Tax Legislation on the Horizon in September Budget Resolution

Blog
September 17, 2021

The U.S. House Ways and Means Committee have completed a four-day mark up of crucial tax provisions to be included in “The Build Back Better Agenda” Act.

Earlier this year, the Biden Administration released its fiscal year 2022 proposed Budget accompanied by the “Greenbook” which outlined the proposed changes to federal tax laws and the potential revenue raising estimates. The budget included two sets of tax and revenue plans: The American Families plan and The American Jobs plan that would impact individuals and domestic and international businesses. These plans in addition to the recent tax bill proposed by the House Ways and Means Committee Chair Richard Neal represent a comprehensive agenda aimed to modernize the U.S. tax system, respond to global tax trends  and to revitalize U.S. businesses. Outlined below are the highlights of some of the proposed plans grouped into three categories Businesses, Individuals and International:

Businesses

  • Raising the federal statutory Corporate Tax rate from 21% to 26.5% for corporations with income in excess of $5 million. For corporations with income between $400,000 to $5 million a reduced tax rate of 21% and for corporations of income less than $400,000 a tax rate of 18%. Personal service corporations are ineligible for the graduated rates and will be taxed at 26.5%.
  • Expanding the Net Investment Income Tax (NIIT) 3.8% to include investment income derived in the ordinary course of a trade or business for single taxpayers with taxable income over $400,000 or $500,000 for married filing joint taxpayers, as well as trust and estates.
  • Eligible S corporations will be allowed to reorganize as partnerships without the reorganization triggering a deemed sale tax liability.  Allowed for limited two-year period beginning on December 31, 2021.

International

  • Raising the Global Intangible Low Tax Income (GILTI) rate from 10.5% to 16.5% calculated  on a country-by-country basis. In addition to reducing the exemption to not pay taxes on the first 5% of foreign qualified business asset investment (QBAI).
  • Reducing the deduction associated with the Foreign Derived Intangible Income (FDII), yielding an increase tax rate for U.S. corporations export income – from 13.125% to 20.7%.
  • Amending the Base Erosion and  Anti-abuse Tax (BEAT) rate to 10% for taxable years after December 31, 2021, and before January 1, 2024; 12.5% for taxable years  after Dec. 31 2023 and before January 1, 2026; and 15% for taxable year beginning after December 31, 2025.

Individuals

  • Increasing the individual top marginal tax rate to 39.6% to taxable income that exceeds $450,000 (for married filing joint taxpayers), or $400,000 (for single filers) and to estates and trust with taxable income exceeding $12,500.
  • Imposition of a 3% surcharge tax for married filing joint taxpayers with modified adjusted gross income over $5 million or $2.5 million for married filing separate taxpayers, effective beginning December 31, 2021. This result means a top marginal ordinary income tax rate of 46.4% [39.6%+3% surcharge+3%NIIT] and the long term capital gains tax rate to 31.8%
  • To make permanent the disallowance of excess business loss limitation on noncorporate taxpayers (IRC Section 461(I)) effective beginning December 31, 2021.
  • Increasing the Capital gains rate to 25% from 20% (plus 3.8% for NIIT). The introduction of a transition rule will provide for the 20% rate to be applied to gains and losses for the portion of the tax year prior to the date of introduction. For capital gains recognized after the introductory date but arising from a transaction entered into before the introductory date in accordance with a written contract will be treated as having occurred before the introductory date.
  • Extending the holding period for capital gains treatments for carried interest to receive long term capital gains treatment from three years to five years.
  • Termination of the estate and gift temporary increase from $10 million per person ($11 million in 2021 adjusted for inflation)  to  $5 million per person effective December 31, 2021.
  • Grantor trust to now be included in a decedent’s taxable estate  when the decedent is the deemed owner of the trust. This closes the loophole that allowed grantor trust to push assets out of their estate while controlling the trust.
  • Reducing the maximum deduction allowed under IRC section 199A to $500,000 for married filing joint tax returns; $400,000 for individual tax returns; $250,000 for married filing separate and $10,000 for estate or trust tax returns.
  • Elimination of the 75% and 100% Qualified Small Business Stock (QSBS) gains exclusion on the first $10 million. A 50% exclusion will now be allowed for taxpayers with adjusted gross income over $400,000 or for trust and estates. Effective  for sales and exchanges on or after September 13, 2021 pursuant to a written binding agreement in effect by September 12, 2021.
  • Elimination of the Roth to IRA conversion known as the “back-door” Roth strategy for married filing joint taxpayers with income exceeding $450,000 and married filing separate taxpayers with income exceeding $400,000. This legislation also applies to distributions, transfers and contributions made in taxable years beginning after December 31, 2031. Additionally, prohibit after tax IRA contributions and after tax contributions to qualified plans to be covered to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.

Next Steps

While the controversial topic of the State and Local Tax (SALT) deduction was not included in this mark up process, it is expected that lawmakers will add a provision to address a partial repeal or some amendment before a House floor vote. With the legislation now in the hands of the Budget Committee and with the Democrats using the reconciliation process – a procedure to pass the legislation without a Senate filibuster– it is only a matter of time before these proposals become law.

If you have concerns regarding these tax proposals, we encourage you to engage in proactive tax planning. To discuss how any of these potential tax law changes can affect you or your business, please contact an Aronson Tax Advisor.