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House Readies Small Business Tax Relief In Advance of Budget Action

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H.R. 3937, the Small Business Jobs Act, includes measures that have bipartisan support, such as raising the 1099 reporting threshold for nonemployee compensation from $600 to $5,000. Other provisions would increase small business expensing of equipment and would create rural opportunity zones. Below are the details.

1099 Reporting

The bill would reduce two key 1099 thresholds. First, the 1099-NEC requirement for reporting non-employee compensation would increase from $600 to $5,000. This form is used to report income from independent contractor jobs, such as those performed by gig workers, like delivery services, and by subcontract labor.

The legislation also blocks the lower $600 threshold for reporting credit card transactions that was to take effect after 2022. The American Rescue Plan of 2021 lowered the 1099-K reporting threshold for payment card and third party network transactions from $20,000 and 200 transactions per year to $600 per year with no minimum number of transactions. That provision was set to take effect in 2022, but the IRS delayed enforcement for one year in Notice 2023-10. Under H.R. 3937, the rule would revert back to reporting only for aggregate yearly payments exceeding $20,000 with the number of transactions with that payee exceeding 200.

A coalition of corporations supporting “microbusinesses”, such as Airbnb, Etsy, Ebay and OfferUp, have been advocating against the lower 1099-K limit. The Coalition for 1099-K Fairness contends that the lower threshold will disproportionately impact “casual sellers” and will cause confusion and administrative challenges for small sellers. The House bill would answer their concerns by doing away with the lower threshold.

Immediate Expensing

The Tax Cuts and Jobs Act of 2017 (TCJA) doubled the expensing limit for business assets from $500,000 to $1 million with a yearly purchase limitation of $2,500,000. That law also requires inflation adjustments of those amounts. For 2023, the current expensing amount is $1,160,000 with a purchase limit of $2,890,000.

The new bill would increase the base amounts to allow a $2,500,000 expensing limit, with a purchase limitation of $4,000,000, beginning in 2024.

Expansion of Small Business Stock Exclusion

The bill would expand the $10 million exclusion for investors in small business stock by allowing S Corporation to qualify. Currently, only investors in startups organized as C Corporations are eligible. The Committee notes that S Corporations represent nearly half of all US business entities.

The bill also allows a portion of the exclusion for stock held for three years by revising the exclusion table as follows:

Years Stock HeldExclusion percentage
   3     50%
   4     75%
   5 or more     100%

In support of this provision, the Committee explained that, according to US Census data, startup companies less than five years old create the majority of net new jobs, about 1.7 million per year.

Rural Opportunity Zones

The legislation would expand the Opportunity Zone (OZ) concept put in place by the TCJA to cover more rural areas, creating Rural Opportunity Zones in communities with high poverty rates. Currently, 95% of OZ investments are in urban areas. The OZ program allows deferral and/or exclusion of gain from investments in designated areas.

The term ‘qualified rural opportunity zone’ means any population census tract which:

(i) is located in a rural county; and

(ii) is in persistent poverty (as determined by the Bureau of the Census)

A ‘rural county’ means any county if more than 50% of the census blocks are rural blocks.

The bill also imposes extensive reporting requirements on funds and businesses operating in qualified opportunity zones and rural opportunity zones.

The measure now heads to the House floor for a vote. Though some of the provisions have bipartisan support, others are opposed by the House Democrats and the Senate. Still, a House-passed small business tax relief bill can be seen as an opening position by Republicans in anticipation of any tax package that may be included in this fall’s budget bills.

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