Tax Strategy: A revised framework for the Build Back Better bill

November 8, 2021 4:19 PM

Democrats in Congress continue their efforts to find sufficient support among their members to enact the Build Back Better legislation under budget reconciliation. With narrow majorities in both the House and Senate, passage requires the support of every Democratic member of the Senate and almost every Democratic member of the House.

The Build Back Better bill is being referred to as the human infrastructure bill, and the House has only just voted on the Senate-passed physical infrastructure bill (which does include some tax provisions). The negotiations that led to that had further trimmed the price tag of the Build Back Better bill from around $3.5 trillion in the Ways and Means version of the bill to around $1.75 trillion (with another possible $100 billion for immigration) in the most recent proposed framework for the bill. Even with this latest framework, changes continue to be proposed, and some Democrats in both the House and Senate continue to raise concerns about the framework until they can get more assurances about the fiscal effects of some of the provisions.

Obviously, in moving from a $3.5 trillion bill to a $1.75 trillion bill, a lot has now been dropped from the legislation. Although further changes are anticipated, it seems very likely that the legislation will continue to stay much closer to the $1.75 trillion figure. This column will highlight what's currently still in, and what was taken out of, the latest framework.

Individual tax provisions

The original proposals to raise the top individual income tax rate and the top capital gain tax rate for incomes in excess of $400,000 have been eliminated. In their place is a 5% surcharge on modified adjusted gross incomes in excess of $10 million and an additional 3% surcharge on modified AGI in excess of $25 million. For estates and trusts, the surcharges would kick in at $200,000 and $500,000 respectively.

The 3.8% net investment income tax would be expanded to apply to owners of pass-through businesses with incomes in excess of $500,000 for joint filers and $400,000 for single filers. The change is intended to apply to income not already subject to FICA taxes.

The prohibition on excess business losses of noncorporate taxpayers, currently scheduled to expire after 2025, would be made permanent. Carryforward losses would be treated as excess business losses rather than net operating losses.

With respect to the exclusion of gain on the sale of qualified small business stock, the current 75% and 100% exclusion rates would be eliminated for AGIs of $400,000 or more and for any trust or estate. This provision would be retroactive to sales or exchanges after Sept. 13, 2021.

The extensions to the individual tax credits in the American Rescue Plan for 2021 have been scaled back in the current Build Back Better framework. The Child Tax Credit enhancements would be extended only through 2022, except refundability of the credit would be made permanent. The enhancements to the Earned Income Tax Credit for childless taxpayers would also be extended through 2022. The changes to the Premium Assistance Credit would be extended through 2025, along with a few additional modifications. The Health Coverage Tax Credit would be made permanent and increased to 80% of qualified health insurance premiums. It appears that the enhancements to the Child and Dependent Care Credit and exclusion for employer-provided dependent care, currently scheduled to expire at the end of 2021, would not be extended under this framework.

Estate tax provisions

Many of the proposed estate tax changes included in the Ways and Means Committee version have been dropped. These include changes to the estate tax exemption, the grantor trust rules, and valuation discounts.

Business tax provisions

Similar to the individual tax rate provisions, proposed changes to the corporate tax rate did not survive into the latest framework. In their place is a proposed corporate minimum tax of 15 percent on corporations’ adjusted financial statement income, but only if the average annual adjusted financial statement income was in excess of $1 billion for the three prior tax years. The income threshold falls to $100 million for a corporation subject to U.S. tax that has a non-U.S. parent.

The framework would also impose a 1% excise tax on stock repurchases by publicly traded U.S. corporations.

The framework would impose a limitation on the net interest expense allowed as a deduction by a domestic corporation that is part of a multinational financial reporting group and that has average net interest expense exceeding $12 million annually over a three-year period.

Also included in the framework are provisions with respect to the orphan drug tax credit, worthless securities and partnership interests, gain and basis in divisive corporate reorganizations, prison facilities and REIT qualified income, the limitation on excessive employee remuneration, constructive sale rules and digital assets, the wash sale rules, amortization of research and development expenses, and funding the Black Lung Disability Trust Fund.

International tax provisions

Many of the prior provisions in the Build Back Better bill passed by the House Ways and Means Committee have survived into this framework. Some modifications have been made to the deduction for FDII and GILTI, BEAT, the Foreign Tax Credit provisions, the controlled foreign corporation provisions, portfolio interest, and notional principal contract income.

Energy tax provisions

Chris Ratcliffe/Bloomberg

The tax incentives for green energy largely survived in the latest framework for the Build Back Better bill. These include a variety of new tax provisions to promote green energy as well as extensions and modification to many of the current green energy provisions in the Tax Code.

Current status

The House has just passed the Senate-passed infrastructure bill and is looking at the Build Back Better bill. However, it is still not clear at this point if the votes are there to pass either bill. Following the Virginia election outcome, Democrats are feeling some pressure to resolve their differences and prove that they can enact some of the legislation on which President Biden campaigned. It may still take some further time and effort to line up the necessary votes.