As the Build Back Better (BBB) legislation makes its way through congressional talks, there are changes in the works that could impact your upcoming tax obligations.
The first thing to know is that the Build Back Better act is evolving daily. Various pundits, legislators, and members of the executive branch have expressed their hopes of passing the bill before Christmas, but progress has been slow and details are still up for debate. Some of the factors that are creating legislative friction include:
- Amendments that are still underway as of this writing. The final BBB text has yet to be delivered to the Senate Parliamentarian for a determination on whether the bill conforms with budget reconciliation process rules.
- Some Senators whose votes are in play are waiting for a score from the non-partisan Congressional Budget Office (CBO) before they make a final decision (the bill will not pass without support of all Senate Democrats).
- Assuming they pass, changes to the Senate version of the bill will have to go back to the House of Representatives for another vote before heading to the President’s desk for signature.
- Other legislative business (such as passing the National Defense Authorization Act, the debt ceiling, confirmation hearings for executive branch nominees, and observances for the late Senator Robert Dole) has cut available calendar time.
12 BBB Changes That Could Result in a Bigger Tax Bill
Despite the uncertainties, it’s likely that some tax increases will be included in the final bill. These are some of the most significant impacts that may show up.
- Changes to the corporate profits minimum tax threshold
- Limits on excess business losses (rules governing conversion to Net Operating Losses)
- Potential cuts to reorganizations that can currently be done tax-free
- Applicable Financial Statement (AFS) income for large or foreign-owned corporations
- Reduction in qualified small business stock exclusion on gains up to $10M
- Changes to the 2017 Tax Cuts and Jobs Act (TCJA) State and Local Tax (SALT) deduction rules and income caps that are set to expire in 2025
- Expanded application of the Net Investment Income Tax (NIIT) provisions that were enacted as part of the Affordable Care Act to now include active trade and business income
- Proposed surcharges on high-income taxpayers (5% above $10M plus 3% above $25M)
- Restrictions (and adjusted minimum distributions) on retirement accounts with a combined value above $10M in the prior tax year, and elimination of certain Roth exclusions
- Adjustments to Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income calculations with more stringent country-by-country offset rules Limitations on the foreign tax credit that will make it harder to aggregate tax credits from foreign jurisdictions
- Modifications to the Base Erosion and Anti-Abuse Tax (BEAT) may include an increase in 2021 to 12.5 percent, scaling up to 18% in 2025 could mean a higher tax burden
- Extends the Tax Cuts & Jobs Act requirement to capitalize and amortize research and development costs from 2022 to 2025. If this rule does not pass, some taxpayers may see a significantly reduced benefit of the research credit beginning in 2022.
BBB Silver Linings for Taxpayers
Although some rules are changing that may result in higher line items on your tax bill, the Build Back Better Act also includes tax savings opportunities. Examples include a proposed extension of the Child Tax Credit through 2022, and new opportunities to claim clean energy credits for things like electric vehicle purchases.
6 Tax Conversations to Have Now
Talk with qualified tax, estate, and philanthropy advisors about how your individual situation aligns with the proposed tax code changes in the BBB.
- Weigh your capital gains options to see whether it’s better to harvest losses in the current year or delay them to offset gains that may be taxed later at a higher rate
- Consider accelerating income and deferring deductions where possible – bring income into the lowest tax year you can
- Accelerate M&A or other transactions to optimize your portfolio tax burden
- For installment sales closing in 2021, see if electing the installment method makes sense or whether it’s better to opt out and pay all the tax now when rates are lower
- Explore the advantages of converting traditional IRAs to Roth IRAs
- Find out if you qualify for alternative ways to benefit from the potentially sizeable Employee Retention Credit (ERC), such as recent supply chain issues
We provide expert tax planning and consulting services for clients in the manufacturing & distribution, architecture & engineering, and industrial automation industries in addition to other emerging business sectors. We would be happy to talk with you about the implications of pending legislation on your individual tax situation. Reach out today to learn more.