Following more than six months of sheer chaos, the world seems to be settling down a bit.
Or course, concerns surrounding COVID-19, and its impact on the economy persist. But most folks are looking to regain some measure of “normality” (whatever that actually means going forward) in their personal and professional lives.
In the meantime, a couple of important tax legislation revisions have emerged. And with the Presidential election looming, many are wondering what a change in administration might yield for taxpayers?
To ensure you’re current and connected on these important tax-related issues, I’m dropping by with a quick update…
AB 5 Exemption Granted for Writers + Musicians
An update to AB 5, entitled AB 2257, passed in the California Senate and was signed into law by Governor Newsom earlier this month. The update grants an exemption to writers, musicians, photographers, and a number of other freelance workers adversely impacted by the original AB 5 legislation.
AB 5, which officially took effect earlier this year, has seen huge pushback from many sectors of the “gig economy.” The legislation was originally conceived to address ride-share and delivery services, like Uber and Grub-Hub, that treat its workers as independent contractors to avoid typical employer responsibilities, like unemployment + social security contributions, healthcare benefits, and the like.
However, AB 5’s impact (whether intended or not) spilled over onto many freelances that have long and successfully operated as independent contractors. This includes writers, musicians, photographers, and a host of other traditionally freelance businesses.
If you’re one of these freelancers, this latest update to AB 5 is a boon to your business! Key revisions include…
- Eliminating the submission cap that formerly required freelance writers and photographers who handle more than 35 projects for a single employer be reclassified as employees.
- Allowing music industry professionals, including recording artists, songwriters, producers, and promoters, among many others to continue working as freelancers.
- Adding translators, appraisers, and registered foresters to the list of excepted “professional services” providers (a list that already includes graphic designers, travel agents, marketers, and along with several other professional services freelancers).
CARES Act Extends 2018, 2019 + 2020 Carry-back Clause For Five Years
In an effort to ease the financial burden on individuals and small businesses caused by the COVID-19 disruption, the CARES Act reversed the 2017 Tax Cuts + Jobs Act’s limitation on carrying back businesses losses to prior tax years.
Under the latest revision to the CARES Act, both individuals and small businesses can carry-back losses from 2018, 2019, and 2020 tax years for up to five years prior to each of those fiscal years.
This means if you reported business losses that exceed your taxable income in 2018, 2019, or 2020, you can apply those losses as income deductions to any of the five prior tax years. And if your carry-back yields a refund, the treasuring is working to expedite those payments.
This is a sizable financial windfall if your business losses outpaced your allowable deductions over the past three years.
How Will Biden’s Tax Plan Impact Taxpayers?
To begin with, Biden’s “tax plan” is all very much theoretical at this point. The former Obama Vice President still has to clear two key hurdles, which include…
1. Winning the general election against incumbent President Trump — While Biden is still leading Trump in the polls, the numbers are pretty tight. And if history is any indicator… In the past 40 years, only one of the past four Presidents has served for just a single term. Moreover, many are wary of and uninspired by Biden, and feel that irrespective of the polls, Trump is likely to emerge victoriously.
2. Getting His “tax plan” through congress — Even is Biden manages to capture the Presidency, his proposed revisions to the tax code are still subject to legislative approval. And with the strong possibility of another Republican lead Senate, not to mention the radically left-leaning Democrats in both houses looking for drastic measures, this is unlikely to be a Home Run walk around the bases.
Of course, the content of Biden’s proposal is lengthly. But there are two key highlights that could significantly impact taxpayers…
Tax Increases for the wealthy
- An increase in the tax rate for the highest income bracket to 39.6% (back from 37% where it was lowered by 2017 tax reform)
- A cap itemized deductions for wealthier Americans
- A limit on 1031 real estate investment exchange tax breaks
- An increase in capital gains taxes from 23.8% to 39.6%, the largest single increase in history
- Doing away with the 20% deduction for qualified business income for higher-income taxpayers
Cuts for lower-income earners
- A short term increase to the child tax credit, raising the figure $3,000 per child for children ages 6 to 17 and to $3,600 for children under 6
- An increase in the child and dependent care credit to $8,000 per child (up to $16,000)
- Forgiving student loan debt and excluding the forgiven amount from taxation
- Expanding the work opportunity tax credit to include military spouses
- Granting tax breaks and access to 401(k) plans for workers saving money for retirement
- Giving tax credits to small businesses that offer employee retirement plans
Again, this all remains strictly theoretical. But many in the wealthier income bracket are considering selling assets subject to capital gains — include stocks, business stakes, and real estate — prior to the upcoming election. The logic being: Why not sell now and pay 16% less in taxes?
Additionally, many real estate investors are looking to make 1031 property trades, as this could be their last chance to cash in on the program.