By Alistair M. Nevius, J.D., Journal of Accountancy
The House Ways and Means Committee on Monday released legislative text for proposed tax changes to be incorporated in the budget reconciliation bill known as the "Build America Back Better" act. The committee plans to mark up the bill on Tuesday and Wednesday. The proposal would raise tax rates for corporations and individuals and make many other changes to the Internal Revenue Code. Here are highlights of the proposed changes.
Corporations and businesses
Tax rate: The proposal would replace the current flat 21% corporate tax rate with a graduated rate, starting at 18% on the first $400,000 of income; 21% on income up to $5 million; and 26.5% on income above $5 million. However, the graduated rate would phase out for corporations making more than $10 million.
Interest deduction limitation: The proposal would add a new Sec. 163(n) that would limit the interest deduction of certain domestic corporations that are members in an international financial reporting group to an allowable percentage of 110% of the net interest expense. The interest limitation would apply only to domestic corporations for which the average excess interest expense over interest includible over a three-year period exceeds $12 million.
GILTI and FDII: The proposal would reduce the Sec. 250 deduction with respect to both foreign-derived intangible income (FDII, to 21.875%) and global low-taxed intangible income (GILTI, to 37.5%). In combination with the proposed 26.5% corporate tax rate, this would result in a 16.5625% GILTI rate and a 20.7% FDII rate. The proposal would also provide for country-by-country application of the GILTI regime.
BEAT: The proposal would make various changes to the base-erosion and anti-abuse tax (BEAT). First, the BEAT rate in Sec. 59A(b)(1)(A) is amended to 10% in tax years beginning after Dec. 31, 2021, and before Jan. 1, 2024; to 12.5% in tax years beginning after Dec. 31, 2023, and before Jan. 1, 2026; and to 15% in any tax year beginning after Dec. 31, 2025. Second, the base-erosion minimum tax amount would be determined taking into account tax credits.
Carried interests and capital gains: The proposal would generally extend from three to five years the holding period required for gain attributable to an applicable partnership interest to qualify for long-term capital gain treatment. The provision would retain the three-year holding period for real property trades or businesses and taxpayers with an adjusted gross income (AGI) less than $400,000. The proposal also would extend Sec. 1061 to all assets eligible for long-term capital gain rates.
Sec. 1202 stock: The proposal would provide that the special 75% and 100% exclusion rates for gains realized from certain qualified small business stock would not apply to taxpayers with AGI equal to or exceeding $400,000. The baseline 50% exclusion in Sec. 1202(a)(1) would remain available for all taxpayers.
Tax rates: The proposal would increase the top marginal individual income tax rate to 39.6%. This marginal rate would apply to married individuals filing jointly with taxable income over $450,000; to heads of household with taxable income over $425,000; to unmarried individuals with taxable income over $400,000; to married individuals filing separate returns with taxable income over $225,000; and to estates and trusts with taxable income over $12,500.
Capital gains: The proposal would increase the tax rate on capital gains to 25%. A transition rule would provide that the current statutory rate of 20% would continue to apply to gains and losses for the portion of the tax year prior to the date of introduction. Gains recognized later in the same tax year that arise from transactions entered into before the date of introduction pursuant to a written binding contract would be treated as occurring prior to the date of introduction.
Net investment income tax: The proposal would expand the Sec. 1411 net investment income tax to cover net investment income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income (single filers) or $500,000 (joint filers), as well as for trusts and estates.
Qualified business income deduction: The proposal would set the maximum allowable deduction under Sec. 199A at $500,000 in the case of a joint return, $400,000 for an individual return, $250,000 for a married individual filing a separate return, and $10,000 for a trust or estate.
Limitation on excess business losses: The proposal would amend Sec. 461(l) to permanently disallow excess business losses (i.e., net business deductions in excess of business income) for noncorporate taxpayers.
High-income surcharge: The proposal would impose a tax equal to 3% of a taxpayer's modified AGI (MAGI) in excess of $5 million (or in excess of $2.5 million for a married individual filing separately). For this purpose, MAGI would mean AGI reduced by any deduction allowed for investment interest (as defined in Sec. 163(d)).
Unified credit: The proposal would revert the unified credit against estate and gift taxes to $5 million per taxpayer, adjusted for inflation.
Contributions to IRAs: The proposal would prohibit further contributions to a Roth or traditional IRA for a tax year if the total value of an individual's IRA and defined contribution retirement accounts generally exceeds $10 million as of the end of the prior tax year. The limit on contributions would only apply to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of household with taxable income over $425,000 (all indexed for inflation).
RMDs: For high-income taxpayers, as defined in the preceding item, if an individual's combined traditional IRA, Roth IRA, and defined contribution retirement account balances generally exceed $10 million at the end of a tax year, a minimum distribution would be required for the following year. The minimum distribution would generally be 50% of the amount by which the individual's prior-year aggregate traditional IRA, Roth IRA, and defined contribution account balance exceeds the $10 million limit. To the extent that the combined balance amount in traditional IRAs, Roth IRAs, and defined contribution plans exceeds $20 million, that excess would be required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans.
Roth conversions: The proposal would eliminate Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of household with taxable income over $425,000 (all indexed for inflation).
Paid family leave and medical leave: The proposal would end the employer credit for wages paid to employees during family and medical leave to tax years beginning after 2023, instead of the current 2025 expiration date.
S corporation reorganization: The proposal would allow eligible S corporations to reorganize as partnerships without triggering tax. An eligible S corporation would be any corporation that was an S corporation on May 13, 1996 (prior to the publication of current-law check-the-box regulations with respect to entity classification).
Work opportunity tax credit: The proposal would increase the work opportunity tax credit to 50% for the first $10,000 in wages, through Dec. 31, 2023, for all WOTC targeted groups except for summer youth employees.