On October 28, 2021 President Biden announced a new framework for his “Build Back Better” plan to provide more social and environmental programs and increase taxes to fund those programs. Since June, the tax proposals have changed dramatically. Here are some details of what is in and what is not in the tax proposals at this point.
Let’s start with what’s not in the proposed legislation
- No individual income tax rate increases.
- No capital gain rate increases.
- No corporate tax rate increase.
- No gift or estate tax provisions meaning the $11.7 million gift and estate tax exemption is not proposed to be cut in half in 2022 and no proposals to cause grantor trusts (such as Spousal Limited Access Trusts (SLATs, ILITs, GRATs, IDGT, QPRTs) to be subject to estate tax and no change to valuation discounts.
- No change to the 20% qualified business income deduction.
- No retirement plan and IRA rules to eliminate backdoor Roth conversions and limit those who can make Roth IRA conversions or the limitation on what an IRA can own and accelerated RMDs for IRAs over $10 million.
- No change to the $10,000 SALT deduction limitation although some are still interested in eliminating the $10,000 cap for two years.
- No new tax on billionaires’ unrealized capital gains and a plan to require banks to report annual account flows to the Internal Revenue Service.
The major tax provisions would raise money from large corporations and high-income households
- Subject pass-through income from S corporations, LLCs and partnerships to the 3.8% Medicare tax whether they participate or not for single persons with income over $400,000 and over $500,000 for joint filers.
- Extend for one year the current expanded Child Tax Credit for more than 35 million American households, with monthly payments for households earning up to $150,000 per year and make refundability of the Child Tax Credit permanent.
- The Section 1202 gain exclusion on the sale of eligible C corporation stock owned for more than 5 years would not apply to taxpayers with over $400,000 for sales on 9/13/2021.
- On individual income tax rates, the plan includes a 5% surtax on adjusted gross income above $10 million ($200,000 for estates and trusts) and an additional 3% on adjusted gross income above $25 million ($500,000 for estates and trusts). That would effectively raise the top tax rates on ordinary income and capital gains. Taxing adjusted gross income means that people affected by those surtaxes wouldn’t be able to deduct charitable contributions, mortgage interest and state and local taxes.
- Certain large corporation would be subject to 15% corporate minimum tax.
- U.S.-based multinational companies would face a different 15% minimum tax on their foreign income. They would pay at least 15% in each country in which they operate, as part of the U.S. participation in an international agreement.
- Corporate stock buybacks would face a new 1% excise tax.
- Democrats also plan to roughly double the size of the IRS with an eye toward tougher enforcement of tax laws.
Significant Changes to International Tax Provisions
Among others, some additional provisions of the Build Back Better Act, include the following:
- In certain instances, the deduction for interest paid or accrued in excess of the amount of interest income would not exceed 110% of such allowable excess.
- The Section 250 Foreign-Derived Intangible Income (FDII) 37.5% deduction would be reduced to 24.8% effective for years beginning after 12/31/2022. The Global Intangible Low-Taxed Income (GILTI) 50% deduction would be reduced to 28.5%.
- The FDII deduction would be allowed in determining NOL deduction.
- The 1 year carryback of the foreign tax credit would no longer be allowed..
- The foreign tax credit carryforward would temporarily be limited to 5 years instead of 10 years for taxes paid or accrued. The temporary 5-year carryforward will also apply to GILTI related taxes paid or accrued during any taxable year beginning after 12/31/2022 and before 1/1/2031.
- For purposes of Section 951A, the excess of the net Controlled Foreign Corporation (CFC) tested loss would be carried forward to the succeeding taxable year. These carryforwards would also be subject to the Section 382 limitation.
- The Net Deemed Tangible Income Return for GILTI would be reduced to 5% from 10%.
- The allowable deemed paid credit for taxes properly attributable to tested income would be increased to 95% from 80%, and 100% of tested foreign income taxes paid or accrued to a possession of the US.
The legislative process is not over, so there will likely be further developments and changes. We will continue to provide updates as the legislative process continues to unfold.