On Friday, November 19th, the U.S. House of Representatives passed H.R. 5376, the Build Back Better Act (BBBA), a $1.75 trillion spending, social policy, and climate change bill. After months of negotiations, the bill passed by a vote of 220-213, mostly along party lines. The bill now heads to the Senate, where we expect lawmakers to continue to negotiate and change elements of the bill. The Senate can pass the bill with a simple majority through the budget reconciliation process, but Democrats cannot afford any objections from moderate Democrats such as Joe Manchin of West Virginia and Kyrsten Sinema from Arizona. There are a number of major tax provisions included in the bill to help finance the spending package. We’ve summarized the major provisions impacting businesses and individuals below.
Major Business Tax Provisions
Corporate Alternative Minimum Tax
- Imposes a minimum tax of 15% on book income over the corporate AMT foreign tax credits for corporations with 3-year average gross receipts in excess of $1 billion
- If a corporation is a member of an international financial reporting group with a common foreign parent, the corporate alternative minimum tax would apply to corporations with more than $100 million in average gross receipts
Surcharge on Corporate Stock Buybacks
- For public companies, a tax equal to 1 percent of the fair market value of stock that is repurchased
- Applies to any repurchase after December 31, 2021
Limitation on Deductions for Interest Expense
- For domestic corporations or foreign corporations with effectively connected income that are members of an international financial reporting group, limits the amount of interest expense deduction allocable to the domestic corporation to 110 percent of the net interest expense
- The domestic corporation’s allocable interest expense is the group’s interest expense multiplied by a ratio of the corporation’s EBITDA to the group’s EBITDA
FDII and GILTI Changes
- The FDII deduction is reduced from 37.5% to 24.8% resulting in an effective rate of 15.8%
- The GILTI deduction is reduced from 50% to 28.5% resulting in an effective rate of 15%
- GILTI would be applied on a country-by-country basis rather than a global blended basis
Foreign Tax Credits
- Determined on a country-by-country basis
- The foreign tax credit computations would be done at a taxable unit level (controlled foreign corporation)
- The GILTI category foreign tax credit carryforward limitation is repealed
Amortization of Research Expenses
- Under the TCJA, research expenses incurred in 2022 and later were no longer immediately deductible and would be capitalized and amortized over 5 years (15 if incurred outside the U.S.)
- The BBBA proposes to defer the effective date of this provision until Jan. 1, 2026
Major Individual Tax Provisions
Modification of Limitation on Deduction for State and Local Taxes (SALT)
- Increases the deduction for state and local taxes from $10,000 to $80,000 through 2030
- After 2030, the limitation reverts back to $10,000 (under current law, the $10,000 limitation was set to sunset at the end of 2025)
- Effective for tax years 2021-2030
Extends the special 2021 changes to the Child Tax Credit (CTC) through 2022
- Includes a one-year extension of the CTC of $3,000 for a qualifying child over age 6 or $3,600 for a qualifying child under the age of 6
- Makes the CTC permanently refundable
Surcharge on High-Income Individuals, Estates and Trusts
- Imposes a 5% surcharge on the modified Adjusted Gross Income (AGI) that exceeds $10 million for individuals and joint filers ($200,000 for a trust or estate)
- Imposes an additional 3% surcharge on modified AGI that exceeds $25 million for individuals and joint filers ($500,000 for a trust or estate)
- Effective for taxable years beginning after Dec. 31, 2021
Applies the 3.8% Net Investment Income Tax (NIIT) to Trade or Business Income of Certain High-Income Individuals
- Expands the 3.8% NIIT to include income derived in the ordinary course of a trade or business of the taxpayer when AGI is greater than $400,000 for individuals ($500,000 for joint filers)
- Excludes income already subject to self-employment taxes or wages subject to FICA
- Effective for taxable years beginning after Dec. 31, 2021
Limitations on Excess Business Losses (EBL)
- Makes the $250,000 section 461(l) EBL limitation permanent ($500,000 for joint filers)
- Creates a new loss carryforward bucket for EBLs rather than being treated as net operating losses
Modification of Wash Sale Rules
- Expands wash sale rules to certain commodities, currencies, and digital assets (i.e. crypto assets) as well as the acquisition of substantially identical assets
- Effective for taxable years beginning after Dec. 31, 2021
Limitation on Certain Special Rules for Section 1202 Gains
- For any 1202 stock sold, taxpayers with AGI equal to or greater than $400,000, as well as all estates and trusts, may only exclude 50% of the gain (previously 75% or 100%)
- Applies to sales and exchanges after 9/13/21, subject to a binding contract exception
Contribution Limit for Individual Retirement Plans of High-Income Taxpayers with Large Account Balances
- Limits contributions when combined defined contribution plan and IRA account balances exceed $10 million
- Applies to taxpayers with taxable income above $400,000 ($450,000 for joint filers)
- Effective tax years beginning after 12/31/28
Limits the “Back-Door” Roth IRA Strategy and Roth Conversions
- No taxpayer, regardless of income level, can convert after-tax contributions to a designated Roth account or a Roth IRA after 2021
- High-income taxpayers cannot do a Roth conversion after 2031 (applies to taxpayers with taxable income over $400,000 or $450,000 for joint filers)
Increase in Minimum Required Distributions for High-Income Taxpayers with Large Retirement Account Balances
- After 2028, high-income individuals with Roth accounts would be required to distribute all amounts above $20 million each year
- After 2028, 50% of amounts above $10 million in all defined contribution accounts and IRAs must also be distributed, less the Roth distributions
Previous Proposals NOT Included in the Current Version of the BBBA
- Corporate tax rate increases
- Individual income tax rate increases
- Capital gains and qualified dividends tax rate increases
- Lowering of gift and estate tax exemption
- Elimination of the step-up in basis upon death
- Changes to grantor trust rules
We will continue to follow the Build Back Better Act as it makes its way through the Senate. If you have any questions or concerns regarding the bill, please contact your GBQ tax advisor.
Article written by:
Scott Eichar, CPA
Senior Manager, Tax & Business Advisory Services
Kevin Dunn, CPA
Director, Tax & Business Advisory Services
