December 2020 / United States

The US Congress has passed ground-breaking legislation aimed at ending the practice of using anonymous shell companies to engage in money laundering and to hide income from tax authorities. Through an unusual parliamentary manoeuvre, Congress included the legislation in a must-pass bill that funds the Department of Defense for fiscal year 2021. (H.R. 6395).

US Representative Carolyn B. Maloney (D-NY) introduced the legislation, known as the National Defense Authorization Act, which includes the ban on anonymous shell companies – a provision she has championed since 2009. According to the text of the legislation, the anti-money-laundering rules will "discourage the use of shell corporations as a tool to disguise and move illicit funds" by establishing beneficial ownership reporting requirements (Division F section 6002(5)(B) of H.R. 6395). If enacted, the reporting requirements will apply to all US corporations and limited liability companies, and will mandate disclosure of an entity's true owner(s) to the US Treasury Department.

In years past, the shell company ban languished in Congress, without gaining majority support. But this year Congress tacked the beneficial ownership rules onto the annual defence bill in what is called the Corporate Transparency Act (Title LXIV of H.R. 6395). Under current law, most US states do not require the full disclosure of an entity's true owner(s), which has allowed for the increased use of anonymous shell companies for illegitimate activities. The proposed anti-money-laundering rules will ultimately eliminate that practice in those states and, as a result, reduce the ability of criminals to disguise illegally obtained funds as legitimate income. The bill will also increase coordination and information sharing among federal agencies tasked with administering the United States' anti-money-laundering laws.

For a number of reasons the bill gained bipartisan support, passing both chambers of Congress (the House of Representatives and the Senate) with veto-proof margins. The bill is now on its way to President Trump's desk to be signed into law. If the President vetoes the bill, as he has publicly threatened, Congress can override the veto by a two-thirds majority vote in each chamber.

On 28 December 2020, the US House of Representatives passed a bill (H.R. 9501) to increase the second round of coronavirus-related economic impact payments from USD 600 to USD 2,000 for individuals. The bill is entitled the "Caring for Americans with Supplemental Help Act of 2020" or the "CASH Act of 2020".

This second round of the economic impact payments (EIPs) was authorized under the COVID-related Tax Relief Act of 2020, which President Trump signed into law on 27 December 2020 as part of the Consolidated Appropriations Act, 2021 (H.R. 133).

The bill, if passed by the Senate and signed into law by the President, would allow the EIPs of up to USD 2,000 (up from USD 600) for individuals, or USD 4,000 (up from USD 1,200) for married couples filing a joint return, and up to USD 2,000 (up from USD 600) for each qualifying child.

The Chairman of the House Ways and Means Committee announced the passage of the bill through the House in a Statement of 28 December 2020. The Chairman also issued a statement of 29 December 2020 urging the Senate to conduct a standalone vote on the bill after Senate Majority Leader Mitch McConnell introduced different legislation that combines the increased EIPs with provisions regarding the freedom of speech on the Internet and election integrity.

The Treasury Department (Treasury) and the Internal Revenue Service (IRS) issued a News Release of 29 December 2020 (IR-2020-480) to announce that the second round of EIPs began to be issued on 29 December 2020 and that any additional amounts will be paid as quickly as possible.

The News Release of 29 December 2020 further states that the EIPs referred to as the recovery rebate credit (RRC) will appear on IRS Form 1040 (US Individual Income Tax Return) or IRS Form 1040-SR (US Tax Return for Seniors) for the 2020 taxable year because the EIPs are an advance payment of the recovery rebate credit. Taxpayers who did not receive the economic impact payments in 2020 are urged to review the eligibility criteria when they file their 2020 tax returns.

On 27 December 2020, President Trump signed into law the legislative package, including coronavirus-related tax relief and economic stimulus, and extensions of tax and health care policies, as well as to keep the government funded for the fiscal year ending 30 September 2021.

The omnibus legislative package (H.R. 133) is entitled the "Consolidated Appropriations Act, 2021" (the Act). The Act contains the 12 regular appropriations (i.e. government funding) acts for fiscal year 2021, coronavirus relief provisions, and other matters including tax extension provisions.

The US Senate and House of Representatives had passed the legislation on 21 December 2020.

The coronavirus relief provisions include the following tax relief:

• a refundable tax credit in the amount of USD 600 per eligible family member;
• the extension of the repayment period for deferred withholding of employees' share of social security taxes or the railroad retirement tax equivalent from the original period of 1 January 2021 through 30 April 2021 to the new period of 1 January 2021 through 31 December 2021;
• the treatment of personal protective equipment and other supplies used to prevent the spread of Covid-19 as eligible expenses for the educator expense deduction;
• the exclusion from gross income for a forgiven Paycheck Protection Program (PPP) loan;
• the deductibility for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven;
• the exclusion from gross income of college and university students for certain emergency financial aid grants under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act);
• the exclusion from gross income for forgiveness of certain loans, emergency Economic Injury Disaster Loan (EIDL) grants, and certain loan repayment assistance under the CARES Act, without reducing tax basis and other attributes; and
• the deductibility for otherwise deductible expenses paid with the proceeds of the above-mentioned loans and grants that are forgiven.

The tax extension provisions include the following tax relief:

• the permanent extensions of:
  • the deduction for energy efficiency improvements to commercial buildings;
  • the exclusions for qualified state or local tax benefits and qualified reimbursement payments provided to firefighters and emergency medical responders;
  • the credit for qualified railroad track maintenance in the amount equal to 50% of maintenance expenditures prior to 1 January 2023, and 40% thereafter; and
  • the reduction of certain excise taxes and simplified record-keeping requirements related to the taxation of beer, wine and distilled spirits;
• the extensions through 2025 of:
  • the look-through treatment for payments of dividends, interest, rents and royalties between related controlled foreign corporations (CFCs);
  • annual USD 5 billion allocations of the New Markets Tax Credit;
  • an elective general business credit to employers hiring members of ten targeted groups under the Work Opportunity Tax Credit (WOTC) program;
  • the exclusion from gross income of up to USD 750,000 for a discharge of indebtedness incurred for acquisition, construction or substantial improvement of primary residence;
  • the deduction of up to USD 15 million (USD 20 million for certain areas) in the aggregate cost for qualified film, television and theatrical productions;
  • the excise tax of USD 0.09 per barrel on crude oil received at a refinery and petroleum products entered into the United States which is deposited into the Oil Spill Liability Trust Fund;
  • tax benefits for certain businesses and employers operating in empowerment zones; and
  • the employer credit as an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave;
• the extensions through 2021 of:
  • the production tax credits for renewable power facilities beginning construction by the end of 2021;
  • the treatment of qualified mortgage insurance premiums as interest for the mortgage interest deduction;
  • the credit of up to USD 2,000 for qualified new energy efficient homes; and
  • the USD 0.50-per-gallon excise-tax credit for alternative fuel and USD 0.50-per-gallon credit for alternative fuel mixtures;
• a 100% deduction for business meal food and beverage expenses incurred in 2021 and 2022; and
• the use of 2019 earned income in determining the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) in 2020.

The Chairman of the Senate Finance Committee issued a Statement dated 21 December 2020, which included section-by-section summaries of the COVID-related tax relief policies and the tax extension provisions.

The House Committee on Appropriations issued a Press Release dated 21 December 2020, which included division-by-division summaries of the coronavirus relief provisions and the authorizing matters, as well as one-page fact sheets on the coronavirus relief provisions and the authorizing matters.

The Treasury Department issued a Statement dated 22 December 2020.

The White House issued a Bill Announcement dated 27 December 2020 and a Statement dated the same.

The Congressional Research Service (CRS) of the US Library of Congress has released a report to provide an overview of the general tax treatment of corporate and pass-through businesses. The CRS report is entitled "A Brief Overview of Business Types and Their Tax Treatment."

The income of subchapter C corporations, also known as regular corporations, is taxed once at the corporate level according to the corporate tax system, and then a second time at the individual shareholder level according to the individual tax rates when dividends are paid or capital gains are recognized.

Businesses that choose any other form of organization are, in general, not subject to the corporate income tax. Instead, the income of such businesses passes through to their owners and is taxed according to the individual income tax rates. Such pass-through businesses include sole proprietorships, partnerships, subchapter S corporations, and limited liability companies (LLCs).

The CRS report is dated 9 December 2020 and is designated R43104 (Version 8).

Note: The CRS is an agency within the US Library of Congress and serves the US Congress throughout the legislative process by providing legislative research and analysis for an informed national legislature.