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The Green Book – President Biden’s Tax Proposals

21 July 2021

To Our Valued Clients and Friends:

On May 28, 2021, the Biden Administration released its proposed 2022 Budget, in tandem with the U.S. Treasury Department’s release of its “Green Book,” which contains further details regarding the Administration’s tax proposals.

Some of the significant proposals to raise revenue to fund the American Jobs Plan include:

  • Increasing the corporate income tax rate from the current 21% to 28% for tax years beginning on or after January 1, 2022. For businesses with fiscal years which do not correspond with calendar years, the tax rate increase would apply to corporate income earned after December 31, 2021. Note that prior to the enactment of the TCJA, the maximum corporate income tax rate stood at 35%.
  • Creation of a 15% minimum tax on corporations whose worldwide pre-tax income amounted to $2 billion or more for tax years beginning January 1, 2022.
  • Repealing various oil and gas tax benefits – for example, taxpayers would no longer be allowed to expense intangible drilling costs, such as wages, fuel, and repairs. Exploration costs pertaining to domestic oil, gas, and coal would be required to be capitalized rather than expensed. Publicly traded partnerships deriving 90% or more of their gross income from fossil-fuel-related activities would no longer be treated as partnerships for income tax purposes, and would therefore be liable for corporate income tax liability for tax years beginning on or after January 1, 2026. These are only a few of the oil and gas-related tax benefits the Biden Administration proposes to eliminate.
  • However, the provisions include expansion and extension of numerous tax credits for non-fossil-fuel energy investment (ITCs) and production (PTCs). For example, under current law, solar energy plants whose construction began or begins before the end of 2022 are eligible for a 26% ITC, dropping to 22% for facilities on which construction begins in 2023, and 10 10% thereafter. The proposal is to extend a 30% ITC for such facilities, and for geothermic facilities, on which construction is begun after 2021 and before 2027, with a phase-down of 20% of the credit for each tax year thereafter beginning in 2027. The ITC is further expanded to include stand-alone energy storage facilities which have a capacity of 5 kWh or greater. Other renewable energy tax credits are included, expanded, or extended.

To fund the American Families Plan, the Administration proposes:

  • Increasing the top income tax rate for individuals from 37% to 39.6%, effective for tax years beginning on or after January 1, 2022. Note that the current 37% top rate was enacted in 2017’s Tax Cuts and Jobs Act (TCJA), but as a temporary measure which absent, the Biden Administration’s proposed increase would have expired effective for tax years beginning on or after January 1, 2026. 
  • Reducing the income threshold at which the top income tax rate kicks in from $523,600 for single filers and $628,300 for married couples filing jointly in 2021 to $509,300 and $432,700, respectively, for tax years beginning on or after January 1, 2022. The income thresholds will remain indexed to inflation. 
  • Taxing capital gains and qualified dividends at ordinary income rates for taxpayers with adjusted gross income (AGI) of over $1,000,000. This would raise the tax on capital gains to a maximum of 43.4% – this represents the 39.6% top income tax rate plus the 3.8% net investment income tax (see below). Currently, capital gains are subject to a top tax rate of 20% for assets held longer than one year. This provision, according to the Green Book, would be effective retroactively as of “the date of the announcement,” though whether this refers to the date the proposed American Families Plan was announced (April 28, 2021) or the date the Budget and Green Book were released – one month later – is not clear.
  • Treating gifts and death as “realization events” for capital gains purposes. This means that gifts and bequests are subject to taxation on capital gains from the date of the asset’s initial purchase to the date of the gift or bequest. Currently, such gifts and bequests are subject to capital gains taxes only on the appreciation from the date the asset is transferred to the date it is disposed of by the recipient. Taxation on bequests would be deductible against estate tax liabilities. This provision would apply only to asset transfers among individuals or entities owned by or benefitting individuals, not to charitable donations of appreciated assets to donor-advised trusts or 501(c)(3) organizations. This would become effective for property gifted or transferred by bequest after December 31, 2021. For certain property owned by trusts, partnerships, and other non-corporate entities, the provision would become effective January 1, 2022.
  • Exclusions for bequests would include a $1,000,000 per-person exclusion, a $250,000 per-person exclusion for bequeathed residences (not limited to principal residences), and transfers to spouses until the asset is disposed of by or inherited from the spouse. Transfers of certain small business stocks and family businesses (such as farms) also benefit from exclusions, for so long as the business remains family-operated. The Green Book makes no mention of such exclusions with respect to gifts. 
  • Extension of the net investment tax of 3.8% to apply to all business income earned by taxpayers whose income exceeds $400,000, to the extent that such income is not subject to employment taxes, effective for tax years beginning on January 1, 2022. This is a significant departure from the current tax code, which imposes the net investment tax only on passive income, including dividends, interest, and other income a taxpayer receives from businesses in which they do not materially participate.
  • Imposition of self-employment tax on distributive shares of limited partners, LLC members, and S-Corporation owners who materially participate in their businesses and whose income exceeds $400,000, effective January 1, 2022. Current exclusions for such income as rents, dividends, and capital gains will remain in force. 
  • Taxation of carried interest as ordinary income, subject to self-employment tax for individuals whose business income exceeds $400,000, effective January 1, 2022.
  • Limiting capital gain deferral on “like-kind” exchanges (e.g., 1031 exchanges) to a total amount of $500,000 per individual annually ($1,000,000 for married couple filing jointly) effective January 1, 2022. The Green Book does not specify how the limit will be determined for entities rather than individuals, e.g., at the partner or partnership level.
  • Making permanent for non-corporate taxpayers the current limitation on deductions for non-passive business losses – $262,000 per individual, $524,000 for married couples in 2021 – which would have otherwise expired for tax years beginning on or after January 1, 2027.

Taken together, these proposals represent sweeping changes to the current tax code; it remains to be seen what the Congressional response, ultimately, will be. 

There has been enough pushback on some of the proposals from both sides of the aisle that infrastructure spending, initially part of the American Jobs Plan, has been broken out as stand-alone legislation, due to opposition from Senators from both parties to some of the more comprehensive Plan’s provisions. The remaining provisions of the American Jobs Plan are up in the air at present but may be addressed in Congress at a future date.

President Biden is currently traveling through the Midwest to push the American Families Plan.

If you have questions as to how these proposals, if enacted, might affect you and your business, please click here to email me directly – my team and I are here to help.

Until next Wednesday – 

Peace,

Eric

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