On November 19, 2021, the House of Representatives passed the Build Back Better Act (“the bill”) and sent it to the Senate. The bill’s future is rather uncertain. Due to the 50-50 split in the Senate and Republican opposition, it will be necessary for the Democrats to use the budget reconciliation process to pass the bill. Even then, there is a lack of agreement within the Democrats on some of the more contentious issues, such as the State and Local Tax (SALT) deduction. Although there is related Congressional action that will need to be taken very soon – continuation of funding for the government and an increase in the debt ceiling – it may well be that any final legislation would not be passed and signed into law until just before their holiday recess. By way of comparison, the Tax Cuts and Jobs Act of 2017 was not passed by Congress until December 20th and signed into law on December 22nd and it might be expected the bill, if passed, will be on a similar schedule.
The bill has changed significantly since its first version, with spending now reduced to $1.75 trillion. The bill still has some of the social spending programs – such as universal preschool and some expansion of Medicare – and significant green energy initiatives. On the pay-for side, there are tax increases on high-income individuals and several changes to corporate and international tax provisions. However, the bill no longer carries the broader tax increases on domestic businesses and individuals it once did. To help taxpayers consider what the bill means for their taxes in the future, we are providing a summary of some of the key provisions as they stand today:
Business Tax Provisions
Corporate AMT – The most significant corporate provision in the bill is the return of a corporate alternative minimum tax (AMT) set at 15% tax on book profits for corporations with average annual book profit over $1 billion for the prior 3 years, effective for tax years beginning after 2022.
Interest Expense Limitations – A new limit on net interest expense deduction would be imposed for a “specified domestic corporation”, a domestic corporation within a multi-national group with consolidated financial statements and the domestic corporation has average net interest expense of more than $12 million over the prior three years.
Stock Buybacks – A new 1% excise tax on stock buybacks by publicly traded domestic corporations (or their majority-owned subsidiaries) effective for purchases after 2021.
Excess Business Losses – The bill would make permanent the Tax Cuts and Jobs Act’s limit on the amount of excess business losses that pass-through entities and sole proprietors can use to offset ordinary income. It also would create a new carryforward for unused excess business losses, rather than carrying them forward as net operating losses.
Other Business Provisions
- Losses on worthless securities or partnership interests treated as capital losses
- Modifications to calculation of gain on divisive corporate reorganizations
- Extension of the current expensing of research and experimental costs through 2025
- Appreciated digital assets (cryptocurrency) subject to constructive sale rules
- Limits on excessive compensation to the 8 highest-paid employees beginning in 2022
International Business Provisions
Several international tax provisions are in the bill including changes to the GILTI (global intangible low-taxed income) inclusion which is modified to apply on a country-by-country basis, reducing the GILTI deduction from 50% to 24.8%. Also included in the international changes is a reduction in the FDII (foreign-derived intangible income) deduction from 37.5% to 28.5% and an elimination of the current rule that requires excess GILTI and FDII deductions over taxable income to be excluded in calculating NOLs. The foreign tax credit calculation would be revised such that the limitation would be computed on a country-by-country basis
- Surtax on high-income individuals: An additional 5% surtax would be imposed on individuals with modified adjusted gross income over $10 million ($5 million for married filing separately) and an additional 3% would apply to incomes over $25 million ($12.5 million for married filing separately, both beginning in 2022.
- Net investment income tax of 3.8% expanded to include “specified income” from a trade or business for those making over $400,000, – regardless of whether they’re actively involved in the business. This effectively causes all income from pass-through entities to be subject to the 3.8% NIIT or the self-employment Medicare tax, also effective beginning in 2022
- The bill includes several limitations that will prevent high-income taxpayers with large retirement account balances from getting certain tax benefits. Beginning in 2029, this proposal would prohibit additional contributions to a Roth IRA or traditional IRA if a taxpayer’s income exceeds a specified threshold and the total value of their IRAs and defined contribution accounts as of the end of the prior year exceeds $10 million. The bill also imposes new mandatory distribution requirements on such taxpayers. Some retirement-related provisions would go into effect earlier, as soon as 2022 such as one that would restrict or possibly eliminate Roth conversions.
- AGI limitations will be imposed with respect to the exclusion for qualified small business stock gains (Section 1202 stock).
- There is a proposed increase in the SALT deduction cap from $10,000 to $80,000 ($40,000 for married filing separately). This would extend through 2031 after which time the limit would revert to the Tax Cuts and Jobs Act limit of $10,000. There have already been indications the Senate may have a different approach to the SALT limit.
- Other individual provisions include increases or modifications to the child tax credit, earned income tax credit, and health care credits.
Green Energy Provisions
- A multi-pronged expansion of the electric vehicle credit will now allow used cars and trucks to qualify for the credit, as well as qualified 2 or 3 wheeled electric vehicles, and will raise the tax credit for new cars and trucks to as much as $12,500. Of this, $500 is based on meeting the domestic content requirement of battery cells being manufactured in the US and $4,500 is based on the domestic assembly requirement of being assembled at a US factory operating under a union agreement. There is also a new credit for qualified commercial vehicles, for up to 30% of the basis.
- Other green initiatives include an extension of the credit for electricity produced from renewable resources, an extension of the energy investment credit, direct payment elections for several of the energy credits, credits for electric transmission property, zero-emissions facilities, zero-emissions nuclear facilities, modifications of the deduction for energy-efficient commercial buildings and several other extended or modified green energy credits.
IRS Enforcement Enhancements
A key “pay-for” in the bill is an additional appropriation of $80 billion to the IRS to increase enforcement and improve tax compliance. This will provide the IRS with more freedom to assess tax penalties, among other resources. The likely targets for increased IRS scrutiny are high-income individuals, businesses, and international companies. In the scoring of the bill by the Congressional Budget Office (CBO), additional revenues from IRS enforcement were not considered. There are varying views on how much additional revenue would be generated by such increased enforcement action which may be an issue for certain members of Congress who have expressed concern about increases in the deficit.
Provisions Not in the Bill
Earlier proposals included several items that are no longer part of the bill.
- Increase in corporate tax rate
- Increase in top individual income tax rates
- Increase in capital gains rate
- Estate tax provision changes including elimination of step-up in basis
- Increased holding period for carried interest
- Limitations on Qualified Business Income deduction
- Imposition of a “billionaire’s tax” on unrealized gains
- Requirement of banks to disclose bank account activity of more than $10,000 to the IRS
We Can Help
There is still quite a lot of uncertainty about the future of the Build Back Better Act. If you would like help in understanding how the tax provisions of the current bill may affect your or your business, please contact us.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.