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ASA Opposes the Expansion of the Net Investment Income Tax (NIIT) Credit and Loss-Limitation Rules

ASA joined over 130 organizations in a letter to House and Senate Leadership opposing the expansion of the Net Investment Income Tax (NIIT) Credit and the loss-limitation rules.  These two tax increases being considered by Congress would fall entirely on small, individually, and family-owned, closely-held businesses.  More specifically, expanding the 3.8 percent NIIT to individuals and families who actively participate in their business, and by limiting the ability of small, individually, and family-owned businesses to fully deduct their losses during an economic downturn by expanding and extending the so-called “excess business loss limitation” for “noncorporate taxpayers” would increase revenues by more than $400 billion over ten years.

Per the letter, “while expanding the NIIT is sometimes characterized as closing a tax loophole and that it would increase Medicare funding, neither of these claims are true.  When the NIIT was created as part of the Affordable Care Act, it was meant to apply to investment income only.  The business income of small, individually, and family-owned firms where the owners ran the business was specifically exempted.  This exemption was intentional and in no way constitutes a loophole.  Moreover, the revenue raised by the NIIT does not fund Medicare.  As the NIIT initially was adopted as part of a reconciliation bill, attributing the funds of this new tax to the Hospital Insurance trust fund would have violated the Byrd Rule.  That is why the NIIT did not fund Medicare when it was adopted in 2010, and why attributing the revenues raised by its expansion to Medicare likely violates the Byrd Rule too.  Expanding the 3.8 percent NIIT represents nothing more than an eleven percent increase in the rates imposed on family-owned businesses.  Based on Treasury data, we estimate up to 1 million small and family-owned businesses, representing over half of all pass-through business activity, would be at risk of having their rates increased under this policy.  This small business tax hike would hurt the ability of businesses that survived the worst global pandemic in a century to remain viable in the coming months.”