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Article | Tax alert

Continuing developments on tax provisions in the reconciliation bill

Negotiations on President Joe Biden’s Build Back Better (BBB) agenda have been heating up in recent days. There have been a multitude of proposed changes, as congressional Democrats work to craft a plan that satisfies not only Sens. Kyrsten Sinema of Arizona and Joe Manchin of West Virginia but the remainder of the Democratic caucus. With a 50-50 split in the Senate, every Democratic vote is needed to pass the BBB legislation, which can only succeed using the reconciliation process given there is no bipartisan support.

On the morning of Oct. 28, 2021, the White House released its framework for a $1.75 trillion BBB legislation, following weeks of intense negotiations. There is a sense of urgency for all Democrats to agree to the outline so the House can pass the bipartisan infrastructure bill (already passed in the Senate) as President Biden prepares to leave for the G-20 summit.

The BBB framework has not been agreed to by all House or Senate Democrats, and many House progressives are adamant they will not vote on the bipartisan infrastructure bill until both bills can be voted out of the House simultaneously. This proposal is not yet final and no legislative text has been released, so negotiations remain somewhat fluid.

Sen. Manchin’s primary concerns center around total spending costs, coming down significantly from the originally proposed $3.5 trillion framework, and narrowing provisions so the economy doesn’t overheat. Sen. Sinema opposes raising tax rates — both corporate and individual. We see these concerns reflected in the White House framework and expect, as details are finalized, these priorities will remain.

Below, we cover the tax proposals in the framework and the status of previously introduced provisions:

What is in the framework:

  • High-income surtax: Annual individual earnings above $10 million would have a new 5% surtax applied and earnings above $25 million would have an additional 3% surtax applied. Although uncertain, we believe this is regardless of the character of the income (it will also apply to capital gains).
  • Expansion of net investment income tax: Taxpayers with income over $400,000 ($500,000 if married filing jointly) would be subject to net investment income tax on income derived in the ordinary course of a trade or business, regardless of whether the taxpayer materially participates.
  • Corporate minimum tax: A 15% minimum tax would be imposed on corporations with average book earnings of more than $1 billion over a three-year period.
  • Surcharge on corporate buybacks: The framework calls for a 1% surcharge on corporate stock buybacks.
  • GILTI rates: The U.S., in accordance with an international agreement, would institute a 15% global minimum tax on foreign profits of U.S. corporations.
  • Excess business losses: The bill would make permanent the excess business loss limitation. We expect, as proposed in the House Ways and Means bill in September, carryforwards would be treated as a deduction attributable to trades or businesses of the taxpayer rather than the net operating loss, and thus subject to further testing in subsequent years.
  • IRS enforcement: Increased investment in the IRS aimed at hiring enforcement agents to pursue tax evasion from high-income taxpayers (those with income over $400,000) and overhauling dated technology are included in the framework.
  • Child tax credit: Democrats were hoping for a four-year extension of the expanded child tax credit; however, the proposal only includes a one-year extension. It does make the child tax credit permanently refundable.
  • Clean energy and electric vehicle tax credits: The framework includes tax credits for individuals and businesses to incentivize the transition to clean energy sources, to include credits up to $12,500 for purchases of domestically produced electric vehicles.
  • SALT cap repeal: This was not included in the framework, but House Speaker Nancy Pelosi has given assurances it will be in the final bill, though in its proposed form, and whether it will indeed be included in legislation is currently unknown.

Previous provisions not in the current framework:

  • Billionaire tax: On Oct. 27, 2021, Sen. Ron Wyden of Oregon proposed a “billionaire tax” that would effectively “mark to market” the securities of wealthy individuals and trusts each year. This proposal was immediately opposed by Sen. Manchin and 21 House Democrats and did not make it into the proposed framework.
  • Bank activity reporting: The BBB priority of requiring financial institutions to report bank activity to the IRS to aid in enforcement hit a roadblock with Sen. Manchin’s strong disapproval.
  • Individual rate increases: An individual rate increase to 39.6% and top capital gains rate increase to 25%, as proposed in the Ways and Means bill, are doubtful since Sen. Sinema opposes all such increases.
  • Corporate rate increase: Corporate rate increase to 26.5%, as proposed in the Ways and Means bill, is also not supported by Sen. Sinema.
  • Reduction in section 199A qualified business income deduction: Reducing the benefit of the 199A deduction, proposed in both the Biden administration’s Green Book and included in the House Ways and Means bill, did not make it into the framework. We expect the current section 199A deduction will remain intact until it sunsets, as previously planned, in 2026.
  • Changes to IRA rules: Proposed changes to large balance IRAs and the elimination of the back-door Roth IRA method for high-income taxpayers met resistance by Sen. Sinema.
  • Modification of carried interest rules: This revenue-raiser, moving the holding period of carried interests from 3 years to 5 years, did not garner enough Democratic support to be included.
  • Wyden’s partnership draft legislation: Wyden’s proposal, which would drastically alter the operation of partnership taxation, was not included in the framework or the House Ways and Means bill. While it remains a talking point, it doesn’t seem it will be included in any imminent legislation.
  • Elimination of estate step-up: A previous proposal to only allow $1 million per person (plus any primary home exemption) seems to lack support from rural congressional Democrats, including Sen. Jon Tester of Montana, and was not included in the White House proposal.
  • Decrease in the estate tax exemption: Reducing the estate exemption back to the 2010 level of $5 million indexed for inflation did not make it into the final framework despite being widely supported by Democrats.

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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