On Friday May 28th, President Biden’s administration released its proposed budget for fiscal year 2022. As part of the release, the administration also published the General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals (otherwise known as the “Green Book”). This FGMK article provides an overview of the key tax provisions included therein, as well as thoughts and recommendations as taxpayers consider potentially planning opportunities moving forward.
The General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals (otherwise known as the “Green Book”) provides greater detail on the Administration’s proposed modifications to current tax law. Much of these proposed modifications are consistent with earlier proposals found in the Made in America Tax Plan, American Jobs Plan, and the American Families Plan. However, this proposal offers key difference from provisions offered in prior proposals. Provided below are the highlights of this Plan.
Corporate Tax Proposals
The corporate tax changes will reduce some of the tax benefits that were gained under Tax Cuts and Jobs Act of 2017. The following are among such changes:
- Increase of the statutory corporate rate from 21 percent to 28 percent;
- Creation of a new 15 percent alternative minimum tax on global book income of certain large corporations (i.e., corporations with global income exceeding $2 billion); and
- Refocus of the nation’s commitment to clean energy by dramatically limiting the tax benefits available to coal and gas industry, including:
- - Reforming taxation of foreign fossil fuel income;
- - Repealing fossil fuel subsidies; and
- - Reinstating Superfund taxes.
International Tax Proposals
It appears that the Proposal attempts to “level the playing field” to prevent any advantage that could be available for either foreign or multi-national corporations. These changes are very comprehensive in nature and include the following:
- Reduce the deduction under IRC Section 250 for the computation of “global intangible low-taxed income” (“GILTI”) from 50 percent to 25 percent (effectively increasing GILTI from 10.5 percent to 21 percent if the corporate tax rate is increased to 28 percent);
- Eliminate the “qualified business asset investment” (“QBAI”) exemption, and impose a jurisdiction-by-jurisdiction calculations;
- Repeal the deduction for “foreign-derived intangible income” (“FDII”);
- Expand the application of IRC Section 265 to disallow deductions attributable to income exempt from tax or taxed at a preferred rate when calculating the foreign tax credit limitation;
- Replace the “base erosion anti-abuse tax” (“BEAT”) with a new “Stopping Harmful Inversions and Ending Low-Tax Developments” (“SHIELD”) rule which would deny U.S. tax deductions for payments made to foreign related parties subject to a “low effective tax rate” that is below a designated minimum tax rate (projected to be at 21 percent);
- Limit the ability of domestic corporations to expatriate by tightening the anti-inversion rules;
- Restrict the deduction of interest by a financial reporting group attributable to disproportionate U.S. borrowing (projected to be at 21 percent); and
- Deny certain deductions related to offshoring jobs.
Individual and Investment-Related Tax Proposals
The tax proposals also include significant changes for individual taxpayers. Specifically, the tax code modifications include investment-related tax proposals. Individual tax rate increases include the following:
- Increase the top individual marginal income tax rate from 37 percent to 39.6 percent (applicable to taxable income over $509,300 for married taxpayers filing jointly and $452,700 for single filers); and
- Tax long-term capital gains and qualified dividends at 37 percent for taxpayers with adjusted gross income exceeding $1 million (NOTE: As proposed this would be effective as date of announcement of the President’s tax plan which was initially announced in April).
The proposal also takes aim at gifts or bequests of unrealized capital gains. Specifically, the proposal would treat transfers of appreciated property by gift or bequest with unrealized capital gains appreciation in excess of $1 million as realization events. However, excluded from this treatment would be:
- Charitable donations;
- Marital transfers (would also provide availability of deceased spouse’s unused $1 million exclusion, i.e., portability provision somewhat similar to the deceased spouse estate tax lifetime exclusion, and favorable treatment of capital gains attributable to a primary residence); and
- Certain tangible personal property.
The proposal also provides a deferral of gain realization for family-owned and operated businesses, as well as special rules providing for spousal portability.
Further, the proposal would also expand capital gain realization to include assets having unrealized appreciation that have been held by a trust, partnership, or other non-corporate entity within the prior 90 years. Under the proposal, the “test period” commences on January 1, 1940, and thus, the first possible recognition event for any taxpayer under this provision would be December 31, 2030).
Additional investment-related provisions included in the proposal are:
- Tax gains from carried (profits) interests as ordinary income for partners with taxable income over $400,000;
- Repeal of deferral of gain from like-kind exchanges completed in tax years beginning after December 31, 2021, on gains in the aggregate per year in excess of $500,000 ($1 million for married individuals filing a joint return);
- Make permanent the current limitation on excess business losses of non-corporate taxpayers; and
- Expand the net investment income and Self-Employment Contributions Act (“SECA”) taxes for high-income taxpayers with certain income related to pass-through entities. Specifically, Schedule K-1 active income would now be subject to the net investment income tax even if taxpayer is a limited partner or a shareholder of an S corporation.
Tax Credit-Related Proposals
In addition to its revenue-raising proposals, the Biden Administration also included as part of its long-term plans several tax credits and preferences for social programs and income support, including:
- Extending the expansion of the Child Tax Credit to certain children through 2025 and making the credit fully refundable;
- Making permanent the expansions to the Child and Dependent Care Tax Credit;
- Making permanent the expansions to the Earned Income Tax Credit for childless workers; and
- Extending the expanded Affordable Care Act (“ACA”) premium tax credits
The proposal requests over $300 billion (earmarked over 10 years) to provide tax incentives for clean energy, including:
- Extending and enhancing renewable and alternative energy incentives;
- Establishing new tax credits for advanced energy manufacturing;
- Establishing tax credits for heavy and medium-duty zero emission vehicles;
- Providing tax incentives for renewable aviation fuel;
- Providing tax incentives for renewable aviation fuel;
- Providing a disaster mitigation tax credit;
- Expanding and enhancing the carbon oxide sequestration credit; and
- Extending and enhancing the electric vehicle charging station credit
Although Congress is the ultimate arbiter of effectives dates, the Administration would make its tax proposals effective January 1, 2022 with the following key exceptions.
- As noted above, the proposal to tax long-term capital gains and qualified dividends for high-income taxpayers at 37 percent would be effective, according to the Green Book, “for gains required to be recognized after the date of announcement”, possibly April 2021. In essence, it could mean that this would prevent any possible grandfathering under current rates should Congress accept the administration’s recommendation.
- The proposed anti-inversion provisions would apply to transactions completed after the date of enactment.
- The repeal of section 1031 would be effective for exchanges completed in tax years beginning after December 31, 2021. This would, therefore, prevent a grandfathering for any exchange started in 2021 but completed after 2021.
- The proposal to replace the BEAT with the SHIELD would be delayed to January 1, 2023. This would offer impacted taxpayers some flexibility to plan properly.
Thoughts and Recommendations
To become law, the House and Senate would have to pass these proposed provisions in legislation. The approach to offer and pass the legislation will impact passage of all or parts of the proposal. Despite how likely or unlikely passage may be, if enacted, the tax provisions can have a profound impact on most taxpayers. Recommendations include, but are not limited to, the following:
- Assess the availability of grandfathering current planning to take better advantage of current law;
- Evaluate existing income tax and estate tax plans to determine whether there are ways to “opt out” of existing plans to avoid possible future adverse tax consequences;
- Evaluate “event planning” strategies to ensure that plans will be carried out on a tax efficient manner. Such “events” include but are not limited to death divorce, business succession, etc.;
- Evaluate liquidity needs to confirm the needed cash is available to fund possible increased taxes; and
- Evaluate foreign tax planning strategies to address the wide changing tax laws.
With the comprehensive changes outlined in this Proposal, the greatest recommendation is to seek guidance from your FGMK tax advisor. This will best ensure that the issues addressed above can be accounted for both compliantly and strategically.
The summary information in this document is being provided for education purposes only. Recipients may not rely on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.
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