Tax Update for Asset Managers | One Big Beautiful Bill

So just to recap, basically any capital gain you have without limit, unlike some of the things that Kayla will talk about QSPS and some other deferral techniques, there are limits on the amount of capital gain. Here. You can have a hundred million dollars capital gain and if you invest it into or reinvested into a qualified opportunity fund, you can defer the recognition of that gain. The old rules were that it had to be basically done by 12 31 26 as we pointed out, it is now extended indefinitely. You would exclude 10% of the gain if the reinvestment was held five years, 15% have held seven years, and there were again limitations on investments because it had a drop dead deadline of 2026. And then if you held the reinvestment for at least 10 years, any, the appreciation was exempt. So what happens now is it's been made permanent.

And not only that, but the state governors can extend and name new opportunity zones. So there have been opportunity zones already mentioned already delineated by state governors, and if you look a little lower, you'll see that I've put in the website where you can find whether the particular area that you're interested in investing in is an opportunity zone or not. There are thousands of them. There's no fixed state anymore. The five-year exemption rule, because there's no end date, there's no 2026 anymore, an addition sort of a minus is the additional 5% has come out. They've tightened the criteria for what exactly is a low income area, and there's something new about qualified rural opportunity funds where they're trying to make it, trying to create an incentive to invest particularly in rural areas as opposed to city areas. And then because this is much expanded, there are new reporting and penalty provisions which are just detailed and we're waiting for guidance and IRS forms to come out to see exactly what that will be.

But the bottom line is that it's an expanded program at this point. It doesn't have an expiration date, and it is really very unique. Now the past, the actual opportunity zones, the actual opportunity funds that were about six or 7,000 of opportunity funds that were created somewhere between 40 billion and 150 billion ultimately was invested. That's quite a bit of money and I think it'll only grow in popularity. So opportunity zones is something to look into. I suspect that a lot of PE funds that previously had flirted with it or thought about it might want to consider actually getting into qualified opportunity funds, which would then invest in opportunity zones. And it doesn't have to be only buildings in real estate, it could be companies, it could be operating companies that are present that have invested in these particular areas. Outside of that, we'll talk about business deductions.

So miscellaneous is itemized business deductions, what we call two 12 expenses. Other expenses like casualty losses and theft losses and things like that that were temporarily halted by the Trump Tax Act back in 2016 that has now become permanent. So there are no longer any two 12 limitations. There are no longer any two 12 deductions rather, and it's all subject to limitations. You simply can't deduct it if you're an individual. If you are corporations, then obviously you can casualty losses. There were moving expenses, there were theft losses. Those were temporarily suspended as a revenue raiser. Obviously they need to raise more revenue because a lot of these provisions will create are going to cost money, are going to cost tax money. So those have been now permanently extended. And having said that, there are certain theft losses to the extent that they're related to investments that are deductible.

A lot of people don't know about it. There's an article that is linked over here with regard to phishing, pig butchering and other type of scam losses that have to be investment related. You can look at the RevPro, you can look at the article that had written a few months ago when the RevPro first came out to determine whether you or any of your clients or anybody that might actually qualify. Again, the key is that it has to be investment related, not merely that somebody stole money from you. Governors of states have actually been given a little bit more of a leeway in determining whether or not something is. For example, we had the Texas floods just a few weeks ago. It is now not only that the federal government can declare a disaster area which will provide for disaster losses, but governors of states can now declare them, but they have to get permission or they have to get approval from the secretary, from the secretary of the treasurer.

But it puts a lot of the ability to declare a state disaster and be able to get federal deductions. It puts it back into the hands or the control of governors, and I thought that was pretty useful. The miscellaneous itemized deductions are obviously gone, and I sort of said until the next Congress people asked me, is it permanently gone, whether it is permanently gone under the current bill, but as we know, congress changes and things change at that point, but because miscellaneous itemized deductions are gone and those are your two 12 expenses, again, for individuals very frequently what we find is that deal expenses wind up being thrown in as two 12 when in fact it could potentially be put in as part of the deal costs or part of the cost of actually acquiring a deal. And that falls under 2 63 and if you fall under 2 63, there might be opportunity for ultimately getting those costs back as part of your cost basis at least.

Whereas if something is a miscellaneous itemized deduction, not only is it non-deductible, but it also reduces your basis so it doesn't reduce your basis. That is it's not a deductible expense. Ultimately when you exit that investment, you never recouped that basis. It's gone forever. Whereas if it's something like 2 63, you might not get a current deduction, but it still sits in your outside basis and you might be able to get that ultimately as a greater loss or less income. So it becomes more important to take a look at 2 63 and see whether you can qualify for that bonus depreciation in 1 79. Again, the objective here I assume is to stimulate the economy hopefully without causing an increase in inflation. So bonus depreciation, 100%. It had been scheduled to a phase out and I think it was 40% and 25, now it's back to 100%. It applies to maker's property with 20 year life or less.

And that's going to become important to people who do cost sex studies in real estate because cost sex studies for real estate, typically real estate is 39 year property. But if you do a cost cosec study and you get to allocate, whether it's the roof or the parking lot or boiler equipment or HVAC equipment and the like, then you could ultimately put it in as under 20 year life. And if it's under 20 year life, you can wind up deducting the entire amount right away as soon as you put it into service. There's a new category called qualified production property, and that is non-residential property, non-commercial commercial property, but it is property nonetheless that again, normally would have a 39 year life or so, but that also will qualify for bonus depreciation and it's just a wonderful way of stimulating. Now imagine if you put a manufacturing facility or some other production facility that would qualify for bonus depreciation and you spend millions, maybe even tens of millions of dollars, maybe even if you're doing a nuclear power plant or something like that, you're obviously spending giving a lot more and you put that into an opportunity zone and you hold that and somebody is reinvested in this and they've held it for at least 10 years.

And all of the depreciation, whether it's bonus depreciation or maker's depreciation, all those deductions, once you've held 'em for more than 10 years, you get a step up effectively to the fair market value at that time. And any gain thereafter is capital gain. Or if you hold it for at least 10 years, there is no gain on the appreciation, but there's no gain on the recapture of the ordinary income. So for example, you had a hundred million dollars gain, you put it into a qualifying opportunity fund. That a hundred million dollars is all bonus depreciable for argument's sake. It winds up being fully deductible that a hundred million grows to a billion dollars 10 years later. You take that after 11 years, you sell it for $1 billion. None of that a hundred million dollars gain is taxable to you. None of the depreciation that was taken is recapture able either.

So it's just a wonderful marriage, a bonus depreciation and opportunity zone 1 79 expensing rises to two and a half million dollars if you have non-commercial property, which is basically residential real property, which is 39 and a half years and otherwise does not qualify for bonus depreciation. If you do a cost six study and you can take some of the 1 79 and take some of those expenses and take 1 79 against it, you'll actually get a great deduction for it. You have to be careful about state interest because some of the states don't allow bonus depreciation, but they do allow 1 79, so you've got to play between the two. Some general items, health savings accounts can now include telehealth consultations, which is great because during COVID, a lot of telehealth companies were formed and started and they can use some help now, being able to take health savings accounts, deductions for that service gym memberships were considered, but it didn't make it form 10 99 reporting.

And some of you who are service providers may be getting form 10 90 nines. Well, if it's $600 or less, you don't have to order $600 or more is what the criteria used to be, but between 602,000, they don't have to give you a 10 99 anymore. Now the threshold is 2000 per year, so it makes 10 99 reporting perhaps a little bit less onerous. There's something called newer Trump account, and this had actually been floated before under American Savings Accounts or things like that that are meant to encourage young people, children, even children that had just been born into a savings attitude. It's been renamed the Trump account. We can guess why. And basically you can establish a Trump account every year put in as much as $5,000. It grows tax deferred. If it grows at the age of 18, that child can take it out.

It stops growing at that point. You can spend it in anything that you want. We think it comes out at capital gains rates. So as a simple example, if you were able to put $5,000 away into a child's account and being that a gross tax deferred by the way, then the children tax also goes away that you have to include in your personal income any non earned income over the age of 14. So this will solve that one as well, and it roughly at 8% will grow to about $200,000. And now unlike 5 29 a accounts that can only be spent on education and housing for education and the like, this can be spent on anything that you like. You do pay tax on it. Unlike 5 25 29 a accounts that if you spend them on education and the like, it is not a taxable event. So again, this really is meant to encourage savings.

Not only that, but in order to give it a boost, any child born to a citizen or that is a citizen has a social security number, can be between 2025 and 2028. So roughly for the next three years gets a free $1,000 funded by Uncle Sam. On top of that, if your employer wants to give you a bonus, typically those bonuses are subject to F tax, income tax, et cetera. He can put the $2,500 into an account for the benefit I guess of your child into a Trump account. And that is not subject to tax. So that's another little benefit. The lifetime estate and gift tax exemption rises to $15 million. As you may remember, when Trump first put in TCJA, I believe the limit was $600,000. He had raised it to $5 million. It was indexed to inflation. Inflation would for this year make it be roughly 14, 14 and a half million dollars, which is the current exemption, almost 13,000,009 90.

If you just left inflation for 2025, it would rise to about 14 and a half for 26 rather. And then 26 if you just rounded up and now it's $15 million, that's a lifetime exemption. So married filing joint, you can give away as much as $30 million. And everybody had been planning last year in 2024 for the termination of the sunset of the 14 million in change and people were setting up trust to account for it, et cetera. Well, it's back somewhat of a downer is if you're giving away charity individual charitable deductions beginning in 2026, you lose the first one half of 1%. It's similar to on the itemized deductions where you were limited, for example, to medical, anything exceeds 10% of a GI for two 12 deductions when they were available that had to exceed 7.5% or 2% of a GI. This is similar. Charitable deductions will have to exceed one half a percent of your A GI in order for it to be deductible.

So as an example, if your A GI is 10 million, the first 50,000 charity, it's not deductible. So if you are philanthropically inclined, now is the time to do it. Another possibility is there's something called donor-advised funds. Fidelity has it. Many of the other mutual funds have them as well, the mutual fund managers. And if you front end whatever your deduction is that you would want to put over the next five years, if you front-ended it to 25, you're not subject to this limitation. And the beauty of these donor-advised funds is you can advise the donor advised fund whom to leak it out to which charities to leak it out to over the next five or 10 years as you desire. Corporate charitable deductions currently are limited to 10% of taxable income. Beginning in 2026 you lose the first percent. And then there's, we used to be something called a peace limitation on the ability to deduct all of your itemized deductions that had gone away.

Now it's somewhat back and it's a rather complicated computation, but I gave you an example over here. If your itemized deductions of 450, your taxable income is 3 million based on the 2025 threshold for the 37% tax bracket, which with inflation will go up. So it'll be a little bit higher, you'd lose roughly $24,000 of deduction. Okay, I think we're up to our next polling question. So the polling question is, citizens are taxed on worldwide income in which countries regardless of residency, no matter where you live, if you're a citizen of that country, you're taxed on worldwide income, A USA, Russia and China, BUSA, Sweden, Finland and Norway, which have great social programs. CUSA, Eritrea, everybody know where Eritrea is. I think it's near Ethiopia, Myanmar, which used to be called something else. Hungary, Tajik Stan or the only USA. And this is just an interesting sort of trivia tax trivia as to what countries tax their citizens on their worldwide income.

We know for example the uk, France, Germany, some of the other industrialized nations. You could be a citizen of that country, you can have an EU passport, but if you don't work there or if your income is coming from somewhere else and you're living someplace else, you're both living someplace else as well as working someplace else. You don't necessarily have to pay tax to your citizen country, but these countries here, A, B, C or D, which of these countries tax their citizens regardless of residency and regardless of where the income is actually earned. And I think the answer by the way will go to the answer is only is USA actually Eritrea, believe it or not, has like a 2% tax on worldwide income to fund their government. The NMR has it, Hungary has it, TA extent has it, but if you take a look at the industrialized world, first world countries if you will, only the USA taxes their citizens on worldwide income, which makes for very interesting moving of residency out as a point of fact.

And recently you may have heard that Tina Turner left, gave up her citizenship, Campbell's soup, fortune ears, John Dorrance left it and somebody very famous who was one of the original founders of Facebook and had caused quite a bit of controversy. Eduardo Severin left about 10 or 15 years ago when he owned about 2% of Facebook. At the time, I think it was worth $700 million. He was originally a Brazilian native. He wound up going back to Brazil, ultimately to Singapore. He's now the richest, I guess he's a citizen of Brazil, but a resident and citizen of Singapore. He's the richest man in Singapore and Brazil with a value of I think 37 or $38 billion. And he left the USA, he did pay some tax, but certainly not on the value of Facebook, which at the time was about $4 billion. And now it's not that easy to give up citizenship, but that's for another day. At this point. We go on to back to arena,

Irina Kimelfeld: Okay, so as I said, there's more provisions here that were either extension of TCGA that are being made permanent or some modifications of those. So salt cap, which is state and local tax deduction limitation, there's was probably most publicized in public media. It was meant the limitation under the current law, which went into effect in 2018. The limitation is kept at $10,000, $5,000 for married filed separately individuals. The provision was set to expire as of December 31st, 2025. So beginning in 2026, we would've gone back to full de deductibility of state and local taxes paid. The current bill increased. They allowed deduction to 40,000 for taxpayers with a GI of less than $500,000 or 250 for merit filed separately. So the mechanics of this is that 40,000 limitation gets reduced by 30% by the amount by which the A GI exceeds that threshold, but it doesn't go below $10,000.

So for all enhance and purposes, we're expecting that higher earners will be limited to their $10,000. So nothing really changes from them. From now into 2026, the thresholds and the limitation will get increased a little bit to 40,400 and the limitation goes to 505,000 or the threshold goes to 505,000 and then it increases by 1% until 2029 and beginning with 2030, assuming no further changes are made, it goes back to $10,000 from the 40,000. So 40,000 is really a temporary limitation. A lot of our clients have taken advantage of the pass through entity tax workarounds that majority of the states have now passed effectively making elections to pay the state taxes through the businesses and take the deduction that way. It is notable that in the Senate version and then proposed senate version of the bill, the PA workarounds were restricted in various ways as it went through negotiation.

Ultimately, these restrictions did not ultimately become part of the final bill, but since there's no sort of good or bad idea that goes away, we're noting it that to the extent anybody still has that in their mind in Congress, those limitations could come back. And people did pay attention to the PTECH workarounds and as potential way of raising money back. There are seven states that did have an automatic expiration of their pt, A provisions to coincide with the expiration of the limitation at the federal level. So those states, to the extent they do want to continue with their PT A regimes, which we would expect them to do so, would need to pass new laws, extend their laws. So the states or California, Colorado, Illinois, Iowa, Massachusetts, Michigan, Minnesota, Oregon, Utah, and Virginia. So to the extent you're taking advantage of PE in any of those states do watch their legislative updates and how they're going to handle their extension.

So the limitation is not permanent. So there is no sun setting other than going back to 10,000, 2030 research and experimental expenditures. Also kind of hotly debated topics. And another one that's really meant just for growth, they split the RNE section, which was up to now covered by section 1 74. There's now new section 1 74 A that covers specifically domestic RNE expenditures. So the RNE expenditures can now be expensed and they don't have to be capitalized for years effective after December 31st, 24. So that's starting with 25. Taxpayers can elect to capitalize and amortize over 60 months, notably for small businesses may elect to amend their tax returns and the deduct expenditures back to 21 when they were starting to capitalize them. The small business definition goes back to gross receipts dusted under section 4 48 C3 4 48 C, which has three year gross average receipts of 31 million.

You would have to meet the small business criteria for taxable years beginning after December 31st, 2024. So that's in 25. So that we have the benefit of hindsight here to go back and amend the returns to 21 if that is beneficial. And of course, so this could be portfolio companies, private equity funds, this could also be RE expenditures at the management company level that have been incurred. So going back and amending the returns could be beneficial, allowing the owners to take additional expenses. And all taxpayers, not just small businesses, can elect to deduct any unamortized amounts that were incurred between 22 and 25, either in the current year or rat over the two years. So once again, this is a planning opportunity to understand what the taxable income may be and the most beneficial year or years to take the deduction.

1 63 was another provision that was put in place by TCGA. It limits the amount of allowable business interest expense. So it has to be business interest expense to 30% of adjusted taxable income. So up until 2022, the adjustable taxable income was defined as basically ebitda. So without taking into account the deductions for depreciation and amortization starting 22, the adjusted taxable income included the deductions for depreciation and amortization. So effectively lowering the deductible interest limit. So the provisions of the new act going go back to using ebitda. So effectively allowing more of an interest deduction for businesses. And so this, once again, this applies to active businesses of portfolio companies of private equity funds, but also to trade or hedge funds that has given rise to trader business activity management company if there's any business interest there. The ACT does make it clear that capitalized interest is still considered in the calculation of limitation as there was some talk of potentially using capitalized interest as a way of going around the limitation.

And 4 61 L, once again, another one of TCJ provisions that is now becoming permanent. It disallows the deduction of business losses. Once again, this is business not investment, the business losses that exceed 250,000 or 500,000 for married filing jointly. So it's an individual provision and in case the business losses are generated at the partnership or S corporation, the limitation is determined at the partner or shareholder level. The limitations are subject to adjustments so that to 50 or 500 does go up for inflation. Any disallowed loss becomes net operating loss going forward. There was some talk about changing that provision that one did not become part of the final bill either. So once a loss is disallowed, it becomes an NOL going forward and can be deducted in the future. This once again can apply to trader funds as well as management companies. So if there are losses being generated at any one of those levels, those could be limited. And by the same token, the trader funds the income is considered business income, so it can offset potential business losses that would be subject to limitation. The provision would also apply to any PA deductions that are being taken at either GP level management company of course as the pt, a expense is considered business expense and could generate business losses.

And this provision I wanted to just touch on section 49 68. It's not directly impacting taxable income calculation of asset managers or funds. However it could impact the investors in the funds. So section 49 68 raised the excise tax on certain private colleges and universities endowment funds. It has gone from 1.4% to 8% of net investment income, which includes all the things you would think would include interest, dividends, rents, royalties, et cetera. And so this increase in tax, 1.4% was there all along. Now it's 8%. It does affect a fairly small handful of endowments and universities. But to the extent you have these investors in your funds, they may be looking for changes to the allocation strategies and where they're choosing to invest. They may be looking to move away from investing in anything that produces current income that will become currently taxable. Anything that could produce dividends, anything that has a high turnover in the funds, so highly traded funds into lower turnover funds or potentially private equity could become preferable. They could be potentially utilizing more real estate investments that do not generate the types of income that would be currently taxable. They could consider if they weren't already going into feeder structures or non-US blockers, potentially look for those structures. So if you do have those investors, you may be having conversations with 'em about what it is they're looking to invest going forward.

And we're up to the next poll question. And since this deals with 1981 when I was barely born was born Marie, if you want to talk about this one, I dunno where Marie is, but percent,

Murray Alter: But the question is what was the highest marginal rate on unearned income at the time? There was a split between unearned income and earned income, unearned income being dividends, interest royalties, et cetera, earned income being wages and salaries before the economic recovery tax Act of 1981. Those of you who are old enough will remember Ronald Reagan became president in 1980 at a time when the was doing rather poorly. So he created this tax act called the Economic Recovery Tax Act. Inflation was running grant pit treasury bills were at double digits, 12, 13, 14%. Mortgages were also approaching double digits, 10, 11% depending upon the particular state. And he wanted to revive the economy. This is the famous trickle down theory. What were the highest rates before IDA of 81 on unearned income? 91%, 70%, 50% or 35%. And while we're waiting for the answers, some questions, some questions have come in, do you have to be born in 26 or 25 in order to get the $5,000 contribution that you can put tax deferred into the Trump Act? Into the Trump account? The answer is no. You have to be born from 26 to 25 through 28 in order to get that thousand dollars for free.

Irina Kimelfeld: Then there's another question about the expenses on the Schedule C,

Murray Alter: Schedule C reduction. Yeah, you want to take that arena?

Irina Kimelfeld: Yeah, so the limitations, the two 12 limitation that Marie was speaking about before, these were other itemized deductions. So to the extent you have business expenses, those are not limited. So it's other itemized deductions. A lot of times where we see that is in the investment fund arena because the investment funds are not as opposed to trading funds, they're not considered to be in a trade or business. So management fees or any other expenses that are being paid there, those would be subject to the two 12 limitations, which is not permanent. But to the extent your expenses, which I would expect Schedule C expenses to be are related to a trade or business, those would not be limited under to 12,

Murray Alter: Right? So we'll give you the answer to the poll. Let's see how we did here. And 70%, 38%, 50%, 25.2. So the answer is actually that it was 70% just prior to erda. It had been as high as 91 to 94% during the war years. We're talking about in the forties it had dropped to 70%. It sort of was this disincentive to make investment and that was the thinking for dropping it to 50% and that ERDA did that, dropped it to 50%. There were also cuts in individual rates, capital gain rates, et cetera. And you can all decide for yourselves whether that led to an economic recovery act or not. But I guess we have similar thinking today with further tax cuts. And with that we turn it over to Kayla.

Kayla Konovitch: Thanks Murray. Hi everyone. So in this sentiment we're going to focus on the expansion of qualified small business stock under section 1202, and I am really excited to talk about this provision and the enhancements because I really believe this is going to significantly impact your investment strategies for all private equity venture capital. This is really an enhancement. So let's dive in. Okay, so I want to focus in on here first, let's review the rules for qualified small business stock that was acquired through the date of enactment through the OBBA. It actually should say not prior to OBBA through the date of enactment. That's July 4th, 2025. So to review, a non-corporate taxpayer could potentially exclude up to a hundred percent of the gains that are realized on exchange of or sell of qualified small business stock. And what's the requirement to qualify? The stock has to be held for more than five years.

The exclusion amount is the greater of $10 million or 10 times the basis of the asset. And the third, and by the way, I'm going to point out we're just focusing on the tests and the requirements that actually are changed under the OBBA rules. So I want to put out a disclaimer that this is not all encompassing. There's many other qualifying tests. The third item is what is a qualified small business? One of the criteria was that the gross assets of the company cannot exceed $50 million. That 50 million is historically at the time and immediately after the issuance of the stock. And again, the gross assets that's measured based on the tax basis of the assets, that's not based on fair market value. So these three provisions I'm highlighting here because these are the ones that changed under the OBBA. However, there are many other qualifying tests and it's important and they're still relevant because for any historical acquisitions through the data of enactment in July 4th, 2025, these are the rules and it's still in play.

I added over here a chart with the acquisition dates. You're probably more familiar. You should be familiar with this chart where the exclusion right from 1993 through February 17th, 2009 is 50% and then increased to 75%. And then after September 27th, 2010, the exclusion increased to a hundred percent. So it's really important. These rules are still in play for all acquisitions issuance of stock through the date of enactment July 4th, 2025. Now, okay, so let's focus on the new and improved qualified small business stock. So any QSBS that you acquired after the date of enactment, that's after July 4th, right? So starting from July 5th, 2025 and into the future, any new issuances of stock, there's a phase in increase in the exclusion of gain and the amount of the exclusion of gain. So there's a new holding period that was set. If you held stock for three years or more, you now may be eligible for a 50% exclusion, four years or more, 75 exclusion five years or more.

It's a hundred percent exclusion. So this is a significant change where you do not have to hold the stock for more than five years and you may be eligible to receive a partial exclusion of gain. Now I do want to point out that the non-excludable portion of gain is subject to the 28% collectibles tax rate, not the long-term gain rate of 20%. So it's the 28% rate plus 3.8% for the net investment income tax of a non-excludable portion. What that essentially means is that the effective rate really truly what your tax savings, let's say on a three year holding period, it's not really 50%, it's really about a 33% tax savings. And on a 75% gain exclusion, it comes out to about 65% tax savings. So I just want to bring that home when we're thinking about it and calculating what the benefits are, but significant improvement, shorter holding period, there can be earlier liquidity for investors.

The second significant improvement here is that the gain exclusion amount was increased to 15 million. That's up from the $10 million amount and it's still the greater of the two. It's now the greater of 15 million or 10 times the basis of your assets of the cost basis of the asset of the stuff that was sold. So you still have that benefit, but now it's significantly increased and it also clarified and specifically stated if you're married to filing separate, the amount of the exclusion is seven and a half million. The third significant change is that the gross asset test was increased to 75 million. So now any targets and companies that have gross assets, again based on the tax basis of the asset up to 75 million may be eligible for the exclusion. And the fourth item is that there's now an inflation adjustment. So starting in 2027 every year there's going to be an annual inflation adjustment increase for the gain exclusion and the gross assets. So those are really significant improvements that are very beneficial for investors, for founders in our client base. Now again, this enhancement are only for stock that was purchased starting July 5th, 2025 and into the future. And I say purchase meaning original issuance metal. The test, it starts with July 5th, 2025.

So we put together an updated qualified small business stock investment timeline because it's really important to focus in on the acquisition date, the holding period, and that's going to determine the exclusion percentage and the amount of tax that you'll pay. So in the first top half, the top portion, this is really the chart that I showed you before, it's if you held a stock for more than five years based on these dates may be eligible for 50 75 or a hundred exclusion, right? The hundred percent was from September 28th, 2010 through the date of the enactment. That's through July 4th, 2025. And there also was an A MT preference adjustment for the non-excludable portions. That's important to note as well. So now after the date of an enactments, so starting for July 5th, 2025, if you held a stock for three years or more, it's a 50% exclusion, four years or more, 75%, five years or more is a hundred percent.

Also note that the rules are now it's at least it's at three years or more, four years or more or five years or more. It's no longer more than five where you needed an extra day to sort of get you over that humps. That was changed as well. And there also is no A MT preference adjustment. That was another benefit as well. So this is going to be, I think a really good handy chart to really identify your tranches, your stock and figuring out based on the date holding period, what the exclusion percentage is. Okay, so let's focus on the planning opportunities of what this means. How can we benefit? There's many ways here that I think there's going to be a lot of tax savings opportunities. So one is there's an expanded target eligibility. Right now you can invest in companies that have gross assets up to $75 million.

This is significant for any of the smaller to mid-market deals that can now qualify. More targets will be eligible for this exclusion. And even if there are some that are above the 75 million, there may be ways of proper structuring that you may be able to get there and meet this test as well. So definitely reach out to us about any structuring questions related to that. There's also the r and d expense treatment that I Irina mentioned earlier in today's presentation right under 1 74 A. The domestic RD expenses that can now be fully expensed rather than capitalized and that effectively will help reduce the tax basis of the assets, which will essentially help you meet the gross asset test as well. So that's also a favorable adjustment that can impact 12 section 1202. We now have the flexible timing on exits of qualified small business stock, very favorable.

You can return liquidity to investors sooner. You don't have to hold it for more than the five years. You can sooner and still receive the partial exclusion with tax benefits. That's a significant change. And ultimately the increase in the gain exclusion amount from 10 increase to 15 million is also going to obviously enhance tax savings. And you might want to think about strategies like gifting or stacking that may help you multiply this exclusion amount as well. Now we expect with entity conversions, right? People remodeling out partnership S corp versus C corp structure, we expect there to be a lot more activity in entity conversions. One is that it may be more companies that are forming as C corps because it is more favorable at this point. Of course it has to be modeled out with your facts, but it is more favorable with the QSBS new rules.

So we might also see companies that decide to convert if it made sense to a C corporation. Just be mindful if you do have an entity that converts that conversion. Basically you take the fear market value of the company, it's considered a property contribution for the gross asset test. So whatever that fear value is, that's what's used for the gross asset test. So it needs to be under $50 million and in addition, whatever that fear value is, that built in appreciation is not eligible for the exclusion. You will pay regular tax rates on it. It's only the subsequent appreciation post-conversion that would be eligible for the exclusion, but there still might be a big opportunity here. We expect there to be a lot more activity with entity conversions. Some other considerations you might want to do some lot identification planning where if you have a partial exit or sell, you might want to identify which shares make the most sense to sell now versus later, depending on the holding period and how long you held it for whatever the exclusion amount percent.

So there's an analysis to do if there's going to be a partial sell to really identify the lot that makes sense to sell first. If it's Fi, FO or lifo, you can actually identify which stock you want to sell. That's a strategy that can be utilized as well. And of course carried interest. This is another benefit. The care interest rules we're still eligible for that loophole and qualified small business stock. There's an opportunity there as well. So that is also a big benefit to the asset management industry. And section 10 45, it still remains in effect. There's no change there. Just to remind you, section 10 45 is when you didn't hold the stock for the full five-year period. You sold it earlier, but you rolled the proceeds into a new qualified small business stock investment within 60 days. You get there are two benefits. One is you have a tax referral and the holding period also tax.

Those rules still remain in effect. You can still utilize that. Although now that we have these enhanced provisions under the OBBA for at least the future stock, it might not be as impactful. We'll see. But that's still in play. And I also want to note that carried interest is not eligible to do the 10 45 rollover. It's very clear in the regulations that Carrie is not eligible. Only a capital interest is eligible for a 10 45 rollover if it comes up through from the corp up to the partnership. And the other good piece of news for any New Jersey investors, founders that are residents of New Jersey, effective January 1st, 2026, New Jersey now will conform with the federal QSVS treatment and that's on any realization. So starting 1 1 20 26, any realizations and into the future, they're going to follow the federal rules. So we really have a lot of favorable provisions here and enhanced opportunity for our client base and investors to really strategize and figure out how can we maximize tax savings here.

So feel free to reach out with any tax planning. And I do also want to add that we will be hosting a webinar August 5th, solely focused on qualified small business doc. We'll take a deeper dive, we'll go over the new rules and there'll be a session just focused on this, so hopefully receive the invite. If not, reach out. It is also posted in the webinar platform here so you can register as well. And yeah, there should be a lot of planning opportunities, so definitely keep this in mind when you strategizing. And then I will turn it over to Marie for some additional trivia.

Murray Alter: Just quick so we can give Jay some time to go over his international changes. How many of the 38 members in the OECD, which is the organization for cooperation and development do not have a value added tax? It's also sometimes called the GST Gross Services tax or Gross Sales tax in Canada. How many do not have a vat? USA, Russia and China, USA, Sweden, Finland and Norway USA or Retrie and Yanmar Hungary and Patrick Stan again or only the USA. In other words, there are 38 countries here. Most of certainly the developed countries and a lot of the underdeveloped countries are members and we're supposed to cooperate with each other and figure out what's a good taxing scheme, et cetera. How many of them do not have a VAT value added tax? They all have some sort of a progressive income tax, somewhat of a regressive income tax I guess as well. We certainly have the sales tax. Some of the others might have something similar as well and that we'll just give it another 10 or 15 seconds. We're try to make this one short. How many do not have that? And then maybe you can figure out why when you hear the answer and I think we'll just go and give it another 10 seconds.

Irina Kimelfeld: Number of questions there. Kayla, on availability for QSBS exclusion in California. And I believe the answer to that is no,

Kayla Konovitch: No, no. California is one of the last hold out states and it's a significant state with a lot of venture and investors there, a lot of founders, but California does not allow the exclusion.

Murray Alter: Here we go. And the answer is only the USA does not have a vat. Every one of the other 38 countries do have a vat. Now the question is why doesn't the USA have a, the answer is because it is a consumption tax and we have 50 states and all 50 states have a sales tax. There is no national sales tax. There was talk about it at one point of creating a national sales tax, which would effectively be a vat, but that is our consumption tax and the others have a VAT instead of its sales tax. Jay, sorry to leave you with all.

Jay Bakst: Thank you Murray. I am going to share my screen right now. Let me see. Lemme know if you see it. Can you see my screen?

Astrid Garcia: Yes, now we can.

Jay Bakst: Okay, fine. So very quickly we are not going to have time to go through all of the slides, but on the subject of downward attribution, a 62nd introduction as to why it's relevant. Because when a US shareholder is invested in a foreign corporation, unlike a regular corporation whose earnings are not taxed to the US shareholder, if it's a foreign corporation that's owned more than 50% by US shareholders, each of whom own at least 10%, that is what's called A CFC, A controlled foreign corporation. And the US shareholder, 10% US shareholder has to take into account it's pro rata share of subpart income, guilty most kinds of income Now prior to the tax cuts and jobs. Now what do we mean when we say ownership? So there's basically what I think of two types of ownership. There's economic ownership, which is direct and indirect ownership. We all know what that means.

But in addition to that, there is something called constructive ownership, which means if you're a constructive owner, you don't really have an economic interest in it, but you're related to somebody else who does. And therefore, because of that relationship, we're going to treat it solely for purposes of determining CFC status control status. We're going to treat it as if you do and therefore you're going to become a US shareholder. That counts towards the more than 50% test. Now there's a form of constructive ownership called downward attribution. What does that mean? So in this example over here, which is the prototype example for what congress back in 2017 was concerned about, you have besides the 20% direct ownership that US sub has in the foreign subsidiary over here you have the 80% that's owned by the foreign parent. And downward attribution means that the US subsidiary is treated as though it owns the 80% the foreign parent does.

Somewhat counterintuitive. Prior to TCJA in 2017, it was section 9 58 before which prevented this downward attribution from a foreign person to a US person and therefore this foreign sub was not treated as A CFC because it was only 20% US ownership and they got out of so to speak, paying tax on sub income and guilty Congress perceived that this was not within public policy and therefore they simply repealed 9 58 before which had a terrible effect. I mean besides just addressing this particular scenario over here, it wound up killing a fly with a sledgehammer. We're going to see in the subsequent slides how it did that. So in a nutshell, in one line, what does this bill do? This new bill puts back 9 58 B four into the code saying in general, no downward attribution and creates new code. Section 9 51 cap B that says that if you're more than 50% shareholder, you shareholder with downward attribution, then we will subject you to all the rules of stuff that I think guilty.

That is in one short line what this bill does. Let's see some examples on how this really makes a difference. So in this scenario over here, and by the way, there are new terminologies over here. The more than 50% shareholder with down retribution is called a foreign controlled United States shareholder. And the foreign subsidiary, the foreign corporation itself is called a foreign controlled foreign corporation. So really no change practically in this scenario, but let's see where it does make a change. Okay, over here you have sister companies. So this foreign corporation is under current law TCJA controlled foreign corporation. Why? Because the ownership is downwardly attributed to the US person that is treated as owning a hundred percent of the subsidiary of the foreign corporation. And as a result, it doesn't really affect this guy over here because this guy is not an economic owner, will never take into account so income and guilty.

But the USPE fund up here that only owns 10% was caught into this unexpectedly and unintentionally. What this new bill does is saying that without more than 50% ownership, downward attribution will not apply. So therefore, even though technically this foreign subsidiary is going to be treated as a foreign controlled foreign corporation under new section 9 51 B as to only as to the US person over here, but it has no effect really because this US person over here has no economic interest and therefore will not pick up any separate, I think income guilty. Who doesn't make a difference for this USP fund up here that owns only 10%, this no longer will be treated as A CFC and therefore this USP fund up here will not be treated as a 10% US shareholder of a control foreign corporation. Finally, we come to here and we have one more example after this for a different twist, but this is a more simple example where you have a foreign corporation that is owned by these three US shareholders.

And remember we said that in order to be counted towards the more than 50% test, you have to own at least 10%. Well, this guy owns 9% and without downward attribution, this would not be a CFC with downward attribution. And how would that work? The 46% times 20%, which is approximately also 9% is attributed up and down here. And now if there is downward attribution further from a foreign person to a US person, then this US person now owns 18%. And what do you have? You have a CFC because now between these three guys, they own more than 50% and this becomes A C, FC. And these three guys have to take into account income and guilty. However, under the new code section 9 51 KB, it's only if with downward attribution you own more than 50%. Well, let's do the test over here. We said that 46% times 20% is about 9%.

It goes up to here. Down here. If you tack on 9% to any of these three guys, do you get to more than 50%? No, you do not. Therefore, not only is this foreign corporation no longer A CFC under the new bill, but it is also not a foreign controlled foreign corporation as to any of these three guys, the last example that's going to illustrate the point is going to be the exact same thing, except instead of this one, only 20% over here, this one owns 42%. Let's see how that looks. So over here again, you have 42%, 6%, 6%, and let's do the downward attribution model. Okay? 46% times 20% is 9%. If you're doing downward attribution, it comes up here. Down here. If you tack on 9% to 42%, what do you have more than 50%. Voila. Now, foreign corporation is a foreign controlled foreign corporation and this U-S-P-L-P-D is considered to be a foreign controlled viewer, shareholder under new section code section 9 51 KB.

And therefore this shareholder will have to take into account its pro ratta share of Subpart F income and guilty with respect to foreign corporation. However, these two guys over here that own each 6%, if you tack on the 9% through down attribution, it's still going to be only around 15% far short of the 50% that is needed in order to get up to make a difference and therefore they will not under this new bill B US shareholders that have to take into account annually their pro rata share of income and guilty. That is basically it. One last point as to when this is effective, it's generally effective beginning after December 31st, 2025. But there's a special rule in the bill that is worded very cryptically and it seems to suggest possibly that the Secretary of the Treasury, the IRS, might have the authority to set a different effective date for this. So we'll stay tuned to see what the IRS does or does not do with this. And now with that, I'm going to turn it back over to Astrid. Let me stop sharing my screen and back to you. Astrid.

^{Transcribed by Rev.com AI}