By way of background, the budget that the president submits to Congress contains estimates of federal government income and spending for the upcoming fiscal year and also recommends funding levels for the federal government. Congress then considers and passes appropriation bills. If Congress does not pass all appropriation measures by the start of the fiscal year (October 1), it has to enact a continuing resolution to keep the government running. The committees of jurisdiction are responsible for considering revenue proposals and any changes to the Internal Revenue Code.
As relevant to this discussion, the Biden Administration fiscal year (FY) 2022 budget incorporates the administration's American Jobs Plan infrastructure proposal (and accompanying Made in America Tax Plan) and its American Families Plan and adds details on the Administration's request for annual operating expenditures for government agencies. It focuses on wealth redistribution and not growth. (See Holland & Knight's previous alerts, "Biden Administration's Made in America Tax Plan: Procedural Aspects," April 8, 2021; "Biden Administration's Made in America Tax Plan: Interaction with OECD Inclusive Framework," April 15, 2021; and "Biden's American Families Plan Proposes Income Tax Hikes," April 29, 2021.)
The administration's budget, which reflects the administration's tax and policy priorities, is an opening bid in negotiations with Congress and is likely to change as it winds its way through Congress, particularly because of the close margins by which the Democrats control the House and Senate and also because of the views of the more moderate Democratic members in the Senate.
The General Explanations of the Administration's Fiscal Year 2022 Revenue Proposals (the so-called Green Book) prepared by the U.S. Department of the Treasury, accompanies the administration's budget and provides an explanation and revenue estimates for the administration's revenue proposals. The 2021 Green Book is the first Green Book since the Obama Administration, and provides details (current law, reasons for change, explanation of proposal and effective date) as well as revenue estimates for the American Jobs Plan and the American Families Plan.
The tax reforms proposed in general are intended to modernize the U.S. tax system to respond to current fiscal challenges, including to raise revenue, to improve tax administration and to make the tax system more equitable and efficient.
A high-level overview of the corporate and individual income tax changes is reflected in tabular form.1
American Jobs Plan: Reform Corporate Taxation
Plan intended to collect sufficient revenue, build a fairer tax system and reduce incentives that encourage profit shifting and offshoring.
Item
Current Law
Proposal
Effective Date
1. Increase Tax Rate
21 percent
28 percent
Tax years after
Dec. 31, 2021
2. Global Minimum Tax
Global Intangible Low Taxed Income (GILTI) Regime
Qualified business asset investment (QBAI)
10.5 percent rate
Global averaging
High tax exception
Repeal QBAI
21 percent rate
Country-by-Country (CbC) computation
Repeal high tax exception
Pillar 2 – adopt "top down" income inclusion rule (IIR) and CbC
Tax years after Dec. 31, 2021
3. Deductions Attributable to Exempt Income or Taxed at Preferential Rates and § 904(b)(4)
Deductions claimed for expenses allocable to income eligible for deduction under §§ 245A or 250, which administration asserts provides subsidy for overseas investment
Expand § 265 to disallow deductions allocable to class of foreign gross income exempt from tax or taxed on a preferential basis
Repeal § 904(b)(4)
Tax years after Dec. 31, 2021
4. Inversions
§ 7874 definition
Expand definition by replacing 80 percent test with greater than 50 percent test
Eliminate 60 percent test
Add additional restrictions to broaden scope of inversions, to include domestic shareholder fair market value (FMV) test, U.S. management and control test, and substantial business activities for place of incorporation of foreign parent
Transactions after date of enactment
5. Reform Fossil Fuel Income
Foreign oil and gas extraction income (FOGEI) not GILTI; foreign oil related income (FORI) is GILTI; and neither is Subpart F income
Availability of foreign tax credits (FTCs) for oil and gas income
Repeal GILTI exemption for FOGEI
Limit FTCs for dual capacity taxpayers to amount as if taxpayer was not a dual capacity taxpayer
Tax years after Dec. 31, 2021
6. Foreign Derived Intangible Income (FDII)
Deduction for FDII
Repeal FDII
Tax years after Dec. 31, 2021
7. Base Erosion and Anti-Abuse Tax (BEAT) and Stopping Harmful Inversions and Ending Low-tax Developments (SHIELD)
Tax on certain corporate taxpayers in addition to regular tax liability if certain requirements are satisfied and base erosion payments exist
Repeal BEAT, which deals with payments
Replace with SHIELD, whose intention is to tax low-tax profits by disallowing deductions to domestic corporations and branches in respect of gross payments made directly or indirectly to low taxed members
Interaction with Pillar 2 minimum tax (SHIELD ETR reduced to global minimum rate if Pillar 2 agreement)
Applies to financial groups with $500 million-plus of global annual revenues
Designed to apply to foreign headquartered businesses
Tax years after Dec. 31, 2022
8. Limit FTCs from Sales of Hybrid Entities
Sales of hybrid entities not currently subject to § 338(h)(16)
Apply principles of § 338(h)(16) to hybrid sales to determine source and character of any item
Transactions after date of enactment
9. Restrict Deductions of Excessive Interest for Disproportionate Borrowings in the U.S.
No Provision
Limit interest deductions above that under § 163(j) for overleveraging U.S. group
Current law § 163(j) does not consider leverage of a multinational corporation (MNC) group's U.S. operations relative to leverage of group's worldwide operations; therefore, U.S. group can overleverage to reduce U.S. tax
Exceptions: financial services entities and groups that report less than $5 million net interest expense
Previous iterations included in President Obama's Green Book and in House and Senate Republican legislation
Applies to foreign headquartered businesses
Tax years after Dec. 31, 2021
10. 15 Percent Minimum Tax on Book Earnings of Large Corporations
No provision
15 percent minimum tax on worldwide book income for corporations with income in excess of $2 billion
Tax years after Dec. 31, 2021
11. Incentivize Onshoring and Disincentivize Offshoring
No provision
Onshoring: New 10 percent business credit for eligible expenses (need to demonstrate U.S. job creation)
Offshoring: Disallow deductions for expenses paid or incurred in offshoring business
Expenses paid or incurred after enactment
Comments
- The above chart identifies the proposal and provides an overview of its application. For details, see the full description in the Green Book.
- The Biden campaign previewed many of the proposals, to include Nos. 1, 2, 4, 5, 6, 7 (partially), 10 and 11.
- The Made in America Tax Plan expanded on the proposals referred to above but did not explicitly deal with No. 11.
- New proposals include Nos. 3, 8 and 9.
- Several Democratic senators have expressed concerns over a 28 percent corporate rate and have suggested a rate of 25 percent; in addition, they have expressed concerns with other corporate provisions. The Republicans view modification of the favorable Tax Cuts and Jobs Act (TCJA) provisions as a "red line" that cannot be crossed.
- The Treasury Department characterizes most of the Green Book's international provisions as incremental (apart from the SHIELD and select others), as not changing the basic U.S. international tax architecture.
- As to the interaction of the U.S. 21 percent global minimum tax and the OECD Inclusive Framework Pillar 2, the U.S. recently suggested a 15 percent minimum tax. The design of the SHIELD to conform generally to the Pillar 2 IIR reflects the close coordination the U.S. is giving to achieving its domestic priority of a 21 percent GILTI inclusion with conformance to the objectives of the Inclusive Framework to have a robust minimum tax. To achieve agreement, all members of the Inclusive Framework do not need to agree to the Pillar 2 minimum tax (e.g., the Cayman Islands that has a zero rate, but may require substance); rather, there has to be a critical mass, such as the G-7 and G-20 (which may be achieved in G-7 and G-20 meetings in the next few weeks).
American Families Plan
Plan is intended to collect more revenues from high-income taxpayers by increasing income tax rates and closing loopholes; reforming the taxation of capital income by equalizing the income taxation of income from labor and income from investment; eliminating the stepped-up basis provision that the Biden Administration asserts enables capital gains to escape taxation, and providing the IRS with resources, information (through new legislation) and technology to 1) improve taxpayer service, 2) improve taxpayer compliance and 3) enhance enforcement to close the tax gap, so as to build a fairer and more efficient tax administration system. (Another part of the American Families Plan that expands tax credits for low- and middle-income workers and families is not discussed herein).
Item
Current Law
Proposal
Effective Date
1. Increase Top Marginal Rate
37 percent
39.6 percent
Tax years after Dec. 31, 2021
2. Increase Tax Rate on Long-Term Capital Gains and Qualified Dividends
20 percent highest rate
Long-term capital gains and qualified dividends of taxpayers with adjusted gross income (AGI) of more than $1 million taxed at ordinary income tax rates
Effective for gains required to be recognized after the date of announcement (i.e., April 28, 2021)
3. Treat Transfers of Appreciated Property by Gift or Death as Realization Event
Gift: carryover basis
Inheritance: generally step-up in basis
Transfers of appreciated property by gift or on death above $1 million threshold treated as recognition event
Transfers of appreciated property into, and distributions in kind from, a non-grantor trust/partnership/other entity are recognition events
Trust/partnership/other entity that is owner of property recognizes gain on unrealized appreciation if that property had not been subject of a recognition event within prior 90 years (first recognition event is Dec. 31, 2030)
Transfers defined under gift and estate tax provisions and valued using gift and estate tax methodologies
Exclusions: Include transfer to U.S. spouse or charity, $1 million per person is portable to other spouse and indexed for inflation and other exclusions
Family-owned businesses: Special rules as to when realization event and 15-year payment plan
Gains on property transferred by gift and property owned at death by decedent dying, after Dec. 31, 2021, and on certain property owned by trusts, partnerships and other noncorporate entities on Jan. 1, 2022
4. Rationalize Net Investment Income (NIIT) and Self-Employment Contributions Act (SECA) Taxes
Close loophole that allows certain income from pass-through businesses, particularly limited partners and S corporation owners, to avoid Medicare Payroll Tax and NIIT
Ensure all trade and business income of taxpayers with AGI in excess of $400,000 subject to either NIIT or SECA tax
Tax years after Dec. 31, 2021
5. Carried Interests
Taxed at capital gains rates and not as ordinary income
Taxed at ordinary income rates
SECA tax due on such income
1061 repealed for taxpayers with taxable income in excess of $400,000
Tax years after Dec. 31, 2021
6. Like-Kind Exchanges
Deferral of gain on "like kind" exchanges of real property used in a trade or business or held for investment
Allow $500,000 for each taxpayer
Gain in excess taxable
Exchanges completed in taxable years beginning after Dec. 31, 2021
7. Make Permanent § 461(l) (Excess Business Loss)
Excess business losses from pass-through entities not deductible for tax years beginning Dec. 31, 2020 and before Jan. 1, 2027
Make provision permanent
Tax years after Dec. 31, 2026
Comments
- The above chart identifies each proposal and provides an overview of its application. For details, see the full description in the Green Book.
- Items in Biden campaign proposals not included in Green Book:
- The estate and gift tax modifications rolling back the Tax Cuts and Jobs Act (TCJA) enhanced estate and gift tax lifetime exemptions; these items also were not included when the American Families Plan was introduced.
- Phasing out the Section 199A qualified business income deduction. Ostensibly, this provision was not included because of its anti-small business optics (even though it has been reported that more than half of the benefit targets taxpayers making more than $1 million per year). Most small businesses operate in pass-through form and many of these businesses have been hardest hit by the COVID-19 pandemic.
- Eliminate the TCJA SALT cap on the itemized deduction for state and local taxes (SALT) paid or accrued (not in connection with a trade or business). More than 20 Democrats and a number of Republicans have joined a bipartisan caucus that has pledged not to vote for any legislation that does not include a repeal of the SALT cap.
- Limit itemized deductions by restoring the phase out of deductions for AGI of more than $400,000, and limit the overall benefit to 28 percent for those in the top brackets.
- Impose 12.4 percent Social Security payroll tax for wages above $400,000.
- Among the most controversial items not only is the proposed tax increase, but also the apparent April 28, 2021, retroactive effective date for the imposition of the increased rate of tax on long-term capital gains and qualified dividends, which effective date would prevent wealthy taxpayers from selling off their appreciated assets prior to yearend to avoid a potential tax increase.2 In contrast, in the run up to the introduction of the American Jobs Plan and the American Families Plan, Treasury Department officials stated publicly that retroactive tax legislation is not their preferred option.3 For those taxpayers subject to the "Medicare Tax," the addition of the 3.8 percent tax increases the federal rate of tax to 43.4 percent compared to 23.8 percent under current law. This proposal is anticipated to face stiff opposition, not only by Republicans, but also by a number of Democratic senators.
- Another controversial proposal is to end the wealth planning technique of stepped-up basis at death and to treat gifts and death as recognition events. The proposal, as described, is complex and costly (provided the top rate for capital gains is increased to 39.6 percent) and will require careful analysis. It also has cross-border consequences because, for example, under current law, a U.S. beneficiary of a foreign decedent generally can take a step-up in basis.
- The increase in the ordinary income tax rate from 37 percent to 39.6 percent will impact only 1 percent of taxpayers.
- The proposed effective dates need to be carefully considered; for example, the Section 1031 proposal is effective for exchanges completed in taxable years beginning after Dec. 31, 2021. Query how this interacts with the 180-day rule, which requires that the total transaction must be completed in six months or no more than 180 days? What happens if the transaction is initiated in 2021 but completed in 2022?
Enhance IRS Resources, Information and Technology
This aspect of the American Families Plan is a key portion of the plan. The Green Book estimates that improved compliance resulting from the additional investment to enhance resources, update outdated technology and introduce a comprehensive financial account reporting will net $779 billion over the 2022-2031 budgetary period. The Green Book provides that the increased focus on compliance and enforcement is targeted at those taxpayers with the highest incomes rather than taxpayers with actual income of less than $400,000.
Two of the highlights are a new comprehensive financial institution annual information reporting and the expansion of broker information reporting with respect to crypto assets.
New Financial Institution Reporting. The Biden Administration proposes a new comprehensive financial institution annual information report of the inflows and outflows of financial accounts to increase the visibility of gross receipts and deductible expenses reportable to the IRS, thereby enhancing the effectiveness of IRS enforcement measures and encourage voluntary compliance. The annual information report prepared by the financial institution would report gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner. Reporting of this information would apply to all business and personal accounts by financial institutions, including bank, loan and investment accounts, with exceptions for de minimis gross flow threshold of $600 or fair market value of $600. Other accounts with characteristics similar to financial institution accounts would also be required to report, as would crypto asset exchanges and custodians. Separately, there would be crypto reporting requirements in cases in which taxpayers purchase crypto assets from one broker and then transfer the crypto assets to another broker, and for businesses that receive crypto assets in transactions with a fair market value of more than $10,000. This financial reporting proposal would be effective for tax years beginning after Dec. 31, 2022.
Broker Crypto Reporting. The Green Book acknowledges that using crypto assets is a rapidly growing problem and presents opportunities for U.S. taxpayers to conceal assets and taxable income by using offshore crypto exchanges and wallet providers, as well as by creating entities through which they can act. To combat this abuse, third-party information reporting is critical. The proposal would expand the scope of information reporting by brokers who report on crypto assets to include reporting on certain beneficial owners of entities holding accounts with the broker. The proposal would require brokers, including entities such as U.S. crypto asset exchanges and hosted wallet providers, to report information relating to certain passive entities and their substantial foreign owners when reporting with respect to crypto assets held by those entities in an account with the broker. The proposal, if adopted and combined with existing law, would require a broker to report gross proceeds and such other information as the Treasury Secretary may require with respect to sales of crypto assets to customers, and, in the case of certain passive entities, their substantial foreign owners. The proposal also would enable the U.S. to share such information on an automatic basis with appropriate treaty partners to reciprocate for information received from its treaty partners. The proposal would be effective for returns required to be filed after Dec. 31, 2022.
Additional proposals to improve tax administration include 1) increased oversight of paid tax return preparers, 2) enhanced filing of electronic returns, 3) proposals to enhance compliance with listed transactions, and 4) modification of the centralized partnership audit regime.
Prospects for Enactment
There are several possibilities for passage of the American Jobs Plan and the American Families Plan, some of which are linked to the American Jobs Plan and some of which are not. The first is a bipartisan agreement with Republicans on a scaled-down version of the American Jobs Plan, as proposed by the GOP (and potentially without the corporate tax increases that the GOP do not favor). A resolution of whether bipartisan agreement is viable may be determined by early June. If not, then a legislative pathway for the American Jobs Plan and the American Family Plan would be through the budget reconciliation process; in that case, query whether there would be one bill or more than one bill?
For more information and questions on the Biden Administration's FY 2022 budget request and its impact on taxpayers, contact the authors.
Notes
1 This overview does not include details relating to the American Jobs Plan initiatives related to Support Housing and Infrastructure and Prioritizing Clean Energy and the American Jobs Plan initiatives entitled Support Workers, Families and Economic Security.
2 The Green Book Revenue Estimates reflects a revenue pick-up of $1.241 billion in 2021. A Treasury Department official justified the retroactive aspect of that provision by arguing that the Treasury Department was trying to prevent taxpayers from accelerating their gains into the temporary low-tax period before the rate increase took effect. See Jonathan Curry, "Stepped-Up Basis Repeal Gets Tamer Treatment." Tax Notes, June 1, 2021.
3 Retroactive taxation is allowed because taxation is neither a penalty imposed on the taxpayer nor a liability which the taxpayer assumes by contract, but rather a method of apportioning the cost of government among those who enjoy its benefits and who must bear the resulting burdens. In addition, some limited retroactivity may be necessary as a practical matter to prevent the revenue loss that would result if taxpayers, aware of a likely impending change in the law, were permitted to order their affairs to avoid the effect of change. See Mertens § 4.15 Retroactivity (case citations omitted).