SUMMARY OF SPECIFIC ITEMS
DISCLAIMER: THIS SUMMARY IS FOR INFORMATION PURPOSES ONLY. NO REPRESENTATION OR WARRANTY IS MADE WITH RESPECT TO THE ACCURACY, APPLICABILITY, FITNESS OR COMPLETENESS OF THE CONTENT OF THIS SUMMARY. ONLY CERTAIN PROVISIONS OF THE ADMINISTRATION’S PROPOSALS ARE INCLUDED IN THIS INFORMATIONAL SUMMARY. IT IS LIKELY THAT DURING THE LEGISLATIVE PROCESS, AMENDMENTS, DELETIONS, AND ADDITIONS WILL BE MADE TO THE ADMINISTRATION’S PROPOSALS AND THAT THE FINAL ENACTED LAW COULD BE SIGNIFICANTLY DIFFERENT THAN THE PROPOSALS MADE BY THE ADMINISTRATION ON MAY 28, 2021 AND SUMMARIZED BELOW. WE WILL UPDATE THIS SUMMARY UPON PASSAGE OF THE BILL.
On May 28, 2021, the Treasury Department issued its “General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals”. Treasury’s Explanations, referred to as the “Green Book”, provides details of the Biden Administration’s tax policy proposals (the “Proposal” or “Proposals”). The full text of the 2022 Green Book can be found at:
This summary will focus on those proposals that we consider to have the greatest impacts on our clients. We will only briefly touch on certain aspects of the proposal, such as foreign tax considerations. We will also comment on the proposed changes, including noting various provisions of the tax law that were rumored to be targeted for repeal or change, but are not included in the Proposals. Remember - these are only proposals and the final changes in the law will not be effective until voted on by the House and Senate, and allowed to become law (either through signature or inaction) by the President. While no one can predict what the final law will be, the one prediction of which we are 99.9% confident is that the final changes will be different than the Proposals made by the Administration.
Noticeably absent from the Proposals are the following, which had been identified by Biden as possibilities for amendment or repeal during the 2020 campaign and on into early 2021:
(1) No reduction of the federal estate tax per person exemption - currently $11,580,000.00. Note - the exemption sunsets at the end of 2025 without further action by Congress, with the result being a return to pre-2017 exemption amounts.
(2) No repeal of the 20% business income deduction under Code Section 199A.
(3) No repeal of the state and local tax deduction limitation ($10,000.00);
(4) The elimination of miscellaneous itemized deductions continues; and
(5) The increased personal exemption amounts taking effect in 2017 also continue.
Although the above items are absent from the Proposals, it is possible that one or more of these items will be considered prior to final passage. For example, just yesterday, June 15, Senator Ron Wyden announced that he would propose an income limitation to the Section 199A business income deduction for pass through entities. His proposal calls for the phaseout to begin at $400,000 of income at the individual level, with a total elimination of the deduction at $500,000.
The below summary will focus in order on those Proposals we feel will have greatest impacts on our clients:
Corporate Tax Rate Increase
The corporate tax rate would increase from 21% to 28%. The increase would apply only to entities taxable as “C” corporations under the Internal Revenue Code. The 2017 Act eliminated brackets for corporate income and imposed a flat tax at 21%. The Proposal would simply increase this flat rate to 28%. The Proposal would be effective for taxable years beginning after December 31, 2021. For fiscal year corporations with tax periods in both 2021 and 2022, the tax rate would be 21% plus 7% of the portion of the taxable year that occurs in 2022.
Individual Income Tax Rate Increases
For married filing jointly filers and for single filers, under current law, the maximum rate of 37% applies to income over $628,300 and $523,600, respectively. The 37% maximum rate sunsets in 2025 and returns to 39.6%. The Proposal calls for a 39.6% rate to be applied to taxable income in excess of the 2017 top bracket thresholds, which are $509,300 and $452,700 for married filing jointly filers and single filers, respectively. The proposed effective date is January 1, 2022. After 2022, the thresholds would be indexed for inflation.
COMMENT: Though not addressed in the Proposal, presumably the thresholds for the lower brackets would be reduced to 2017 levels as well.
Taxation of Capital Gains
Current law taxes long term capital gains and qualified dividends at a maximum rate of 20% (23.8% if the taxpayer is subject to the 3.8% net investment income tax - referred to as the “Obama Tax”). The Proposal would tax long term capital gains and qualified dividends to the extent a taxpayer’s taxable income exceeds $1 million ($500,000 for single filers) at the maximum ordinary income tax rate, currently 40.3% (this rate includes the 3.8% net investment income tax) - would be increased to 43.4% under the Proposals. Thus, for example, a taxpayer who has $700,000 in earnings and $400,000 in long term capital gains would pay the tax at the preferential 23.8% rate on $300,000 of the gain and up to 43.4% on $100,000 of the gain. The Proposals identify an effective date of the “Announcement” - which would be April of 2021 and therefore retroactive. However, if passed, it is more likely the effective date will be the date of enactment OR January 1, 2022.
Partial Repeal of the Basis Step Up Rules of Code Section 1014
Of all the Proposals made by the Administration, this Proposal could possibly have the greatest effect on the largest number of individual taxpayers on a going forward basis. Under current law, upon the death of a taxpayer, that taxpayer’s heirs are entitled to increase the tax basis of property inherited from the deceased taxpayer to its fair market value as of the date of the taxpayer’s death. This basis step up rule has been a fixture of US tax law for over 100 years. The Proposals call for the following:
- A functional repeal of the basis step up rules - with a $1 million per person exclusion. The exclusion is calculated on the basis of the fair market value of the property.
- The repeal of Code Section 1014 would be replaced with a system that taxes built in gains (and allows losses) upon (1) the death of a taxpayer; (2) upon the gift of property by a taxpayer; and, (3) in the rare case, where property has not been subject to a gain recognition event for 90 years or more. Thus, for example, if a single taxpayer donated $2 million of appreciated land to his or her children, and the land had a basis of $800,000, the total gain would be $1.2 million - but the taxpayer would be entitled to exclude $1 million of that gain from recognition; and thus, gain income would be recognized on the $200,000 balance. The $1 million exclusion would be a lifetime exclusion and could be used only once.
- The Proposal would exclude tangible personal property and personal effects.
- The Proposal would call for a 15-year payment plan if the asset donated or inherited is an interest in a family owned and operated business.
COMMENTS: First, this Proposal would probably affect the largest number of taxpayers out of all the proposed changes in the Administration’s plan. Attempts to repeal the step up in basis rule failed in 1976 during the Carter administration and during the Obama administration. There are many unanswered questions regarding the application of the Proposal, and enforcement would be a daunting task for the IRS. Expect to see either major changes or failure of this proposal to become law.
Net Investment Income Tax and Payroll Taxes - Pass Through Entities
Under current law, the 3.8% Net Investment Income Tax (NIIT) is due on investment income of taxpayers who have taxable income in excess of $200,000 ($250,000 for joint filers). The NIIT does not apply to self-employment earnings. Self-Employment earnings are subject to social security taxes of 12.4% on such income (capped at $142,800) and the 2.9% Medicare tax that is not capped. Under current law, S Corporation income is not subject to the NIIT, social security taxes, and Medicare taxes. The Proposal calls for S corporation distributive share income to be subject to either payroll taxes or the NIIT. The measure is the “material” participation of the shareholder in the business of the Company. The same rule would apply to limited liability companies taxable as partnerships. The Proposals would apply only to taxpayers with income over $400,000. The effective date would be January 1, 2022.
Repeal of Like Kind Exchanges
The 2017 Act repealed like kind exchanges for tangible personal property, with exchanges in real estate continuing. The Proposal eliminates the ability to enter into a like kind exchange for real estate. There would be a $500,000 per person annual exemption ($1 million for joint filers) - this exemption is calculated on the basis of the fair market value of the exchanged property. The effective date of this proposal would be January 1, 2022.
Out of the Proposals made by the Administration, we considered the above Proposals to be of the greatest interest to our clients. Below is simply a listing of these proposals - please visit the Green Book if you are interested in further detail -
- Carried share of partnership interest taxable as ordinary income as opposed to long term capital gains.
- Repeal and elimination of long standing tax preference items for the oil and gas industry, including the expensing of intangible drilling costs, percentage depletion for royalty owners, and enhanced oil recovery credit.
- The creation of numerous alternative energy credits (zero emission vehicles, sustainable aviation fuel, and nuclear power credits.
- The creation of various low-income housing credits.
- Increases in individual credits, such as the earned income tax credit, dependent care assistance credit, and the child tax credit.
- Foreign Tax System Changes, including the revision of Global Minimum Tax Regime, the disallowance of deductions attributable to exempt income, and limit inversions, the elimination of preferences in the taxation of foreign fossil fuel income, the repeal the deduction for foreign-derived intangible income, the replacement of the base erosion anti-abuse tax (beat) with the stopping harmful inversions and ending low-tax developments (shield) rule, the limitation of foreign tax credits from sales of hybrid entities; the restriction of deductions of excessive interest of members of financial reporting groups for disproportionate borrowing in the united states; the provision of provide tax incentives for locating jobs and business activity in the united states and remove tax deductions for shipping jobs overseas
- Minimum Tax on Large Corporations. For C corporations with annual book income in excess of $2 billion, there would be a minimum tax of 15% on that book income, as opposed to taxable income. It is a minimum tax, meaning if a Corporation’s regular tax exceeds the minimum tax, no additional tax is due.
Francis J. “Jay” Lobrano
Belle Chasse, LA
147 Keating Drive
Belle Chasse, LA 70037
TEL: (504) 433.3100
FAX: (504) 433.3103