POTENTIAL TAX LEGISLATION ADVANCES AS PART OF RECONCILIATION BILL
29 September 2021
The House Ways and Means Committee on September 15TH approved a tax package that would increase rates on high-net-worth individuals and corporations and affect cross-border activity and pass-through entities, advancing the tax elements of the Biden administration’s “Build Back Better” agenda.The House Ways and Means Committee on September 15TH approved a tax package that would increase rates on high-net-worth individuals and corporations and affect cross-border activity and pass-through entities, advancing the tax elements of the Biden administration’s “Build Back Better” agenda.
As the next step in the legislative process, the legislation now goes to the House Budget Committee, where it will be combined with bills from other House committees and eventually brought before the full House for a vote as the reconciliation legislation.
Individuals
The draft legislation would raise the top individual marginal tax rate from the current 37% to 39.6% for taxable income over $450,000 for married individuals filing jointly and surviving spouses, $425,000 for head of households, $400,000 for single individuals, $225,000 for married individuals filing separately, and $12,500 for estates and trusts. The proposal would be effective for taxable years beginning after December 31, 2021.
The capital gains tax rate would rise to 25% from 20% for transactions by high-income individuals made after Sept. 13, 2021.
The bill would also create a 3% surcharge on modified gross adjusted income above $5 million, and set a limit on contributions to large individual retirement accounts.
The bill would extend the holding period to obtain long-term capital gains treatment for gain allocated to carried interest partners from three to five years. The three-year holding period would remain in effect with respect to any income attributable to real property trades or businesses and for taxpayers (other than an estate or trust) with adjusted gross income of less than $400,000.
Another key provision is the expansion of the Net Investment Income Tax (NIIT) for taxpayers with greater than $400,000 in taxable income (single filer) or $500,000 (joint filer) as well as for trusts and estates subject to the top tax rate.
Further, the excess business loss limitation would be extended beyond 2025 under Section 461(l). The carryforward losses no longer would be considered a net operating loss. Instead, taxpayers whose losses are disallowed may carry those losses forward to succeeding tax years where they would be treated as excess business losses in future years and considered as part of the $250,000 or $500,000 (adjusted for inflation) limitation for that year.
There are a number of provisions impacting individual retirement accounts, such as the elimination of Roth IRAs for certain taxpayers, increased required minimum distributions for IRA’s with certain asset levels, additional restrictions on accounts holding non-publicly traded securities, and others.
Business Provisions
The legislation would introduce a graduated income tax rate structure for most corporations, with a top corporate tax rate of 26.5%. Corporations with taxable income that does not exceed $400,000 would be subject to a new 18% tax rate (lower than the current 21% rate), while those with income that exceeds $400,000 but does not exceed $5 million would be subject to a 21% tax rate, and those with income in excess of $5 million would be subject to the top 26.5% rate.
On the international front, the bill would reduce the Section 250 deduction for global intangible low-taxed Income (GILTI) to 37.5%, resulting in an effective tax rate of 16.5% based on a corporate tax rate of 26.5%. The GILTI would be calculated on a country-by-country basis.
Other international tax provisions include:
- The deduction for qualified business asset investment (QBAI) would be reduced to 5%;
- The foreign tax credit haircut would be reduced to 5%;
- The tax on foreign-derived intangible income would rise to an effective rate of 20.7% based on a corporate tax rate of 26.5%;
- Excess foreign tax credit carryforwards would be allowed for five years but carrybacks would be disallowed;
- A new limitation on interest expense deductions for some multinational corporations would be introduced;
- The bill would eliminate the taxable income limitation for the Foreign Derived Intangible Income (FDII) deduction. Also, the bill permits this excess deduction to be taken into account in determining a taxpayer’s net operating loss (NOL);
- Amend the Base Erosion and Anti-abuse Tax (BEAT) rate to 10% for tax years beginning after December 31, 2021, and before January 1, 2024; 12.5% for tax years beginning after December 31, 2023, and before January 1, 2026; and 15% for tax years beginning after December 31, 2025;
- The base erosion minimum tax amount is determined without regard to any credits and Section 38 general business credits may be taken against the BEAT
Item’s Not Included in the Bill
The bill does not include any changes to the cap on individual itemized deductions for state and local taxes, which was introduced in 2017’s tax reform. Ways and Means Chairman Richard Neal (D-MA) has said he is committed to include “meaningful SALT relief” in the final legislation. Taxpayers should consider opting into optional pass through entity tax regimes where possible.
The provision to end the tax-free step-up in basis in the Estate Tabove a $1 million threshold, within the estate tax rules, that was proposed by the Biden administration is also not included in the Ways and Means bill.
There are many other provisions considered in the draft legislation. Please reach out to us if you would like to discuss any of the provisions in more detail.
For more information reach out to Pat Capella.