On Tuesday, TSCPA’s Federal Tax Policy Committee issued a comments letter to the IRS on proposed regulations (REG-130507-11) regarding the taxation of net investment income (NII) under Internal Revenue Code section 1411. This section imposes a 3.8 percent Medicare contribution tax on certain NII for individuals, estates and trusts with income above certain statutory threshold amounts. For many closely held businesses, the proposed regulations do not adequately distinguish income from an owner's capital investment in a business from income for work performed by the owner for the business. This can result in the owner having to pay an extra 3.8 percent tax on some regular business income.
The committee expressed serious concerns with Treasury’s position that certain owners of LLPs and LLCs do not meet the material participation requirement for the purpose of calculating the NII tax. It also recommended that the regulations should provide de minimis exceptions for computing and reporting NII where portfolio assets are less than 10 percent of the fair market value of all assets; the fair market value of the portfolio assets is less than 110 percent of their tax basis; the partner/shareholder holds less than a 5-percent interest in the entity and the fair market value of such an interest is less than $50,000; the portfolio assets do not exceed a certain dollar amount (e.g., $50,000) of the value; or the taxpayer represents its MAGI will be less than the applicable threshold. Read the Letter.