Right before the Memorial Day weekend, the U.S. Treasury released its Fiscal Year 2022 explanation of the various proposals included in President Biden’s “Made in America” tax plan. Legislation has yet to be drafted and the proposal and details of the provisions included in what’s known as the Green Book are likely to change during the legislative negotiations. With so many questions resulting from the release, here is an overview of some of the tax proposals.
- Increase the corporate tax rate – There are proposed changes for C Corporations from 21 to 28 percent. The new tax rate would be effective for taxable years beginning after December 31, 2021.
- Impose a 15% minimum tax – A minimum tax would be issued on worldwide book income for corporations with such income in excess of $2 billion; called a book tentative minimum tax (BTMT). The minimum tax would be equal to 15% of world-wide pre-tax book income less General Business Credits and Foreign Tax Credits. A book tax credit would be allowed against regular tax in future years but could not reduce tax liability below the BTMT in that year. BTMT would be effective for taxable years beginning after December 31, 2021.
- New general business credit – The proposed plan creates a new general business credit equal to 10 percent of eligible expenses paid or incurred in connection with onshoring a U.S. trade or business. In addition, the proposal will reduce tax benefits associated with U.S. companies moving jobs outside of the United States by disallowing deductions for expenses paid or incurred in connection with offshoring a U.S trade or business.
- Increase the top marginal individual tax – The newly proposed rate for top earners is 39.6 percent. This rate would be applicable for taxable years beginning after December 31, 2021. In taxable year 2022, the top marginal rate would apply to income over $509,300 for married individuals filing joint and $452,700 for single taxpayers.
- Long-term capital gains – Long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed using ordinary income tax rates, plus 3.8% net investment income tax (total 43.4%). This change may be effective to the “date of announcement”. It is unclear whether such date would be the date of the May 28, 2021 budget reveal or when President Biden unveiled the American Families Plan on April 28, 2021.
- Pass-through income — All pass-through income of high-income taxpayers (those with adjusted gross income over $400,000) will be subject to 3.8-percent Medicare tax, either through the net investment income tax or Self-Employment Contributions. This includes income earned by limited partners in a partnership or LLC and S Corporation shareholders.
- Excess business loss – The proposal makes permanent the excess business loss limitation which was enacted under the Tax Cuts and Jobs Act of 2017 and is set to expire in for tax years beginning Jan 1, 2027.
- Earned Income Tax Credit – This also makes permanent the expanded Earned Income Tax Credit, changes to the Child and Dependent Care Tax Credit, and extends the Child Tax Credit increase through 2025 and makes permanent full refundability. These are items enacted with COVID-19 related stimulus.
Interestingly, the current proposal does not eliminate the qualified business deduction as expected.
Estate & Gift Tax
- Capital gain income — The proposal addresses a change in the overall taxation of capital gain type income and includes various implications in the area related to transfers of appreciated property by gift or on death. Specifically, the proposal:
- Imposes a deemed taxable gain at the time of transfer due to gift or at death
- Imposes a deemed taxable gain event to trusts, partnerships and other non-corporate entities if the property has not had a recognition event within 90 years
- Has exclusions for certain tangible personal property, the exclusion for small business stock, as well as an additional exclusion of $1.0M per person ($2.0M for a married couple) from recognition of other unrealized gains on transfer
These proposals when combined with the Bills already introduced by Senator Sanders and Senator Van Hollen would result in a major overhaul to the transfer tax regime and planning tools that have been used for decades.
In addition to the above, the proposal taxes carried interest as ordinary income, repeals deferral of gain in excess of $500,000 on like-kind exchanges and establishes various clean energy credits.
Amid legislative change, count on Clayton & McKervey to keep you informed of updates that impact you and your business. Beyond the corporate and individual outline provided here, learn about the proposed international impacts if applicable to your situation. We are dedicated to finding the best solution for every client as President Biden’s plans unfold and are formalized. Follow us on LinkedIn or subscribe to our newsletter for the latest information.