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Tax Legislation Update: Updated Framework for “Build Back Better”

Tax Legislation Update: Updated Framework for “Build Back Better”
Announcement of revised framework for “Build Back Better”

On October 28, President Joe Biden announced an updated framework for the “Build Back Better” (BBB) legislation. The revised package includes funding for expanded health coverage, affordable housing, universal pre-kindergarten and childcare, clean energy, and climate investments, along with other items. The president called for Congress to “take up this historic bill — in addition to the Bipartisan Infrastructure Investment and Jobs Act — as quickly as possible.”

In response, the House Rules Committee released a modified version of H.R. 5376, the “Build Back Better Act.”

Summary of pertinent tax provisions
The following is a summary of key tax provisions in the revised framework. NOTE: These items, among others, will be discussed in our Build Back Better webinar on Tuesday, Nov. 16. Stay tuned for more details.

  • Surtax on high-income earners: There would be a new 5% surtax on annual individual earnings above $10 million, and an additional 3% surtax on earnings above $25 million. It appears these surtaxes may apply to all types of income, including capital gains.
  • Enhanced IRS enforcement: Additional investment in the IRS for hiring enforcement agents to pursue tax evasion from high-income taxpayers (those with income over $400,000) and technology overhauls are included in the framework.
  • 15% Corporate Alternative Minimum Tax on large corporations: 15% minimum tax on the corporate profits that large corporations — those with over $1 billion in profits reported to shareholders for any three consecutive tax years of the corporation occurring during the period ending with the tax year that precedes such tax year and ending after December 31, 2019. No indication of the effect, if any, of prior or future reported losses.
  • Excise tax on repurchases of corporate stock: 1% surcharge on corporate stock buybacks.
  • Expansion of net investment income tax to certain trade or business income: 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 - including from S corporations, partnerships, and LLCs -regardless of whether the taxpayer materially participates.
  • Global minimum tax: The U.S., in accordance with an international agreement among members of the Organization of Economic Co-operation and Development (OECD) would institute a 15% global minimum tax on foreign profits of U.S. corporations.
  • Permanent limitation of excess business losses: The bill would make permanent the excess business loss limitation.
  • Limited child tax credit expansion: Although Democrats were hoping for a four-year extension of the expanded child tax credit; the proposal only includes a one-year extension. It does make the child tax credit permanently refundable.
  • Tax credits for 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.
Provisions NOT included in the revised framework
  • Repeal of the State and Local Tax (SALT) deduction cap: This was not included in the framework, although House Speaker Nancy Pelosi has indicated that it will be in the final bill, however this is currently very uncertain.
  • Wyden Billionaire tax proposal: Earlier this week, 2021, Oregon Sen. Ron Wyden proposed a “billionaire tax” that would effectively annually “mark to market” the securities of wealthy individuals and trusts. However, this was opposed by Senator Joe Manchin of West Virginia and other Democrats. Nonetheless, as of Friday, Oct. 29, Senator Wyden apparently still holds out hope that this provision will be added even though House Ways and Means Chair Richard Neal (D-MA) has indicated it will not be in the final legislation.
  • Overall individual rate increases: Due to opposition from Arizona Senator Kyrsten Sinema, it is unlikely that an individual rate increase to 39.6% and top capital gains rate increase to 25%, as proposed in the previous Ways and Means bill, would make it into the final legislation.
  • Overall 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, QBI, deduction, proposed in both the Biden administration’s Green Book and included in the previous House Ways and Means bill, did not make it into the framework. It seems likely the current section 199A deduction will remain intact until it sunsets, as previously planned, in 2026.
  • IRA rules changes: Proposed changes to large balance IRAs and the elimination of the back-door Roth IRA method for high-income taxpayers also met resistance by Sen. Sinema.
  • Elimination of estate step-up: A previous proposal to only allow $1 million per person (plus any primary home exemption) lacked support from rural congressional Democrats, including Sen. Jon Tester of Montana, and was not included in the updated framework.

What’s next?
It is important to note that 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 final legislative text has been released, so, as of October 29, negotiations are very fluid.

We will continue to monitor developments with respect to this legislation and will provide updates as soon as they become available.

Learn more during our upcoming webinar series, or email us for additional information at info@herbein.com