Earlier this year, the Biden administration announced plans to pursue two major pieces of legislation.
The first was intended to provide jobs and repair the nation’s crumbling road infrastructure. This became the Infrastructure Investment and Jobs Act, which, as of late October 2021, is still pending in the Senate.
The second initiative, called the Build Back Better Plan (BBB), is an ambitious 3.5 trillion infrastructure bill that addresses education, child care, climate change, environmental issues, and healthcare.
To pay for these benefits, the BBB Plan restructures the tax system, particularly for corporations and the wealthy. Here are some of the key tax provisions:
Individual Income Tax
Increase in the top marginal individual income tax rate – The top marginal individual income tax rate would increase to 39.6%.
Increase in the maximum long-term capital gains rate – The maximum capital gains rate would increase to 25% from the current rate of 20%. The income level that this capital gains rate bracket applies to would be aligned with the new 39.6% rate bracket.
Net investment income tax application to active business income – Under current law, the net investment income tax applies an additional 3.8% tax to a taxpayer’s net investment income when the adjusted gross income exceeds a certain threshold. Net investment income only includes income earned from a business if the taxpayer is passive with respect to that business, not active. The proposal would subject active business income to the net investment income tax as well, but only when adjusted gross income exceeds (1) $500,000 for married couples filing jointly, (2) $250,000 for married couples filing separately, and (3) $400,000 for all other taxpayers.
Section 1202 modifications – Under current law, Section 1202 permits up to a 100% exclusion from the sale of certain C corporation stock. The proposal would cap the exclusion at 50% for all estates and trusts and taxpayers with an adjusted gross income in excess of $400,000.
General Business Provisions
Limitation on the qualified business income deduction (QBID) – The QBID would be limited to a maximum deduction of (1) $500,000 for married taxpayers filing jointly, (2) $400,000 for single filers, or (3) $250,000 for married taxpayers filing separately. There is currently no limitation on the deduction, which is otherwise scheduled to expire on December 31, 2025.
Permanent limitations on the ability to deduct excess business losses – The Tax Cuts and Jobs Act (TCJA) of 2017 imposed a $250,000 limit on the deduction for excess business losses (EBLs) ($500,000 for married couples filing jointly) for tax years beginning in 2018. The proposal would make this provision permanent and would also create a new loss carryforward bucket for EBLs rather than being treated as net operating losses.
Carried interest – The TCJA treated income related to carried interests as short-term capital gain unless the gain was related to property held for at least three years. The BBB Plan proposes to increase the holding period to five years.
Election to make a tax-free S corporation conversion to a partnership – In general, a corporation can’t convert to a partnership without the conversion being a taxable event. The proposal would permit S corporations that have continually maintained an S election since May 14, 1996, to make a tax-free conversion to a partnership during 2022 or 2023.
Corporate Income Tax
Modification of corporate income tax rate structure and increase in top rate – The TCJA eliminated the graduated income tax rate structure with a top rate of 35% in favor of a flat rate of 21%. Effective for tax years after December 31, 2021, the BBB Plan would restore the graduated rate structure and tax income below $400,000 at 18%, maintain the current 21% rate for income between $400,000 and $5 million, and tax any income above $5 million at 26.5%.
Deferral of worthless stock loss on corporate subsidiaries – Under current law, an insolvent corporate subsidiary can be liquidated so that the corporate parent can claim a loss with respect to the subsidiary’s stock. This proposal would defer the recognition of that loss until the subsidiary’s property is ultimately disposed of.
Expansion of deduction limitations on certain compensation – Under current law, publicly held corporations are prohibited from deducting amounts exceeding $1 million paid to covered individuals. Those rules were recently expanded to broaden the pool of covered individuals in tax years beginning after December 31, 2026. The proposal would accelerate this expansion to tax years beginning after December 31, 2021, and make other technical corrections.
Estate and Gift Tax
Termination of the temporary increase in unified credit – The bill would accelerate the restoration of the unified credit to 2010 levels of $5,000,000 per individual, indexed for inflation.
Grantor trust changes – Grantor trusts would no longer be excluded from estate tax if the decedent is deemed the owner of the trust. Furthermore, sales between an individual and their grantor trust would be taxable even if they are the deemed owner of the trust.
Infrastructure financing and energy credits – The BBB Plan would significantly expand tax credits in many areas, including housing, clean and green energy, and new markets.
Increase in funding the Internal Revenue Service – Nearly $80 billion in additional funding would be provided to the IRS over the next ten years to increase the enforcement of federal tax laws with respect to corporations and high-income individuals.
The BBB Plan also makes considerable changes to international taxes, foreign tax credits, and foreign corporation statuses.
With the right tax planning partner on your side, you can minimize your liability, stay compliant, and navigate the short- and long-term impact of new tax laws on your business.
Rubino’s tax professionals are experts in developing and executing integrated tax strategies that benefit all stages of your company’s lifecycle and your personal financial planning. Through a relationship-oriented approach, we stay ahead of tax changes and help you mitigate their impact or take full advantage of the opportunities they provide.
If you need guidance about how the BBB Plan affects your business, reach out to us today.
The information in this blog is an overview of planned legislation and is not intended to be used to guide financial decision-making. For more detailed information about how the BBB Plan affects your individual tax situation, contact your financial professional or reach out to Rubino and schedule an appointment.