The House of Representatives voted 228-206 on Friday to pass a key bipartisan measure underpinning President Biden’s infrastructure initiatives. The Infrastructure Investment and Jobs Act (IIJA), which had been approved by the Senate in August, now awaits President Biden’s signature.
Six Democrats in the House voted against the IIJA, which meant that support was needed from some of the thirteen House Republicans who voted in favor of the bill. The IIJA is identical to the version passed by the Senate August 10, and provides funding for “hard infrastructure” projects such as roads, bridges, and airports. It includes new reporting requirements for cryptocurrency. Notably, another IIJA provision will cut short the employee retention tax credit (ERTC) by repealing benefits that would have been available for the fourth quarter of 2021. This is likely to spawn problems for employers who already reduced payroll tax deposits in anticipation of the credit.
Meanwhile, House legislators resolved to vote on an updated version of the Build Back Better Act (BBBA), the counterpart to the IIJA that generally provides for green energy projects and social safety net initiatives, once its estimated revenue effects are available. All eyes now turn to the BBBA, and its continued evolution, detailed below.
Revenue and Spending Effects of the BBBA
One of the main hurdles to the BBBA’s approval has been its price tag, and to mitigate concerns over the cost of the legislation, lawmakers have made some changes to the bill since we released our comprehensive analysis.
The $1.75 trillion in BBBA spending would be mostly offset by revenue-raising measures, according to the Joint Committee on Taxation (JCT). The JCT indicated on Thursday that tax increases under the BBBA would raise $1.48 trillion. These tax increases would principally consist of the following:
- $319 billion (22%) from the corporate alternative minimum tax on book income
- $279 billion (19%) from international tax changes
- $252 billion (17%) from expansion of the net investment income tax
- $228 billion (15%) from the income tax rate surcharge on high-income individuals, estates, and trusts
- $160 billion (11%) from additional limitations on excess business losses for noncorporate taxpayers
- $124 billion (8%) from the excise tax on corporate stock buyback transactions
- $114 billion (8%) from other measures
The revenues from the proposed tax increases were estimated for the 10-year period spanning 2022-2031.
Lawmakers in the House noted that the residual $270 billion in spending could be offset by an estimated $400 billion in tax collections through enhanced IRS enforcement to close the tax gap. The JCT does not include that type of revenue in its estimates because it pertains to “hoped-for but quite uncertain savings [that] are used to offset near-term certain spending increases.”
Lawmakers in the House pledged to vote on the BBBA once they receive an alternative revenue estimate from the Congressional Budget Office (CBO) to compare with the JCT estimates. The CBO’s estimates will also exclude the estimated tax collections figure, but will nevertheless quantify it as “nonscorable revenue.” It is expected that the CBO estimates could take two to three more weeks to complete.
BBBA Provisions Substantially Unchanged from the October 28 Draft
The November 3 draft of the BBBA legislation contains the following items that remain substantially unchanged from the October 28 draft. For a more in-depth look at any of these provisions, please refer to our earlier publication.
Domestic Corporate Tax Reforms
- Corporate alternative minimum tax
- Excise tax on repurchase of corporate stock
- Limitation on deduction of interest expense
- Modifications to treatment of certain losses
- Adjusted basis limitation for divisive reorganization
- Modifications to exemption for portfolio interest
- Limitation on certain special rules for Section 1202 gains
- Rules relating to common control
- Modification of wash sale rules
- Research and experimental expenditures
- Possessions economic activity credit
Tax Increases for High-Income Individuals
- Application of Net Investment Income Tax to trade or business income of certain high-income individuals
- Limitations on Excess Business Losses of non-corporate taxpayers
- Surcharge on high income individuals, estates, and trusts
Social Safety Net Spending Provisions
- Temporary extension of increased Child Tax Credit
- Permanent refundability of Child Tax Credit
- Permanent expansion of Earned Income Tax Credit for childless individuals
- Temporary expansion of Healthcare Tax Credits
- A new scholarship program for medical students in rural and underserved areas
- A new credit for contributions to qualified public university research programs
- Changes to the university endowment excise tax
- Exclusion of Pell Grant funds from gross income
- Removal of drug conviction bar for the American Opportunity Credit
Green Energy Credits and Incentives:
- Extension of Production Tax Credit
- Extension of Business Energy Credit
- Qualifying Electric Transmission Property Credit
- Extension of Carbon Oxide Sequestration Credit
- Zero-Emission Nuclear Power Production Credit
- Credit for renewable fuels
- Expansion of Energy Efficient Commercial Buildings Deduction
- Extension or expansion of other business provisions (summarized under section V.J. in our previous article)
- Modification of procedural requirements relating to assessment of penalties
- Modifications to limitation on deduction of excessive employee remuneration
- Prohibited transactions relating to holding DISC or FSC in individual retirement accounts
Funding the Internal Revenue Service, Improving Taxpayer Compliance and Other Provisions
- Funding of the Internal Revenue Service
Finally, all of the international corporate reforms profiled in our previous comprehensive analysis remain substantially unchanged in the November 3 draft of the BBBA.
Significant Changes to the November 3 Draft of the BBA
Lawmakers in the House coalesced around some notable changes that are included in the November 3 draft of the BBBA. We organized these changes into topical areas of interest.
Increase to State and Local Tax Deduction
Limit on Itemized Deduction for State Taxes. The BBBA would increase the individual limitation on the deduction for state and local taxes from $10,000 to $72,500 ($36,250 in the case of an estate, trust, or married individual filing a separate return), and extend the limitation through 2031. This provision would be made effective for taxable years beginning after 2020.
Provisions Relating to Individual Retirement Plans
Tax Treatment of Rollovers to Roth IRAs and Accounts. In order to close the so-called “back-door” Roth IRA strategy, and a similar one for retirement plans, the bill would prohibit all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to Roth accounts regardless of income level, effective for distributions, transfers, and contributions made after Dec. 31, 2021.
In addition, the bill would eliminate Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision would apply to distributions, transfers, and contributions made in taxable years beginning after Dec. 31, 2031.
Statute of Limitations with Respect to IRA noncompliance. The bill would expand the statute of limitations for IRA noncompliance related to valuation-related misreporting and prohibited transactions from 3 years to 6 years to help IRS pursue these violations that may have originated outside the current statute’s 3-year window. This provision would apply to taxes to which the current 3-year period ends after Dec. 31, 2021.
IRA Owners Treated as Disqualified Persons for Purposes of Prohibited Transactions Rules. The bill would clarify that, for purposes of applying the prohibited transaction rules with respect to an IRA, the IRA owner (including an individual who inherits an IRA as beneficiary after the IRA owner’s death) is always a disqualified person. This section would apply to transactions occurring after Dec. 31, 2021.
Social Safety Net Spending Provisions
Paid Leave Program. Beginning in 2024, up to four weeks of paid leave would be provided to individuals on account of childbirth, recovery from major illness, or caring for family members. Individuals eligible for paid leave must have earned at least $2,000 of wages or self-employment income in the prior year. Additionally, eligible individuals must have at least some wages or self-employment income during the period in which they are claiming leave.
The percentage of earnings that would be reimbursed would be based on the taxpayer’s income. A taxpayer with up $290 per week to in earnings would receive 90.138% of their weekly earnings under the program. Taxpayers who earn between $291 and $659 per week would receive 73.171%, and taxpayers who earn between $660 and $1,192 per week would receive 53.032%. Taxpayers with earnings above this highest threshold would not be eligible for paid leave under this program. These amounts would be indexed for inflation, and would be coordinated with state-level paid leave programs.
Extension and Expansion of Nonbusiness Energy Property Credit. The credit for qualified residential energy efficiency improvements (windows, doors, etc.) and residential energy property expenditures (air conditioners, heat pumps, etc.) would be extended from Dec. 31, 2021 to Dec. 31, 2031 with regard to the requisite placed in-service date. The credit would also be expanded to replace a lifetime cap with a $1,200 annual credit limitation (subject to certain exclusions), with an additional caveat that the credit would be limited to $600 per item.
Extension and Expansion of Residential Energy Efficient Property Credit. The credit for the cost of residential energy efficient property (solar electric, solar water heating, etc.) would be extended at the full 30% rate through Dec. 31, 2031, with phase downs in 2032 and 2033. The credit would also be expanded to include battery storage technology. The credit would still be made fully refundable, but the year that it becomes refundable would now start in 2024 instead of 2023.
Qualified Plug-In Electric Drive Motor Vehicle Credits. A new refundable credit would be created for new qualified plug-in electric drive vehicles, based on 50% of the vehicle purchase price. The credit would now be limited to one vehicle per-taxpayer per-taxable year. The base amount of the credit would be $4,000, with an additional $3,500 available for vehicles placed into service before Jan. 1, 2027. Additionally, a $4,500 increase to the credit would be allowed if the vehicle is assembled in a U.S. facility operating under a union-negotiated collective bargaining agreement. And another $500 increase to the credit would be allowed if the battery cells are manufactured within the U.S. Beginning Jan. 1, 2027, the credit would not be allowed unless the final assembly is within the U.S.
No credit would be allowed for vehicles having a manufacturer’s suggested retail price that exceeds $80,000 (vans), $80,000 (SUVs), $80,000 (pick-up trucks), or $55,000 (any other vehicle). Note that these levels are higher than previously proposed (which were $64,000, $69,000, $74,000, and $55,000, respectively).
Taxpayers with modified adjusted gross income in excess of $500,000 (married filing joint), $375,000 (head of household), or $250,000 (all other filers) would be subject to phase-outs on the credit amount. Note that these levels are lower than previously proposed (which were $800,000, $600,000, and $400,000, respectively). The new credit would be allowed for vehicles acquired after Dec. 31, 2021, and before Jan. 1, 2032.
No changes were proposed to the comparable credit for previously-owned qualified plug-in electric drive vehicles, described in our previous article.
Other Credits and Incentives
Low-Income Housing Credit. The low-income housing credit (LIHC) is available to owners of residential rental property that is used for low-income housing projects. Such owners must obtain a LIHC allocation from a state or local government credit authority. These authorities have only limited amounts of credits to disburse, which are based on a specific dollar value per capita in the state. The bill would temporarily increase this dollar value for calendar years 2022-2025, after which the dollar value would revert to current law levels. The provision would be effective for calendar years after Dec. 31, 2021.
Other proposed changes to the LIHC include an easing of credit eligibility for buildings financed by tax-exempt bond proceeds, a 50% “basis boost” for buildings occupied by a percentage of extremely low-income tenants, the repeal of the “qualified contract” rule which would otherwise maintain credit eligibility after the sale of the building, and a modification to the “right of first refusal” rule pertaining to credit eligibility based on purchases of the building.
Other Credits and Incentives. The bill would also add or modify other credits and incentives, pertaining to the following:
- A new neighborhood homes credit to encourage the rehabilitation of deteriorated homes in distressed neighborhoods
- Issuances of tax-exempt debt by Indian tribal governments
- A new credit for low-income communities in tribal areas
- Enhancement of eligibility for a “basis boost” on buildings located in an Indian area
- Tax favorable treatment for assistance to certain farm loan borrowers
- Tax favorable treatment for homeowner grants to support natural disaster mitigation efforts
These provisions generally would be effective for calendar years after Dec. 31, 2021.
Path Forward for the BBBA and the IIJA
Lawmakers in the House and Senate have been working together closely on the BBBA in order to negotiate mutually agreeable provisions. This implicates a pre-existing level of understanding within the Senate, but concerns from certain Senators remain. For instance, Senator Joe Manchin (D-WV) indicated that he will need to study the revenue effects of the BBBA once the scores from the JCT and the CBO are both available. This could stretch into late November or early December, depending on the timing of the CBO revenue estimates. In the meantime, it is prudent to begin analyzing how the provisions in the BBBA could impact year-end tax planning activity.
President Biden’s timing for signature of the IIJA remains uncertain. Meanwhile, employers will need guidance about the IIJA’s retroactive repeal of the employee retention credit for the fourth quarter of 2021.
If you have questions about how these provisions would impact you or your business, please contact us.
Nate Smith is a Director in the CBIZ National Tax Office. He can be reached at 727.572.1400 or firstname.lastname@example.org.
Bill Smith is a Managing Director for CBIZ MHM’s National Tax Office. He can be reached at 301.907.2412 and email@example.com.
Eric Strawder is a Tax Manager at the National Tax Office at CBIZ. He can be reached at 816.945,5500 or EStrawder@cbiz.com.
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