On Friday, November 19th, the House passed President Biden’s $1.7 trillion Build Back Better Act. As of now, the Build Back Better Act and the provision within it are not yet final. We anticipate changes to the bill before the Senate takes a vote and, even then, it is not guaranteed to pass. We do not expect any action on this bill before next week.
Although these provisions are not final, you should be aware of what’s included and how these changes could affect your tax planning. Below is a high-level overview of the potential tax provisions within the Build Back Better Act. Watch for additional, specific information from us in the coming weeks.
The current bill would create a surcharge on high-income individuals, estates, and trusts. The proposed surcharge tax equals the sum of 5% of the amount of the taxpayer's adjusted gross income (AGI) exceeding $10 million ($5 million for married taxpayers filing separately; $200,000 for an estate or trust) plus 3% of the amount of the taxpayer’s AGI that exceeds $25 million ($12.5 million for married taxpayers filing separately; $500,000 for an estate or trust).
Beginning December 31, 2028, any contributions which bring the total value of an individual's IRA and defined contribution retirement accounts to exceed $10 million would be prohibited.
The limitation would apply to individuals with income over $400,000 (single filers and married filing separately), $425,000 (heads of household), or $450,000 (married taxpayers filing jointly).
If an individual's combined retirement account balances exceed $10 million at the end of a tax year and the individual meets these same income thresholds, a minimum distribution would be required for the following year.
Effective December 31, 2021, the Build Back Better Act would put an end to backdoor Roth conversions by prohibiting voluntary after-tax (non-Roth) contributions from being converted to Roth after-tax contributions. Additionally, by rolling over after-tax amounts in traditional IRAs to Roth IRAs, it would prohibit taxpayers from executing similar conversions outside of the 401(k) context.
SALT deduction cap
The bill would increase and extend the limitation on the deduction for state and local taxes from $10,000 to $80,000 ($40,000 for married taxpayers filing separately and for trusts and estates) through 2031.
15% minimum tax on profits of large corporations
The bill would impose a 15% minimum tax on the profits of corporations that report over $1 billion in profits to shareholders.
1% surcharge on corporate stock buybacks
The bill would impose a tax equal to 1% of the fair market value of any stock of a corporation that the corporation repurchases during the year, effective for repurchases of stock after Dec. 31, 2021.
Limitation on interest expense deduction
A provision would limit the amount of net interest expense of certain domestic corporations (or foreign corporations engaged in a U.S. trade or business) that are part of an international financial reporting group. The interest expense deduction would be limited to an "allowable percentage" of 110% of the domestic corporation's net interest expense.
Green energy incentives
The majority of the funding of the Build Back Better Act, totaling more than $300 billion, would create or expand tax incentives for clean energy generation, electric vehicles, transmission lines, and other infrastructure to curb greenhouse gas emissions.
Part of the green energy incentives includes electric vehicle tax credits. The credit provides a refundable income tax credit of up to $8,500 for new qualified plug-in electric drive motor vehicles. It would be available for qualified electric vehicles costing up to $80,000 for vans, SUVs, and trucks or $55,000 for other vehicles. A credit of up to $7,500 would be provided for two- or three-wheeled plug-in electric vehicles. Additionally, smaller credits would be provided for qualifying used electric vehicles as well as certain electric bicycles.
For taxpayers with AGI over $500,000 (married filing jointly) or $250,000 (single), the credit would phase out.
The Act incentivizes climate-friendly investments in clean energy technology development, manufacturing, and the supply chain.
Limitation of excess business losses
The bill would make the limitation on excess losses of noncorporate taxpayers permanent.
Small business stock and high-income taxpayers
The bill would also allow the 75% and 100% exclusion of gain from the sale of stock if the taxpayer is a trust or an estate or if the taxpayer's AGI is over $400,000.
Expanding wash-sale rules
The bill would make commodities, foreign currencies, and cryptoassets subject to the wash-sale rules which state that if an investment is sold at a loss and then repurchased within 30 days, the initial loss cannot be claimed for tax purposes.
The foreign-derived intangible income (FDII) deduction would lower from 37.5% to 24.8%. It would also change the applicable percentage for the global intangible low-taxed income (GILTI) deduction from 50% to 28.5%. The bill would also allow the FDII deduction to considered when determining a net operating loss deduction.
Foreign tax credit limitation
In order to apply the foreign tax credit limitation on a country-by-country basis by taxable unit, taxable units would now include the taxpayer corporation itself, each foreign corporation of which the taxpayer is a shareholder, interests held by the taxpayer in a passthrough entity, and any branch of the taxpayer. The bill would also repeal the carryback of the foreign tax credit and applies to tax years beginning after Dec. 31, 2022.
Modification of base-erosion and anti-abuse tax
The bill would modify the base-erosion and anti-abuse tax to gradually increase the applicable percentage as follows: 10% to 12.5% in 2023; 15% in 2024; and 18% after 2024. If they were subject to an effective rate of foreign tax of at least 15% (or 18% after 2024), amounts would not be subject to the base-erosion and anti-abuse tax.