request, which formalizes its legislative agenda for the fiscal year. At the same time, Treasury released its related Green Book
, describing the President’s proposed budget changes and revenue estimates that are projected to bring in $3.6T over a decade and offset proposed spending.
Many pieces of the President’s Building Back Better plan have previously been discussed in outlines of the American Jobs Plan and American Families Plan, which aim to enhance infrastructure, boost IRS funding, and support low to middle-income earners, but we now have greater detail and proposed effective dates. While a majority of the tax changes would become effective in 2022, the President has proposed retroactively increasing the capital gains rate to either late April or May of 2021.
While reviewing these proposed changes, it’s important to remember that while they hold significance as the current administration’s agenda, tweaks are expected and some or all of this may not come to fruition. The President’s proposal is likely a starting point for negotiations with Congress, who is tasked with drafting and passing any related legislation before these ideas become reality.
Below are tax-related highlights from the President’s proposed plan:
- The corporate tax rate was lowered in 2018 from a top graduated rate of 35%, to a flat 21%. President Biden proposes to increase the flat rate to 28% for years beginning after December 31, 2021. Fiscal filers would have a pro rata approach to incorporate the higher rate for 2022 periods.
- A new minimum tax would be introduced as an attempt to reduce disparity between financial statement income and taxable income. Beginning for taxable years after December 31, 2021, corporations with worldwide book income in excess of $2B, a 15% minimum tax would apply to pre-tax book income, less book net operating losses, general business credits, and foreign tax credits. A book tax credit would be available in future years against regular tax, but not below the book tentative minimum tax in that year.
- Many tax credits and deductions for the fossil fuel industry would come to an end, mostly after December 31, 2021, and a host of green energy credits would be introduced or extended.
- A new general business credit equal to 10% of expenses paid to bring jobs and investments back to the U.S. if previously sent offshore.
- Deductions for expenses paid in connection with offshoring a U.S. business will be disallowed.
- The “global intangible low-taxed income” (GILTI) calculation would be altered by eliminating the “qualified business asset investment” (QBAI) exemption, doubling the GILTI tax rate from 10.5% to 21%, repealing the subpart F income high-tax exemption, and implementing a country-by-country calculation.
- Repealing the “foreign-derived intangible income” (FDII) deduction for businesses and instead enhancing R&D incentives (not specified how this would be accomplished).
- Replacing the “base erosion anti-abuse tax” (BEAT), that applied to certain corporations with greater than $500M in receipts, with “stopping harmful inversions and ending low-tax developments” (SHIELD). SHIELD would disallow deductions for payments to foreign related parties in a low-tax country and become effective for tax years beginning on or after January 1, 2023.
- Further interest expense deduction limitations on multinational groups.
- Long-term capital gains and qualified dividends would be taxed at ordinary income tax rates for those with taxable income over $1M. This change is being proposed to be retroactive to the date it was “announced,” which is presumably April 28, 2021, the date the American Families Act was introduced by the President.
- A top individual tax rate increase from 37% to 39.6% would take effect in 2022 for those with taxable income that is greater than $452,700 for single filers, or $509,300 for those married filing joint (indexed annually for inflation).
- Gains from like-kind exchanges in excess of $500,000, or $1M for those married filing joint, would be taxable in the year of the exchange beginning after December 31, 2021.
- Unrealized capital gains at the time of death or upon the making of a gift would be taxed, with exceptions for donations, spousal transfers, and family-owned and operated businesses. Each taxpayer would receive a $1M lifetime exemption.
- Fund managers with taxable income over $400,000 would see an end of the carried interest tax break that treats related income as capital gains and instead subject the income to ordinary rates and self-employment tax.
- S corporation members and limited partners of a partnership who materially participate and have AGI in excess of $400,000 would be subject to 3.8% of tax on passthrough income via changes to either the net investment income tax (NIIT) or employment taxes.
- The excess business loss limitation for noncorporate taxpayers would be made permanent, rather than expire after December 31, 2026.
- Child tax credits, the premium tax credit, and the earned income tax credit that were enhanced for 2021 as a measure to combat COVID would be extended or made permanent.
The 20% passthrough business deduction would remain in effect until its slated demise at the end of 2025, along with the $10,000 state and local tax (SALT) itemized deduction cap, and several other sun-setting provisions from the Tax Cuts and Jobs Act. However, it’s reported these may be addressed in the future.
Congress has begun reviewing President Biden’s plan and will continue the process of producing passable legislation, which with this large of an agenda is no small feat. Negotiations from all angles will undoubtedly continue and as previously mentioned, changes are expected before a final bill is formed. We will keep you informed as notable developments occur.
Please contact your RubinBrown representative with any related question or concerns.
By: Tony Nitti, CPA, MST
By: Amie Kuntz, CPA, MA
Readers should not act upon information presented without individual professional consultation.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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