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Article | Tax alert

Are tax bills on the horizon?

As we head toward midterm elections, congressional Democratic leaders have indicated they only have until the end of June to enact any tax legislation before November. At this time, two possible paths to legislation are on the horizon. While neither is assured to become law, the following considerations should be on your radar.

Semiconductor legislation

The House and Senate have each passed separate pieces of legislation intended to revitalize the U.S. semiconductor industry. Both House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer have said they want to move this legislation during the five-week work period between April 24 and May 27. This will involve setting up a large conference committee to work out the differences between each chamber’s version. This legislation is generally bipartisan and congressional leadership is expected to allow few tax provisions, if any, to be attached.

Tax provisions with a chance of being included in this legislation are:

  • A 25% advanced manufacturing investment tax credit for semiconductor facilities and equipment
  • Full research and development expensing restored, eliminating the amortization provision that went into effect in 2022
  • Retirement provisions of the Securing a Strong Retirement Act of 2022 (SECURE 2.0) may be included. For more, see our recent alert.

Restructured Build Back Better Act

The BBB legislation imploded in late December when Democratic Sen. Joe Manchin of West Virginia refused to support it. In recent months, informal discussions have been conducted to explore ways to revive the more widely supported elements of the original package. Conversations have centered around lowering prescription drug prices and energy provisions, with possible corporate and individual rate increases to pay for the new programs and reduce the federal deficit. Sen. Manchin is likely to require that half of any new revenues raised under the bill go toward deficit reduction, greatly reducing the spending provisions contained in the original BBB. At this point, conversations have not advanced to formal talks.

While passage of a restructured BBB bill is far from certain, let alone knowing which provisions would ultimately be included, the following are relevant tax proposals you should be aware of:

  • Possible rate increases include a corporate income tax rate increase to 25% (up from 21%) and individual capital gains rate increase to 28% (up from 20%). Democratic Sen. Kyrsten Sinema of Arizona appears to remain unwilling to support rate increases. In 2021, she was opposed to raising ordinary rates, which led to surtaxes in the original BBB proposals.
  • Surcharge provisions in the original BBB were directed toward high-income individuals, estates and trusts. If Sen. Sinema continues objecting to ordinary rate increases, some or all of these could be included in the final package:
    A new 5% surcharge on modified adjusted gross income (MAGI) in excess of $10 million ($5 million for married filing separately) and an additional 3% surcharge on MAGI in excess of $25 million ($12.5 million for married filing separately). For purposes of these surcharges, MAGI equals adjusted gross income (AGI) reduced by investment or business interest expense. Since the section 199A qualified business income does not factor into AGI, it appears these surcharges will apply to income before this deduction. These surcharges apply to all types of income, including long-term capital gains and qualified dividends taxed at preferential rates.
    - The surcharge is also assessed on trusts and estates, with the 5% surcharge on MAGI in excess of $200,000 and the additional 3% on MAGI in excess of $500,000. Estates and trusts will continue to compute AGI as per current law.
    - The 5% and 3% would be in addition to any applicable 3.8% net investment income tax, the 0.9% additional Medicare tax as well as the Medicare tax on earnings.
  • Other revenue raisers: Included in the BBB were several provisions that would increase tax revenue via changes to rates other than the ordinary income tax rate. Some or all could appear in a restructured BBB legislation. Ones to watch include:
    Creation of a corporate alternative minimum tax of 15% on the adjusted financial statement income of large corporations
    Creation of a corporate stock repurchase excise tax of 1% on the value of any stock repurchased
    Modification of business interest expense limitation for partnerships and S corporations
    Limitation of the exclusion of gain from the sale of small business stock
    Expansion of the net investment income tax to include income derived in the ordinary course of a trade or business regardless of taxpayer participation
    Changes to the limitation of business loss cap — making the cap permanent and subjecting carryovers to further testing in subsequent years
    Changes to the treatment of worthless securities
    Modification of the wash sale rules to include digital assets and extending the application to related parties
  • Energy provisions: The BBB contained a myriad of climate and energy provisions totaling $555 billion. A majority were tax credits to increase investment in renewable energy sources like wind, solar and nuclear power. The bill also contained an enhanced credit for qualified plug-in electric vehicles, allowing credits of up to $12,500.
  • Expanded child tax credit: It is likely progressive Democrats will push for an expanded and refundable amount of the tax credit ($3,600 in 2021 as compared to $2,000 in 2022). However, there are concerns about the cost to sustain this credit level and some senators want to add a work requirement. Sen. Manchin has expressed his desire to maintain the lower credit amount.
  • SALT cap: The BBB previously proposed modifying the state and local tax (SALT) cap. Introduced in the Tax Cuts and Jobs Act (TCJA) and currently set to expire after 2025, the SALT cap limits individuals to $10,000 of SALT-itemized deductions ($5,000 for married taxpayers filing separately). Members from states with higher income tax rates are likely to push to either repeal or modify the cap. The BBB proposal would have increased the SALT cap to $80,000 per taxpayer ($40,000 for married filing separately) and kept this the cap limit in place through 2030.

Enactment prospects

Due to the slim Democratic majority in the House and the 50-50 split in the Senate, passage of any bill is far from certain. We believe the greatest chance of passage lies with the semiconductor legislation where there is bipartisan desire to incentivize U.S. manufacturing in this area. It remains unclear which tax provisions would ultimately be attached.

Any additional tax bill would likely need to be included in budget reconciliation in order to avoid the Senate filibuster rules. While chances of a compromise among Democrats between now and the end of June may not be good, taxpayers should monitor the above provisions just in case a bill gains traction before Congress recesses for the summer and election season gets into full swing.

Please reach out to your Baker Tilly advisor if you have questions regarding your tax position. We will continue to monitor developments on the Hill and issue additional alerts as warranted.

We encourage you to connect with your Baker Tilly advisor regarding how any of the above may affect your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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