Biden Administration’s FY 2022 Budget And Its Tax Increases For Corporations, Wealthy – Tax

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Highlights The Biden Administration on May 28, 2021, released its fiscal year (FY) 2022 budget. The $6 trillion budget, the largest since World War II, focuses on rebuilding the nation’s aged infrastructure, augmenting the social safety net and combatting income inequality. The theme is to grow the U.S. economy […]

Highlights

  • The Biden Administration on May 28, 2021, released its fiscal
    year (FY) 2022 budget. The $6 trillion budget, the largest since
    World War II, focuses on rebuilding the nation’s aged
    infrastructure, augmenting the social safety net and combatting
    income inequality. The theme is to grow the U.S. economy from the
    bottom up and middle out, and not from the top down.

  • To fund some of these expenditures, the Biden Administration
    proposes to increase taxes on the wealthy and corporations and to
    enhance Internal Revenue Service (IRS) compliance, information and
    enforcement initiatives, projected to raise $3.6 trillion in
    revenues over a decade.

  • This Holland & Knight alert provides an overview of the
    proposed corporate and individual income tax increases as detailed
    in the U.S. Department of the Treasury May 2021 General
    Explanations of the Administration’s Fiscal Year 2022 Revenue
    Proposals (the so-called Green Book). Subsequent alerts will focus
    on discrete topics, such as the impact of proposals on estate and
    wealth transfer planning, carried interests, Green Energy, select
    international tax changes, repeal of BEAT and replacement by
    SHIELD, interaction of the U.S. global minimum tax proposal with
    the Organization for Economic Cooperation and Development (OECD)
    Inclusive Pillar 1 and Pillar 2 initiatives and enhanced IRS
    compliance, enforcement and information reporting.

  • These proposals reflect the administration’s priorities and
    should be viewed as an opening bid in negotiations with Congress.
    Changes are likely, particularly because of the close margins by
    which the Democrats control the House and Senate and also because
    of the views of some of the more moderate Democratic members in the
    Senate. It will be important to carefully monitor Congressional
    considerations.

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?

Footnotes

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).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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