The “Green Book” Explanation of Tax Proposals for 2023 U.S. Budget

Blog
April 5, 2022

Every year as part of the Fiscal Year Budget process, the U.S. Treasury department releases the ‘General Explanations of the Administration’s Fiscal Year Revenue Proposals’ also known as the ‘Green Book’. The Green Book is critical as it explains the proposed tax legislations and provides policy rationale behind the proposals, and revenue projections.

The 2023 Green Book was released on March 28, 2022. While the fate of these proposals depends on support to pass the bill in the Senate, it has the potential to reshape economic recovery in a time of high inflation. Below are the highlights from the proposed plans in the FY2023 Budget:

Business

  • Raising the Corporate Tax rate for C Corporation from 21% to 28% thereby also increasing the Global Intangible Low-Tax Income rate to 20% from 10.5%.
  • Reducing a partner’s ability to shift partnership basis between related parties under IRC section 754 by introducing a matching rule eliminating the stepped-up basis between related parties.
  • Conforming the “control test” under IRC section 368(c) [80% ownership of voting and nonvoting stock] with the “affiliation test” under IRC section 1504(a)(2) [80% ownership of voting and 80% value of total stock]. The new control test would align with the affiliation test.

International Tax Reform

  • Repealing the Base Erosion Anti-Abuse Tax (BEAT) and replacing it with the Undertaxed Profits Rules (UTPR). The UTPR is a new international tax agreement to ensure multinational companies with global revenue over $850 million are subject to a minimum rate of tax regardless of where income is earned.
  • Introducing a new business credit of 10% of expenses paid or incurred in connection with onshoring a U.S. trade or business to incentivize businesses to bring offshore jobs and investments back into the U.S.
  • Modifying IRC section 1295(b)(2) to allow taxpayers to make a retroactive Qualified Election Fund (QEF) election with respect to Passive Foreign Investment Companies (PFICs) without requesting consent from the Commissioner of the Internal Revenue Service.

Individual Taxation

  • Increasing the individual top marginal tax rate to 39.6% for taxable income that exceeds $450,000 (for married filing joint taxpayers), $400,000 (for single filers), $425,000 (for head of household filers) and $225,000 (for married filing separate filers).
  • Increasing the long-term capital gains and qualified dividends rate for individual taxpayers with over $1 million to be taxed at ordinary income rates, with 37% being the top rate.
  • Donors or deceased owners of appreciated assets will now realize capital gains at the time of transfer of the appreciated asset.
  • Extending the three-year statute of limitation to six years under IRC section 6501, if a taxpayer omits over $100 million of gross income on a tax return.
  • Imposition of a minimum 20% tax on total income (including realized or unrealized capital gain) for taxpayers with wealth over $100 million. 
  • Taxing a partner’s share of income on an “investment services partnership interest” (ISPI), as ordinary income if it exceeds $400,000, regardless of the character of the income.
  • Allowing the deferral of gain up in aggregate of $500,000 per taxpayer for real property in like-kind exchanges. Amounts over $500,000 (or $1 million for married taxpayers) would be recognized in the year of the exchange.
  • Any gain of IRC section 1250 property held for more than a year will be treated as ordinary gain for non-corporate taxpayers with adjusted gross income (AGI) over $400,00.

New Digital Tax

  • Requiring new reporting of accounts holding digital assets held by foreign digital asset exchange or foreign digital provider of assets exceeding $50,000. [Form 8938]
  • Requiring certain financial institutions to report account balances for all financial accounts in the U.S. owned by a foreign person including digital assets held in passive entities.
  • Requiring digital brokers in the U.S. to report gross proceeds and other information with respect to the sales of digital assets.

Next Steps

In a similar case to the bipartisan Infrastructure bill passed by Congress last year, the FY2023 budget will require the Biden administration to garner much needed bipartisan support. While proposed tax legislations are currently deadlocked in the Senate, there is the possibility that some of these budget proposals could be inserted into other non-tax legislation with hope for easier enactment.

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.