On May 28 the Treasury Department released the General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals. This document, traditionally known as the Green Book, outlines in greater detail the Administration’s tax proposals which were initially previewed in the American Jobs Plan and the American Families Plan. President Biden’s proposals, if enacted, would have a wide ranging impact on wealthy individuals and on businesses.
It is important to remember that these proposals are just a starting point for any potential tax law changes. The Green Book outlines the President’s “wish list” for tax policy, but it is Congress that must draft and pass tax legislation. And because tax legislation must originate in the House of Representatives, Democrats in the House will be the early group to watch as any tax legislation takes shape. The sharply divided Senate would be the next stop, where procedural rules could require significant revisions to fit under the Senate’s budget reconciliation rules. And on June 6, West Virginia Democrat Joe Manchin wrote an op-ed in the Charleston Gazette-Mail stating his intention to vote with Republicans to effectively kill the For the People Act that the Administration believes is needed to secure free and fair elections and protect against voters restrictions imposed by states. This could be an early indicator of how he will approach the Administrations infrastructure and tax bills.
So while the additional detail provided by the Green Book helps to clarify President Biden’s proposals, any final legislation could vary significantly in both the major points and the final details. With that caveat in mind, an overview of the Green Book’s major points and some observations follows. This begins with major business provisions, continues with the individual provisions most likely to affect wealthy taxpayers, and concludes with some significant omissions.
Reviewing the details included in the Green Book may help provide a more detailed roadmap to where changes to tax legislation may be targeted and assist with business and individual tax planning efforts.
Biden Tax Proposal: Business Provisions
Raise the corporate tax rate to 28%, up from the current 21%
Effective Date: Jan. 1, 2022
Additional Details: For fiscal year C corporations, there would be a blended rate in the initial year with the tax being 21% plus an additional 7% tax applied to the portion of the taxable year that begins in 2022. This rate increase would apply to all C corporations regardless of size or whether they are publicly traded or privately held.
CBIZ Observations: Senator Joe Manchin (D-VW), a critical vote in any tax plan, indicated that he disfavors the idea of a 28% corporate tax rate, though he did say that 25% would be realistic. This is just one of many examples where individual members of Congress can have significant influence on the contours of any tax plan.
A 15% minimum tax on book income for large corporations
Effective Date: Jan. 1, 2022
Additional Details: This provision would impose a 15% minimum tax on corporations with worldwide book income that exceeds $2 billion. In particular, taxpayers would calculate book tentative minimum tax (BTMT) equal to 15% of worldwide pre-tax book income (calculated after subtracting any book net operating loss deductions), less General Business Credits (including research and experimentation, clean energy, and housing tax credits) and foreign tax credits. This book income tax would be creditable against the corporation’s regular tax in future years.
CBIZ Observations: The book income tax would be limited to very large corporations, but reports indicate that the Biden administration has offered to expand this tax as an alternative to raising the corporate tax rate to 28% as part of ongoing negotiations. The book income tax bears many similarities to the corporate alternative minimum tax (AMT) that was repealed under the 2017 tax law commonly known as the Tax Cuts and Jobs Act (TCJA). Because GOP members of Congress have indicated that changes to the TCJA are nonstarters, the new book income tax (albeit similar to the former AMT) could perhaps be more palatable.
Make the excess business loss limitation permanent
Effective Date: Jan. 1, 2027
Additional Details: The excess business loss limitation prevents individuals from deducting business losses in excess of $250,000 ($500,000 for joint return filers). This provision, enacted as part of the TCJA, is set to expire at the close of 2026.
Tax carried interests as ordinary income
Effective Date: Jan. 1, 2022
Additional Details: This proposal would increase the tax rate for hedge fund managers and other taxpayers who provide services to investment partnerships and are allocated income from a profits interest in the investment partnership. An investment partnership generally is one where substantially all of its assets consist of investment-type assets (e.g., certain securities, commodities, real estate, etc.). Such allocations would be subject to ordinary tax rates, as well as self-employment taxes, and would not be eligible for lower capital gains tax rates. The change would be applicable to all taxpayers making more than $400,000 per year.
CBIZ Perspective: The TCJA instituted a three-year holding period on carried interests in an effort to limit the benefit of the low 23.8% rate. This proposal would apply regardless of a partner’s holding period. Partners with adjusted gross income of more than $1 million would already have capital gains subject to ordinary tax rates under another of President Biden’s proposals, rendering this carried interest proposal moot for such taxpayers.
Expand and harmonize the Net Investment Income Tax (NIIT) and Self-Employment Contributions Act (SECA) tax system
Effective Date: Jan. 1, 2022
Additional Details: This change would apply either the NIIT or the SECA tax to pass-through income from both partnerships and S corporations to high income taxpayers. First, for taxpayers with adjusted gross income over $400,000, the net investment tax would apply to gross income and gain from any trade or business that is not otherwise subject to self-employment taxes. Secondly, the classes of income subject to SECA taxes would be expanded to include distributive shares of pass-through income to include limited partners, LLC members, or S corporation shareholders, when the owner provides services and materially participates in the business.
CBIZ Perspective: The SECA tax proposal would upend a foundational principle of taxation for S corporation shareholders, subjecting their income allocations to SECA tax to the extent they exceed certain threshold amounts. The SECA tax proposal would also eliminate the “limited partner” exception for partnerships that has vexed taxpayers and the courts for years. And the NIIT proposal would expand its reach so that it would not matter whether the taxpayer materially participated in the pass-through business. Notwithstanding these issues, legislation cannot affect Social Security taxes when enacted using the Senate budget reconciliation process. This potentially could mean that only the Medicare portion of the SECA tax can be altered in order to remain within the confines of these rules.
Cap benefits under the like-kind exchange deferral rules
Effective Date: Exchanges “completed” beginning Jan. 1, 2022
Additional Details: Gains deferred under like-kind exchanges would be capped at $500,000 ($1,000,000 for joint filers) per taxable year. Gains in excess of these thresholds would be recognized and taxed accordingly.
CBIZ Perspective: The $500,000 ($1,000,000) exception is determined on an aggregate basis and not a per exchange basis. The wording of the effective date suggests that in-process exchanges commenced prior to Jan. 1, 2022 would still be subject to the new cap. Also, it is unclear how these caps would integrate with exchanges completed by pass-through entities.
Biden Tax Proposal: Individual Provisions
Increase the top tax rate for individuals to 39.6%, up from 37%
Effective Date: Jan. 1, 2022.
Additional Details: The proposal would increase the top marginal individual income tax rate to 39.6%. This rate would be applied to taxable income in excess of the 2017 top bracket threshold, adjusted for inflation. In taxable year 2022, the top marginal tax rate would apply to taxable income over $509,300 for married individuals filing a joint return, $452,700 for single individuals.
CBIZ Perspective: The proposed tax bracket thresholds are an important detail revealed in the Green Book that was not provided in earlier proposals. These thresholds would be lower than those that apply under current law to the highest tax bracket ($628,300 for married individuals filing a joint return, and $523,600 for single filers).
Tax capital gains for high income taxpayers at ordinary income rates
Effective Date: Retroactive to the “date of announcement”
Additional Details: This proposal would tax capital gains at ordinary income tax rates for taxpayers with adjusted gross income that exceeds $1 million ($500,000 for married taxpayers who file separately).
CBIZ Perspective: The Green Book again clarifies a significant detail that was previously unclear, in specifying that the $1 million threshold is based on adjusted gross income, and the threshold applies equally to both single filers and married individuals filing a joint return. By way of example, the Green Book also clarifies that all sources of income (including capital gains) are used to measure the $1 million threshold. Notwithstanding these nuances, the effective date creates an additional concern. It is not yet clear whether the “date of announcement” is April 28, the day President Biden released the American Families Plan (AFP), or if it is May 28, the date the Green Book was released, or if a different date might apply when legislation is introduced in the House of Representatives. In any case, the retroactive nature of the provision makes this a challenge for tax planning. Taxpayers may be forced to work to mitigate the tax impact instead of being able to plan for a more favorable outcome.
Treat transfers of appreciated property by gift or on death as realization events
Effective Date: Jan. 1, 2022
Additional Details: Transfers of property by gift or on death would no longer be sheltered from taxation at the time of the transfer. Under the proposal, the excess of the property’s fair market value on the transfer date over the transferor’s basis in the property would be deemed realized as capital gains by the transferor. Additionally (effective Dec. 31, 2030), gains on property that have not been the subject of a recognition event in the past 90 years would be deemed realized when transferred to or from a trust (other than a grantor trust), partnership, or other non-corporate entity. There is an option to pay the tax over a 15-year period in certain instances.
Family owned and operated businesses would not be subject to this deemed realization rule until the interest in the business is sold or the business is no longer family owned and operated. The $250,000 ($500,000 MFJ) exclusion from capital gains on a principal residence would be maintained. Gains from transfers of tangible personal property, such as household furniture and personal effects (excluding collectibles), would be exempt. There would also be a $1 million per-person (indexed for inflation) exclusion for gifts and transfers at death. This exclusion would be per spouse and any unused portion is transferrable from one spouse to the other upon the death of a spouse.
CBIZ Perspective: When gains are triggered under the deemed realization rule, the recipient obtains a basis in inherited/gifted property equal to its fair market value on the transfer date. However, the deemed realization of gains on transfer would cause “phantom” income to the transferor, meaning transferors may not have cash to pay the resulting tax. Furthermore, it is not clear whether a threshold for de minimis gifts (currently $15,000) would continue to be excluded. Although it is not mentioned in the Green Book, presumably gifts to spouses and to charities would be exempt from such phantom income. Regarding the gain exclusion on a principal residence, it is unclear whether the exclusions will be applied only to actual sales or exchanges, or if they will be applied to a deemed transfer of the principal residence when the other deemed transfer rules are triggered.
As previously discussed, some legislators from high-tax states have stated that they will not support tax law changes without a repeal of the $10,000 state and local tax (SALT) cap. In light of the fierce advocacy for repeal by these legislators, it is notable that repeal is not mentioned in the Green Book. A full repeal of the SALT cap would require additional offsetting tax increases and would benefit wealthier individuals, which likely weighed against inclusion in the Green Book.
The Green Book also does not discuss a cap or any other significant change to the Qualified Business Income (QBI) deduction. Repealing QBI benefits for individuals making more than $400,000 was part of President Biden’s campaign. Because this would be a substantial revenue raiser, it may later emerge if other revenue raisers prove to be unfeasible.
The Green Book provides greater detail on the President’s tax plan that was eagerly awaited in the wake of earlier proposals. Again, the Green Book simply outlines the President’s agenda for tax policy, and it is Congress that will have to draft, and eventually pass, any tax legislation. Although President Biden enjoys a Democratic majority in the House of Representatives, the Senate is likely to be the chamber that creates the most difficulties for him to be able to move forward with his infrastructure and tax proposals. As a result, the contours of final legislation may vary significantly in both the major points and the final details. For additional information on the Administration’s tax plan, please contact us.
Bill Smith is a Managing Director for CBIZ MHM’s National Tax Office. He can be reached at 301.907.2412 and firstname.lastname@example.org.
Nate Smith is a Director for CBIZ MHM’s National Tax Office. He can be reached at 727.572.1400 and email@example.com.
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