments occurred in the Senate this week, setting the stage for negotiations over major tax changes.
On Aug. 10, 2021, the Senate passed a bipartisan infrastructure spending bill, Senate Amendment 2137 to H.R. 3684, the Infrastructure Investment and Jobs Act (the Infrastructure Act). This action follows months of negotiations involving the Biden administration and senators from both the Democratic and Republican parties. The Infrastructure Act includes very limited tax changes, but the advancement of this bill is expected to be coordinated with other legislation implementing more significant tax changes. On Aug. 11, 2021, the Senate also passed budget reconciliation instructions that will set the stage for broader social infrastructure programs and further tax changes. Both of those bills now move to the House for consideration. Here are our initial reactions.
How did we get here?
Earlier this year, the Biden administration announced plans to pursue two major forms of legislation. One package would involve infrastructure spending and was proposed to be funded with corporate and international tax changes. The second package would involve new social and educational spending programs and would be funded by tax increases on higher-net-worth individuals. In pursuit of the infrastructure bill, the administration engaged with a bipartisan coalition of senators. That decision ultimately meant that the infrastructure spending bill excludes the originally proposed corporate and international tax changes. However, Democratic leadership is now pursuing a separate bill that’s expected to pair the social spending programs with significant tax changes.
What’s in the Infrastructure Act?
The bill provides over $550 billion of funding for many forms of national infrastructure projects. This includes spending on roads, bridges, passenger and freight rail, broadband internet, water infrastructure, public transportation, and other similar programs. However, from a tax standpoint, the bill includes four primary provisions:
Early termination of the employee retention credit (ERC)
The Infrastructure Act would accelerate the expiration of the ERC from Dec. 31, 2021, to Sept. 30, 2021, for most employers, preventing employers from obtaining the $8.2 billion of benefits projected for that period. This credit was enacted in 2020 as a COVID-19-related support program for businesses and initially applied to qualified wages paid after March 12, 2020. The program has been continually modified and extended and is currently set to expire on Dec. 31, 2021. However, the accelerated expiration date wouldn’t apply to recovery startup businesses, which first became eligible for the ERC on July 1, 2021. Please see our ERC resource page for additional details about this program.
Tax information reporting for cryptocurrency
The Infrastructure Act would expand existing tax information reporting requirements. Specifically, this would expand the definition of a broker to include persons that are paid to regularly provide services effectuating transfers of digital assets on behalf of others. Brokers meeting this definition would be required to supply Form 1099-Bs to their customers and the Internal Revenue Service (IRS) providing details on the value of digital assets sold, the acquisition date and sale date, and the basis of each digital asset sold. These requirements would apply beginning in 2023 (with Form 1099-Bs issued in early 2024).
The term “digital asset” included in this provision would include cryptocurrencies, such as bitcoin, but could be extended to other emerging assets in the digital marketplace. This change is part of the broader focus of Congress and the IRS on cryptocurrency transactions and the potential for tax avoidance. By expanding tax information reporting requirements, it’s expected that the IRS will obtain much more detail about completed transactions.
The primary impact of this provision is expected to be on centralized exchanges, such as Coinbase, where cryptocurrency transactions are completed regularly. However, the text of this provision generated considerable concern within the cryptocurrency community about the reach of the change. Specific questions were raised about whether this would implicate blockchain miners, stakers, validators, node operators, and hardware and software developers. In response to industry concern, competing amendments were considered over the past several days. However, the final bill doesn’t include any clarifying amendments. Overall, this is a first step by Congress to address the evolving digital asset marketplace, but it’s almost certainly not the last step.
Modifications to disaster-related tax deadlines
Several sections of the Infrastructure Act modify existing rules relating to extensions of time to complete tax filings and payments in the wake of federally declared disasters. These changes will create automatic extensions of time to both pay taxes and file tax returns for taxpayers affected by disasters while permitting the IRS to provide further extensions similar to its current practice. It also expands the definition of qualifying disasters to include significant fires for which assistance is provided pursuant to the Stafford Act.
Tax-free capital contributions to public utilities
Finally, the Infrastructure Act includes a tax change related to capital contributions to corporations in order to implement other aspects of the bill. This would allow regulated public utilities to receive tax-free contributions to fund the construction of drinking water or sewage disposal facilities. This rule was previously amended by the Tax Cuts and Jobs Act to cause these types of contributions to be taxable. The new modifications to that rule are expected to help implement the new infrastructure investments, which include contributions to public utilities with respect to drinking water and sewage disposal enhancements. However, the tax change only applies to corporations and not to any other entity types such as partnerships.
What’s excluded from the Infrastructure Act?
The short answer is that all of the other tax changes proposed by the Biden administration have been excluded from the Infrastructure Act. Given the bipartisan nature of this bill, it was necessary to exclude the tax changes since they are not supported by members of the Republican party. However, those proposals are expected to be considered in the second bill that the Senate initiated the same week.
What’s next?
The Infrastructure Act and the budget reconciliation instructions now move to the House of Representatives for consideration. The House is currently in recess but is expected to return in late August to consider these legislative initiatives. At this stage, it’s unclear whether the House will advance the Infrastructure Act in the near term or hold that bill for consideration with the other tax changes. However, given the size and scope of the reconciliation bill, it’s likely to require months of further negotiation and legislative action. Taken together, we now have clarity about the provisions of the Infrastructure Act, but we await further Congressional action to see which of the major tax proposals will advance and when.
