Key Tax Provisions Under Build Back Better Act

On November 19, the House passed the Build Back Better Act, sending it to the Senate for further debate. This is the third piece of major legislation put forth by the Biden Administration.

Major legislation enacted or in debate in Washington, D.C. this year includes:

1. American Rescue Plan Act (passed in March 2021 via budget reconciliation).
2. Infrastructure Investment and Jobs Act (IIJA) passed by Congress on November 8, 2021 and signed by President Biden November 15, 2021.
3. Build Back Better Act passed by the House on Novemebr 19, 2021 sending it to the Senate for further discussion.

Smith and Howard’s tax team will provide a detailed analysis once the legislation is finalized and signed by the president and will keep you up to speed on other potential actions. Meanwhile, we have summarized key provisions of the IIJA and the BBB bill (as it reads now) that may be of interest.

IIJA

As we reported last week, the IIJA contains key provisions affecting employers, one of which is the early termination of the Employee Retention Tax Credit (ERTC). The ERTC had been set to expire January 1, 2022 but under the IIJA it will expire retroactive to October 1, 2021 (with the exception of wages paid by a recovery start-up business). This effectively reduces the maximum credit available to eligible employers from $28,000 to $21,000 per employee.  Businesses may still receive credit for qualified wages paid through September 30, 2021. This does not mean that businesses cannot submit 941-X forms for quarters that ended prior to October 1, 2021 – they simply will not be able to receive any ERC credits for wages paid during the fourth quarter of 2021 as was originally expected based on the CARES Act.

BBB Act

The Build Back Better Act (BBBA), as originally proposed in early 2021, was a $6 trillion plan. Its second iteration came in around $3.5 trillion, and the most recent proposal (discussed below) has been “scaled back” to $1.75 trillion. Still a hefty price tag, but it does eliminate some of the earlier, more controversial tax changes. Even this current plan is likely to change before final passage and in all probability will have to go through budget reconciliation to pass, given the 50-50 split in the Senate. The summary below is divided into individual, business and international provisions as well as green energy elements of the bill as it stands now (November 19, 2021).

BBBA AND INDIVIDUALS, ESTATES AND TRUSTS

Top Marginal Increases Eliminated; Two-Stage Surcharge Added

In our communication in October about the originally proposed BBBA, we noted significant increases in top marginal rates as well as an increase in the top capital gain tax rate for individual taxpayers with AGI in excess of $400,000. The latest BBBA proposal eliminates those increases and includes a two-stage income tax surcharge on modified AGI of individuals, estates and trusts.

• Stage 1 of the surcharge requires an additional 5% tax to a joint filer, single filer, or head of household with modified AGI in excess of $10 million ($5 million for a married taxpayer filing separately, $200,000 for an estate and trust).
• Stage 2 of the surcharge requires an additional 3% tax to a joint filer, single filer or head of household with modified AGI in excess of $15 million ($12.5 million for a married taxpayer filing separately, $500,000 for an estate and trust).

The surcharge would apply in tax years beginning after 2021.

Net Investment Income Tax

The most recently proposed BBBA widens the net of taxpayers who will be subject to the net investment income tax (NII tax) of 3.8% by eliminating exemption for taxpayers who are S Corporation shareholders, limited partners and LLC members. This current proposal, effective for tax years beginning after 2021, applies to joint filers with income over $500,000 ($400,000 for single filers and heads of households and $250,000 for married taxpayers filing separately).

State and Local Tax Deduction

The state and local tax deduction would increase from $10,000 per year to $80,000 per year through 2030. The deduction would reduce back to $10,000 for 2031, and would then expire altogether.

The increased SALT cap of $80,000 per year is effective for 2021 (as proposed).

Excess Business Losses

The prohibition on the excess business losses of a noncorporate taxpayer, currently applicable through 2026, would be permanent.

Among other areas, the BBBA focuses on expanding the social safety net in terms of health and education resources, as well as tax-specific programs. From a tax perspective, this includes expansion, extension and/or modification of credits that were provided by the American Rescue Plan Act that was passed in March 2021. A few of those are highlighted below.

Child Tax Credit

BBBA extends to 2022 many of the child tax credits that were provided in the American Rescue Plan Act in early 2021.

• Amount of credit increased to $3,000 per qualifying child and $3,600 for qualifying children under six
• Credit paid in advance for a full year
• Credit fully refundable*
• Age limit of qualifying child increases to include children who have not attained age 18
• Phaseout of credit done in two stages
• Credit available to U.S. possessions

*The proposal extends the full refundability of the credit to tax years after 2022 but does not provide for any monthly or advance payment of the credit, nor an extension of the increased credit amount.

Earned Income Tax Credit

ARPA also significantly expanded the scope of the earned income tax credit (EITC) and the BBBA extends those increases to 2022.

Health Care Credits

BBBA makes permanent the health coverage tax credit and increases the amount of the credit to 80% of qualified health insurance premiums. It also extends changes from ARPA to the share of premium contributions required and expanded the eligibility for premiums assistance credits to qualifying families.

IRA Prohibited Transactions

BBBA prohibits receipt of any commission or payment from an entity, any stock or interest owned by the individual for whose benefit the IRA is maintained by an account that holds a DISC or FSC, a prohibited transaction, effective for stock and other interests acquired or held on or after December 31, 2021.

Increased Funds to IRS for compliance enforcement

To enable the IRS to close the gap between what they should collect versus what they actually collect, the BBBA provides increased funding targeted to enforcement. It also would apply backup withholding rules to third-party settlements and gives the agency more freedom to assess certain penalties.

BBBA AND BUSINESSES

In large part, the early Build Back Better proposals for businesses have been eliminated and/or replaced by new proposals. The overarching goals are to leverage taxes on large businesses and to raise revenue for the legislative package.

Corporate Alternative Minimum Tax Returns

The Tax Cuts and Jobs Act of 2017 eliminated the corporate alternative minimum tax.  The BBBA brings it back, effective for tax years beginning after 2022. As proposed, the new corporate AMT would equal 15% of the corporation’s adjusted financial statement income for the tax year, reduced by a corporate AMT foreign tax credit. Only corporations with average annual adjusted financial statement income in excess of $1 billion for the three prior tax years would be subject to the corporate AMT. For certain foreign-parented corporations, the threshold is reduced to $100 million. Some exceptions apply to the determination of an applicable corporation where there is a change in ownership or a consistent reduction in income.

Stock Repurchases

The proposed BBBA includes a 1% excise tax (effective on repurchases after 2021) on:

• stock repurchases by domestic corporations whose stock trades on an established securities market. A repurchase includes a redemption, or any transaction determined to be economically similar to a redemption.
• the purchase of the stock of a specified affiliate corporation, which is a corporation more than 50% owned (by vote or value) by the purchasing corporation, or a partnership in which the purchasing corporation holds more than 50% of the capital or profits interest.
• certain purchases of the stock of a foreign affiliate. The tax would apply to repurchases after 2021.

Business Interest Expense

The BBBA includes a limitation on the net interest expense allowed as a deduction by a specified domestic corporation. A “specified domestic corporation” is defined as a domestic corporation that is part of a multinational group that prepares consolidated financial statements and had an average interest expense over the past 3 years of $12 million annually. The deduction for such a corporation’s net interest expense (or the excess of interest expense over interest income) is limited to 110% of the group’s net interest expense. The limitation is proposed to apply to tax years beginning after 2022.

Additional Changes for Businesses

The proposed legislation makes several other changes to business-related provisions of the Code. The below changes are proposed to take effect for tax years beginning after 2021, unless otherwise noted:

• Treatment of losses as capital losses in the case of worthless securities or partnership interests;
• Modifications to the calculation of gain and basis in the case of a divisive corporate reorganization (effective upon enactment);
• Acceleration of the expansion to the top eight highest paid employees for the limitation on excessive employee remuneration under ARPA, initially set to take effect after 2026, to tax years beginning after 2021;
• Application of the constructive sales rules to appreciated digital assets;
• Modifications to the wash sales rules;
• Delay to 2026 the requirement to amortize research and development expenses under the Tax Cuts and Jobs Act.

BBBA AND INTERNATIONAL PROVISIONS

For the most part, the provisions providing changes to foreign-related and international taxation remained intact under the latest proposal.

FDII and GILTI Deductions

• Current law states a domestic corporation receives a deduction of 37.5% of its foreign-derived intangible income (FDII) and a 50% deduction for its global intangible low-taxed income.
• These are scheduled to be reduced to 21.875% and 37.5%, respectively, for tax years beginning after 2025.
• The proposed legislation would accelerate the step down of these favorable deduction rates to the 21.875% (FDII) and 37.5% (GILTI) for tax years beginning after 2021.
• Under current law, if the sum of the FDII and GILTI deductions exceeds the corporation’s taxable income, then the deduction for the total is reduced by the amount of the excess, and the reduction is not included in the calculation of the corporation’s net operating loss (NOL). The proposal eliminates the limitation and allows for the deduction to be used in calculating NOLs.

CFC One-Month Deferral

BBBA eliminates the option to allow foreign corporations (CFCs) to use a tax year beginning one month before the tax year of its majority U.S. shareholder, effective for the tax years of corporations that would otherwise begin after November 30, 2021.

Foreign Tax Credit

The proposal states in the safe harbor under Reg. §1.901-2 that a domestic company can use to determine the proper amount of foreign tax credit where the company pays an amount to a foreign government that is at least partially in exchange for an economic benefit provided by the foreign government.

The BBBA would apply the limitation on the foreign tax credit on a country-by-country basis, rather than on an aggregate basis. The change would apply to regular taxes and also oil and gas taxes.

For purposes of the foreign tax credit, the proposal also replaces the 20% haircut on tested foreign income taxes paid with a 5% haircut.

GILTI Inclusion Modification

The BBBA would require GILIT to be included in the income of a shareholder of a CFC on a country-by-country basis (in a method similar to that proposed to apply to the calculation of the foreign tax credit).

The modification is effective for tax years beginning after 2021.

Deduction for Foreign-Source Dividends

The current rule allows for a deduction equal to the amount of the foreign-sourced portion of a dividend received from a 10-percent owned foreign corporation is modified to only allow the dividend if the foreign corporation is a CFC. However, the shareholder and the foreign corporation can elect to treat the foreign corporation as a CFC if it is not in fact a CFC. The proposal is effective upon the enactment of the proposed legislation.

Foreign Base Company Income

For calculating income under Subpart F, foreign base company sales income and foreign base company services income are proposed to be included in the income of CFC shareholders only if the shareholder is a taxable unit that is a tax resident of the U.S.

BEAT Modification

The BBBA modifies the application of the base erosion and anti-abuse tax (BEAT) for tax years beginning after 2023. In the proposal, any corporate taxpayer with gross receipts in excess of $500 million would be subject to the BEAT. Regulated investment companies, real estate investment trusts, and S corporations would continue to be excluded from the application of BEAT. Additional modifications to the calculation of BEAT are also proposed.

Additional International Provisions

The BBBA makes several other changes to international and foreign-related provisions of the Code. The provisions below are proposed to take effect for tax years beginning after 2021:

• Modification of the definition of a 10% shareholder for purposes of the exemption of portfolio interest (effective upon enactment);
• Modification of the treatment of notional principal contract income calculated by reference to U.S. source income or gain of all publicly traded partnerships (effective 180 days after enactment); and
• Modification of the calculation of the earnings and profits of a CFC.

GREEN ENERGY PROVISIONS

The BBBA provides more than a half-trillion dollars in green energy incentives and investments.

Electricity Produced from Renewable Resources

The proposal extends the credit for electricity produced from certain renewable resources through December 31, 2026. This extension applies to electricity produced from solar energy. The BBBA also extends (for five years) the option to claim in investment tax credit in lieu of this production tax credits specific to these facilities.

Elective Direct Payment

In lieu of a tax credit, entities can elect to claim a direct payment for certain energy projects. The credits for which a direct payment can be claimed include the alternative fuel refueling property credit, the renewable electricity production credit, the carbon oxide sequestration credit, the energy investment tax credit, and the qualifying advanced energy project credit. This applies to tax years beginning after December 31, 2021.

Investment Credit for Electric Transmission Property

The BBBA creates a new 6% investment credit for investments in qualifying electric transmission property. This is tangible depreciable property such as electric transmission lines or related property. The credit is increased to 24% where wage and workforce requirements are met.

Nonbusiness Energy Property Credit

The BBBA extends the credit for nonbusiness energy property for 10 years through December 31, 2031. This credit applies to energy efficient windows and doors, and the lifetime maximum for the credit is replaced with an annual limit of $1,200. The residential energy efficient property credit is also extended through 2033.

Residential Energy Credit

The proposal extends residential energy efficient property for 10 years and also adds “qualified battery storage technology expenditures” to the list of expenditures eligible for the credit.

Plug-in Electric Vehicles

The credit for the purchase of plug-in electric vehicles is extended through 2031, and enhanced, under the proposal. The proposal eliminates the current limitation on the number of vehicles a manufacturer can sell.

A new credit of up to $2,500 is provided for the purchase of a previously owned plug-in electric vehicles, as well as a new credit for up to 30% of the basis of a qualified commercial electric vehicle placed in service after 2021 and before 2032.

Other New Green Energy Credits

Additional new credits to encourage the growth of green energy include the following:

• The BBBA creates a new credit for qualified commercial electric vehicles placed in service by the taxpayer.
• The proposal extends the sunset date for the alternative refueling property credit for 10 years (and modified the credit amount for certain fuel refueling property).

Questions?

As the Build Back Better Act moves forward in Congress, it is prudent to understand the changes in legislation and how these changes may affect you and your business.

The tax team at Smith and Howard is closely following all proposed tax changes from the Biden Administration and will communicate updates as they are announced. If you have any questions in the meantime, please contact your S+H tax professional. Whether you’re a current client or exploring opportunities for tax savings for you and/or your business, please contact our tax team at our “Contact an advisor” button below this article and we’ll get back with you within 24 hours.