Carta Policy: Weekly Brief for April 15

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TL;DR

  • Congress is on a two-week recess; upon return, they’ll focus on competitiveness legislation, Federal Reserve nominations, and BBB 2.0.
  • It’s tax time: We take a deeper dive into the employee retention credit and deductibility of retirement plans, work opportunity, and capital investment.
  • Treasury signals perspective on tax reporting for digital asset lending & OCC Chair advocates for stablecoin issuance to be tethered to a standalone bank-chartered entity.
  • Inflation hit 8.5 percent in the United States last month, the fastest 12-month pace since 1981

Macro matters

Congressional agenda

Congressional policymakers are home for the Easter recess. When they return, Congress will begin the legislative conference on the America COMPETES Act to resolve differences and pass the competitiveness bill sometime in June. Carta remains focused on removing the provision that would direct the SEC to rewrite regulations around raising capital in private markets under certain exempt offerings. The Senate will push forward on nominations, including those to the Federal Reserve Board. And Senate Democrats will revive Build Back Better 2.0 conversations, which will heat up this summer; qualified small business stock (QSBS) remains in jeopardy, and we remain engaged. 

Capital markets

Gensler doubles down on climate proposal

In a speech this week, SEC Chair Gary Gensler defended the SEC’s controversial climate change proposal, noting it follows a long tradition of disclosures and reflects the fact that most companies are publishing sustainability reports. At a high level, the SEC’s proposal, which is intended to bring comparability and consistency to climate disclosures, would require public companies to disclose how climate risks impact their business; report on climate-related targets and goals; and disclose greenhouse gas (GHG) emissions, including indirect emissions generated by suppliers and customers (Scope 3) if they are material or the company has set a GHG target or goal. The SEC did not affirmatively mandate climate disclosures for private companies, though there could be knock-on effects from public companies requiring more climate information from their private business partners in their value chains, and from institutional investors increasingly demanding more climate information to inform capital allocation decisions. 

While many have criticized the proposal as overly burdensome and beyond the SEC’s jurisdiction, others have expressed concerns that Scope 3 disclosure provisions could have a chilling effect on climate disclosures. Under the proposal, companies that have set Scope 3 emissions targets would be required to disclose indirect emissions, which could incentivize companies to not set goals or make those commitments. Gensler encouraged public comment on the proposal, which closes on May 20, 2022.  

Crypto & digital assets

Treasury’s digital asset plan

The Treasury Department published its “General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals” (known as the “Green Book”), providing details of tax proposals included in the President’s latest budget submission to Congress, many of which may affect high-income individual taxpayers and asset managers. One proposal would allow the Treasury to determine when digital assets are actively traded versus lent with the expectation of return, and to extend the tax treatment of nonrecognition of gains or losses to digital assets that are not actively traded. This is an administration proposal, not a law—but it signals the administration’s current thinking for tax reporting on digital assets. 

DTCC developing CBDC prototype

The Depository Trust & Clearing Corporation (DTCC) announced it is developing a prototype for how a central bank digital currency (CBDC) will function with respect to securities trading and settlement. DTCC notes the model will assess how a CBDC could enable atomic settlement, a conditional settlement that occurs if delivery and payment are both received at the same time. Proponents of CBDCs suggest their benefits could include reduced counterparty risk and trapped liquidity, increased capital efficiency, and added transparency for regulators.

Hsu supports bank-like regulation of  stablecoins

Acting Comptroller of the Currency Michael Hsu discussed stablecoin policy considerations, calling for the establishment of an “intentional architecture” for stablecoins developed along the principles of “stability, interoperability and separability.” Hsu proposed a regulatory approach for stablecoins comparable to bank regulation as opposed to regulating stablecoins like money market funds. He advocated that stablecoin issuance be conducted in a standalone bank-chartered entity separated from other insured depository institution subsidiaries to further mitigate risk. 

Banking & financial products

Biden to nominate Michael Barr for Fed regulatory role

President Biden plans to nominate Michael Barr to serve as the Federal Reserve’s Vice Chair of Supervision, the role that sets the Fed’s regulatory agenda. Barr is currently the dean of the University of Michigan’s public policy school and previously served as assistant treasury secretary during the Obama administration, where he helped craft the 2010 Dodd-Frank Act. Barr’s previous work with financial technology firms Ripple Labs and Lending Club, as well as related thought leadership, signal he understands the positives of fintech innovation around financial inclusion, the prevention of money laundering, and improving the payments infrastructure. That said, progressive Democrats have previously voiced concerns about his closeness to the fintech industry, so if he is confirmed, expect him to be responsive to their issues.

Antitrust, privacy, and technology

Khan outlines FTC’s approach to privacy

During a speech at the IAPP Global Privacy Summit, FTC Chair Lina Khan outlined the FTC’s plans to use its “scarce” resources to address privacy risks and rein in what she called “surveillance-based business models.” Khan said the FTC intends to focus on businesses that “cause widespread harm” and examine conduct by “dominant firms” as well as “dominant intermediaries.” She noted the FTC is also developing remedies that deprive violators of the “fruits of their misconduct,” through the deletion of unlawfully acquired data and destruction of algorithms that had relied on such data. Notably Khan indicated that FTC is exploring substantive limits and bans on certain types of data processing for both the FTC’s forthcoming privacy and data security rulemaking and in future settlements.

Tax

It’s tax time. Below are a few considerations that may help businesses and startups lower their tax burdens this filing season as well as in the coming year, with more details to follow in our upcoming tax blogs.

Recovery startup businesses may still claim up to $100,000 of employee retention credit (ERC)

While most employers are no longer eligible to receive the ERC for Q4 of 2021, recovery startup businesses may be eligible to receive a maximum credit of $50,000 for Q3 and Q4 of 2021. The ERC provides a refundable employment tax credit to help businesses with the cost of keeping staff employed. 

A “recovery startup business” is any employer that began after February 15, 2020, and had an average of $1 million or less in gross receipts. The IRS provides that “a recovery startup business can still claim the ERC for wages paid after June 30, 2021, and before January 1, 2022.” They can also still claim the ERC for prior quarters by filing an adjusted employment tax return.

What small businesses should consider for 2022

Small business retirement plans:

If your business implements a new 401(k) plan, the retirement plans startup tax credit under the SECURE Act may entitle you to claim a tax credit up to $5,000 for the next three years. Small businesses can also receive an additional $500 tax credit, for three years, by adding an automatic enrollment feature to a new or existing 401(k) plan.

Matching contributions for employees are 100 percent tax deductible for employers, up to the annual corporate tax deduction limit on all employer contributions (25% of covered payroll). Additionally for business owners, contributions to your own 401(k) plan are deductible for the year you contribute to the plan. Both employee and employer contributions for tax year 2021 can be made in 2022 up until the tax return deadline, including extensions.

Work opportunity tax credit (WOTC):

Many workers are only now returning to full employment. Eligible employers may claim up to $9,600 for each qualified employee under the WOTC program. This credit is available to employers who hire and pay wages to  employees who begin work on or before December 31, 2025, and are a member of a targeted group under section 51—for example, individuals who are leaving the military, coming off welfare, or who have been unemployed for more than six months. The WOTC is eligible to employers of all sizes, including both taxable and certain tax-exempt employers.

Capital investments:

For 2022, most small businesses can deduct up to $1.08 million under the section 179 expense deduction when investing in equipment for business use, including technology, machinery, furniture, and vehicles. Section 179 allows businesses to take an immediate deduction for expenses related to certain depreciable assets, allowing businesses to lower their current year tax liability rather than capitalizing an asset and depreciating it over the useful life of the asset in future tax years. As an added incentive, the full deduction applies to equipment purchases that are financed, with the requirement that assets are put into service by year end.

Upcoming events

Notable SEC proposed rules and comment deadlines

Reg ATS

Private fund advisers

Short sale disclsoure 

Cybersecurity risk disclosure (public companies)

Climate-related disclosures

SPAC reform

4/18/2022

4/25/2022

4/26/2022

5/9/2022

5/20/2022*

5/31/2022*

*60-day comment period after publication on SEC website or 30 days after publication in Federal Register, whichever is longer.

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DISCLOSURE: This publication contains general information only and eShares, Inc. dba Carta, Inc. (“Carta”) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services.  This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.  Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.  This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security.  Carta does not assume any liability for reliance on the information provided herein.
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