On Thursday, Nov. 4, 2021, the U.S. House of Representatives revised the latest version of President Biden’s Build Back Better Act (BBBA or HR 5376), which is the current administration’s major social spending and infrastructure plan. This bill was decoupled from the traditional infrastructure bill that was passed by the House on Friday, Nov. 5, 2021. The revised version of the bill reduces spending from $3.5 trillion to about $1.8 trillion and includes many changes tied specifically to spending programs along with notable changes regarding tax law. BBBA would significantly expand tax credits in many areas, such as housing, clean/green energy, and new markets, while also providing increased funding to the Internal Revenue Service (IRS) – nearly $80 billion – over the next 10 years to increase enforcement of federal tax laws with respect to corporations and high-income individuals.
The new version of BBBA does not contain some of the previous provisions as originally introduced in HR 5376:
- Corporate income tax rate increase – The rate would remain at a flat 21 percent.
- Individual ordinary income rate increase – The rate would remain at 37 percent until sunsetting in 2026.
- Individual capital gains and qualified dividends income rate increases
- Carried interest modifications
- Limit on deduction of qualified business income (QBI) of certain “high-income individuals” – The QBI deduction is also already set to sunset in 2026.
- Changes to rules regarding grantor trusts
- Valuation rules for certain transfers of nonbusiness assets
- Increase in limits on estate tax valuation reduction for certain real property
- Termination of temporary increase in unified credit – This would remain at the current level of approximately $11.8 million until sunsetting in 2026.
- Paycheck Protection Program (PPP) – A third round of loans from the PPP is no longer a provision in the revised bill.
Other items under consideration for BBBA but were not included in the new version of the bill include:
- Mark to market regime for very high-income individuals, trusts and estates – This includes the taxing of unrealized gains.
- Requiring financial institutions to report on account flows
Notable items retained, added or changed from the original BBBA are as follows:
- Net Investment Tax (NIT) on active income – The bill imposes the 3.8 percent NIT on active business income when adjusted gross income exceeds $500,000 for married couples and $250,000 for single.
- Excess Business Loss Limitation (EBL) – The bill would make this provision permanent and would also create a new loss carryforward bucket for EBLs rather than being treated as net operating losses.
- Delayed R&D expense capitalization – The requirement to capitalize would be delayed from 2022 to 2026.
- Corporate alternative minimum tax—The bill would impose a 15 percent minimum tax on adjusted financial statement book income for corporations with a three-year average of such income in excess of $1 billion.
- Excise tax on the repurchase of corporate stock—The bill would impose a 1 percent excise tax on publicly traded U.S. corporations based on the value of any of its stock that is repurchased by the corporation during the tax year.
- Deferred effective date for proposals – The effective date of many business and international proposals would be deferred one year.
- Section 250 deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) – The bill would tax GILTI at 15 percent and FDII at 15.8 percent.
- Rate increase for base erosion and anti-abuse tax (BEAT) rate—The bill would increase the BEAT rate to 12.5 percent for 2023, 15 percent for 2024 and 18 percent for 2025 and thereafter.
- Surcharge on high-income individuals, estate and trusts—The bill would impose a tax equal to 5 percent of a taxpayer’s modified adjusted gross income (MAGI) in excess of $10 million and an additional tax of 3 percent of a taxpayer’s MAGI in excess of $25 million.
- Increase in SALT cap – The bill increases the SALT cap from $10,000 to $80,000 for those married filing jointly and extended the sunset of the cap to 2031.
- Change in allowable Employee Retention Credit (ERC) period – The bill also changed the allowable ERC period to end early in Q3 2021 (previously applicable for Q4 2021). Businesses still have three years from the filing date to claim the credit by amending employment tax return Form 941, but they may not include Q4 2021.
The House is expected to vote on the bill once they return from recess the week of Nov. 15, 2021. The Senate Finance Committee is reportedly working on their own version of the bill which may or may not materially differ from the House bill. Once both bills have passed the respective House and Senate, reconciliation occurs before a final bill is placed on the President’s desk for signature.
Windham Brannon continues to monitor the latest regarding BBBA, understanding that many of our clients can be impacted at varying levels by the new legislation.
For questions or more information about BBBA in its most recent form, please contact your Windham Brannon advisor or reach out to Nicole Suk, CPA.
