House of Representatives Passes Build Back Better Act After Congressional Budget Office Releases Cost Estimate
On November 18, 2021 the Congressional Budget Office (“CBO”) released its cost estimate for the revised version of the Biden Administration’s Build Back Better Act (the “Act”), and the House passed the Act the morning of November 19. The package is estimated to cost $367 billion over 10 years. To pay for the social and economic policies advanced in the now $1.75 trillion package, the bill includes a number of tax increases and changes applicable to individuals, businesses, and estates.
The major tax changes are summarized below, and the full text of the proposals can be found here. Though the House passed the Act, it still remains subject to change during the Senate’s amendment and voting process.
- Individual Income Tax
The updated version of the Act would no longer raise the top marginal individual income tax rate and would instead keep the top rate at 37%. The updated legislation would still, however, impose a surcharge on high income individuals. A 5% surcharge would be applied to a taxpayer’s modified adjusted gross income in excess of $10 million for a married couple filing jointly ($5 million if filing separately) and an additional 3% surcharge on a taxpayer’s modified adjusted gross income in excess of $25 million ($12.5 million if filing separately). Modified adjusted gross income would mean adjusted gross income reduced by any deduction allowed for investment interest.
The Act would also expand the net investment income tax (the “NIIT”) for individuals to cover any “net investment income” derived in the ordinary course of a trade or business. The additional NIIT would apply for married individuals filing jointly with taxable income over $500,000 and unmarried individuals with taxable income over $400,000. This provision also applies to trusts and estates. Essentially, this change would subject all earnings from pass-through entities to either the 3.8 percent self-employment Medicare tax or the 3.8 percent net investment income tax, without taking into account whether the income is from a passive or nonpassive activity.
The Act would also increase the limit on the state and local tax (“SALT”) deduction for any taxable year beginning after December 31, 2020 and before January 1, 2031 to $80,000 (or $40,000 in the case of an estate, trust, or married individual filing separately). After December 31, 2030, the limit would decrease again to $10,000.
Additionally, the Act would amend Section 461(1) to permanently disallow excess business losses for non-corporate taxpayers for tax years beyond 2025. Taxpayers could carry forward such disallowed losses to the next taxable year.
Importantly, the proposed legislation no longer includes an increase in the top capital gains rate or a limitation on the deduction of qualified business income.
- Business Tax
As to entity taxation, the Act would amend Section 1202, which excludes from income the gain on the sale of qualified small business stock, to make taxpayers with a gross income above $400,000, as well as trusts and estates, ineligible. Such change would be effective to sales and exchanges occurring on or after September 13, 2021.
Further, Section 163(j), which currently provides the deduction for business interest, would be amended to be applied at the partner or shareholder level, rather than the entity level.
For corporations with profits in excess of $1 billion, the Act adds a 15 percent minimum tax on corporate book income (referred to as the “corporate minimum tax”) effective for tax years beginning after December 31, 2022. Relatedly, the Act would add a 1 percent excise tax on the value of stock repurchases for publicly traded U.S. corporations occurring after December 31, 2021.
- Other Important Updates
Notably, the updated Act does not include certain proposed changes in the estate and gift tax arena that were included in prior versions of the bill. The Act would not expedite the sunset of the increased unified credit against estate and gift tax (which, by its terms, remains scheduled to revert to its 2010 level of $5,000,000 per individual, adjusted for inflation, in 2026). The Act would not add various proposed sections to the Internal Revenue Code affecting the tax treatment of grantor trusts.
The Act provides for an appropriation of over $4 billion through September 30, 2031 for necessary expenses of the IRS in enforcing the Act. Such appropriation is expected to increase revenue resulting from IRS enforcement, which such revenue is not included in the CBO estimate.
It is important to note that the content of the Act may still change through the Senate’s amendment process and voting process and, accordingly, remains somewhat speculative. If you have any questions regarding how these proposed changes may affect your business or individual situation, please contact a Baird Holm LLP attorney.