During the evening hours of Nov. 5, 2021, the House passed The Infrastructure Investment and Jobs Act, more commonly referred to as the bipartisan infrastructure framework, or ‘BIF’. The $1.2 trillion legislation contains significant investment in infrastructure over the next five years and generally focuses on ‘hard infrastructure’ (e.g., roads, bridges, rail, airports, ports, waterways, etc.). While an important item for President Biden’s legislative record, this package does not contain broad income tax provisions – those are left for the Build Back Better Act, currently in negotiation in the House. However, the BIF provides substantial changes to the employee retention credit, an extension and modification of certain superfund excise taxes, increased information reporting for brokers and digital assets and modification of automatic extension of certain deadlines in the case of taxpayers affected by Federally declared disasters.
Changes to the employee retention credit
The legislation ends the employee retention credit (ERTC) early, changing the eligible wages to only those paid before Oct. 1, 2021 rather than Jan. 1 , 2022 as previously expanded in the American Rescue Plan Act. This change does not apply to recovery startup businesses. Many businesses were filing for this credit on quarterly Form 941, or retroactively on Form 941-X, and thus, will not be able to file for the fourth quarter. Those businesses that may have been holding payroll tax deposits in anticipation of fourth quarter credits should begin making deposits again immediately and stay tuned in case any relief is granted for deposits that were not made early in the quarter.
Extension and modification of certain superfund excise taxes
As part of this Act, superfund excise taxes imposed on chemicals and imported taxable products are set to be reinstated July 1, 2022 through Dec. 31, 2031.
Section 4661 imposes tax on the sale by the manufacturer, producer or importer of taxable chemicals. Section 4661(b) lists the almost three and a half dozen chemicals that this section imposes tax on. Included in the list of chemicals are products such as butane, methane, nickel, ammonia, chlorine, hydrochloric acid and sulfuric acid. Each listed chemical has its own tax rate. Under the new provisions of the Act, the tax rate per ton on chemicals is double what it was when the code section was active some 25 years ago.
Imported taxable substances sold or used by the importer are also subject to tax. Section 4672 provides an initial list of taxable substances. This list includes products such as styrene, nickel oxide, polypropylene, formaldehyde and acetone. Additionally, the IRS will publish a list of additional taxable substances where taxable chemicals constitute more than 20% of the weight (or more than 20% of the value) of the material used to produce the substance. Importers or exporters can file a petition with the IRS to add/remove substances from the published list.
The reinstated taxes will affect many industrial manufacturers of listed chemicals. Few taxpayers have existing processes for reporting and paying this tax in place as the tax has been dormant for more than two decades. Taxpayers should consult their tax advisors now to determine if this tax applies to them and how best to prepare for the reporting and payment obligations.
For companies purchasing taxable chemicals or imported taxable products, now is the time to budget for increased prices for these products as it is likely that suppliers will be increasing prices to reflect the reinstatement of these taxes.
Increased information reporting for brokers and digital assets
The BIF expanded and clarified information reporting for digital assets through three key amendments, one definitional and two operatives.
1. Definition of digital assets
The BIF introduces, for the first time in the Internal Revenue Code, a definition of digital assets. Digital assets are defined broadly as “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” This is more expansive than the current IRS definition of ‘virtual currency’ which is “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” With the growing use of distributed ledger technology, the new definition of digital asset may include a continually expanding basket of assets possibly including airline miles and loyalty points.
2. Addition of digital assets to broker reporting
The BIF modified section 6045 to clarify that brokers of digital assets, such as centralized exchanges and possibly DeFi platforms, will need to report trades to their customers on some sort of Form 1099. While it is likely that the barter provision under section 6045 already requires exchanges to report crypto trades, the BIF eliminates any confusion. The amendment operates as a delegation of authority to the Secretary to issue regulations. We expect these regulations to provide much more clarity and specificity around this reporting obligation.
3. Digital assets added to $10,000 cash reporting for businesses transactions
The BIF includes an amendment to treat a digital asset in the same way as cash payments under section 6050I. This means that a person engaging in a trade or business receiving a digital asset payment in excess of $10,000 must report the transaction on Form 8300. Given the decentralized and remote nature of digital asset transactions, as opposed to in person cash transfers, we expect future regulations to clarify the reporting requirements. It is important to note that this reporting obligation only applies to those receiving digital asset payments in the course of their trade or business.
Modification of automatic extension of certain deadlines in the case of taxpayers affected by Federally declared disasters
Under present law, a taxpayer is entitled to an automatic 60-day extension of time to undertake time-sensitive actions, provided the taxpayer is a qualified taxpayer and is within a qualified disaster area. The Act changes and clarifies this automatic extension of time and the certain taxpayer filing acts to which it applies. In addition, the Act provides a specific meaning of the term ‘disaster area’ and instructs taxpayers on how the 60-day extension applies when multiple disaster declarations are declared relating to a disaster area.