Tax provisions in the Build Back Better act

By Alistair M. Nevius, J.D.

The House of Representatives on Friday morning passed H.R. 5376, the Build Back Better Act, by a vote of 220–213. The bill encompasses a wide range of budget and spending provisions and has been the focus of protracted negotiations for the past several weeks. For more on the nontax provisions of the bill, see, "House Passes Build Back Better Act With Universal Paid Leave." The vote on the bill was held after the Congressional Budget Office (CBO) released its cost estimate for the bill. The CBO estimates the bill will cost almost $1.7 trillion and add $367 billion to the federal deficit over 10 years.

The bill contains a wide variety of tax provisions, designed to provide incentives to taxpayers and to raise revenue to pay for the spending in the bill. H.R. 5376 now goes to the Senate for consideration; its fate there cannot be predicted.

One nontax provision in the bill is the provision for four weeks of paid leave benefits for caregiving leave. These paid leave benefits would not be considered gross income to the recipient for tax purposes under a new Sec. 139J.

Among the many tax provisions in the bill (as found in House Rules Committee Print 117-18) are the following:

One year extension of expanded child tax credit; permanent extension of refundability

The changes to the child tax credit enacted by the American Rescue Plan Act (ARPA), P.L. 117-2, for 2021 would be extended through 2022. This would include the requirement that the IRS make advance payments of the credit throughout 2022. Taxpayers whose adjusted gross income (AGI) exceeds $150,000 for joint filers, $112,500 for heads of household, or $75,000 for other taxpayers, would not be eligible for advance payments.

The bill would extend the refundability of the child tax credit beyond 2022.

The bill would also implement new rules to avoid fraud. For payments of advance payment to taxpayers who file joint returns, one-half will be credited to each individual filing the joint return.

Extending expanded earned income tax credit

The bill would extend the changes to the earned income tax credit that were enacted by ARPA through 2022. The increase in the earned income and phaseout amounts would be indexed for inflation in 2022.

SALT deduction cap

The bill would increase the Sec. 164(b) limitation on the deduction for state and local taxes from $10,000 to $80,000 ($40,000 for married taxpayers filing separately and for trusts and estates) but would extend the limitation through 2031.

Expanded premium tax credit

The bill would increase the amounts for premium assistance in Sec. 36B through 2025. The bill would also extend through 2025 the rule that allows the premium tax credit to certain taxpayers whose household income exceeds 400% of the poverty line. The bill would also modify the employer-sponsored coverage affordability test in the premium tax credit through 2025.

The bill would exclude a portion of lump-sum Social Security benefit payments when determining household income for purposes of the credit. The bill would also exclude the first $3,500 of income of dependents who have not reached the age of 24.

Through 2025, the bill would also allow certain low-income employees who are offered employer-provided health coverage to claim the credit. The bill would also make permanent the Sec. 35 health coverage credit, which is currently scheduled to expire at the end of 2022.

15% minimum tax on profits of large corporations

The bill would impose a 15% minimum tax on the profits of corporations that report over $1 billion in profits to shareholders. Any corporation (other than an S corporation, regulated investment company, or real estate investment trust) that for any three-year period has average annual adjusted financial statement income (as defined in new Sec. 56A) over $1 billion and, in the case of corporations with foreign parents, has annual adjusted financial statement income in excess of $100 million, would pay a tax of 15% of its adjusted financial statement income for the year over the amount of its corporate AMT foreign tax credit.

1% surcharge on corporate stock buybacks

The bill would impose a tax equal to 1% of the fair market value of any stock of a corporation that the corporation repurchases during the year, effective for repurchases of stock after Dec. 31, 2021. The provision would apply to any domestic corporation the stock of which is traded on an established securities market.

Limitation on interest expense deduction

The bill would add a new Sec. 163(n) that limits the amount of net interest expense of certain domestic corporations (or foreign corporations engaged in a U.S. trade or business) that are members in an international financial reporting group. The provision limits the interest expense deduction to an "allowable percentage" of 110% of the domestic corporation's net interest expense.

FDII and GILTI changes

The bill would reduce the applicable percentage in Sec. 250(a) for the foreign-derived intangible income (FDII) deduction from 37.5% to 24.8% and the applicable percentage for the global intangible low-taxed income (GILTI) deduction from 50% to 28.5%, resulting in an effective FDII rate of 15.8% and an effective GILTI rate of 15%. The bill would also allow the FDII deduction to be taken into account when determining a net operating loss deduction.

Sec. 951A would be amended to have the GILTI provisions apply on a country-by-country basis, based on controlled foreign corporation taxable units.

Foreign tax credit limitation

The bill would amend Sec. 904 to apply the foreign tax credit limitation on a country-by-country basis, by taxable unit. Taxable units would include the taxpayer corporation itself, each foreign corporation of which the taxpayer is a shareholder, interests held by the taxpayer in a passthrough entity, and any branch of the taxpayer. The bill would also repeal the carryback of the foreign tax credit. The foreign tax credit changes will apply to tax years beginning after Dec. 31, 2022.

Country-by-country minimum tax on foreign profits of US corporations

The bill would modify the Sec. 59A base-erosion and anti-abuse tax to gradually increase the applicable percentage from 10% to 12.5% in 2023, 15% in 2024, and 18% after 2024. Amounts would not be subject to the base-erosion and anti-abuse tax if they were subject to an effective rate of foreign tax of at least 15% (or 18% after 2024).

Small business stock and high-income taxpayers

The bill would amend Sec. 1202 to disallow the 75% and 100% exclusion of gain from the sale of stock if the taxpayer's AGI is over $400,000 or if the taxpayer is a trust or estate.

Wash-sale rules

The bill would amend Sec. 1091 to make commodities, foreign currencies, and cryptoassets subject to the wash-sale rules.

Net investment income tax

The bill would amend Sec. 1411 to apply the tax to net investment income derived in the ordinary course of a trade or business for taxpayers with taxable income over $400,000 (single filers), $500,000 (married taxpayers filing jointly or surviving spouses) or $250,000 (married taxpayers filing separately).

Excess business losses

The bill would make permanent the Sec. 461 limitation on excess losses of noncorporate taxpayers.

High-income surcharge

The bill would create a new Sec. 1A, imposing a surcharge (in addition to any other income tax imposed) on high-income individuals, estates, and trusts. The surcharge tax would equal the sum of 5% of the amount of the taxpayer's AGI that exceeds $10 million ($5 million for married taxpayers filing separately; $200,000 for an estate or trust), plus 3% of the amount of the taxpayer's AGI that exceeds $25 million ($12.5 million for married taxpayers filing separately; $500,000 for an estate or trust).

Green energy incentives

The bill covers a wide variety of new and existing green energy incentives, which it generally arranges as two-tiered incentives, providing either a base rate or a bonus rate. The bonus rate is five times the base rate, and it would apply to projects that meet certain prevailing wage and apprenticeship requirements.

The bill extends the production tax credit for production of energy from renewable sources and the Sec. 48 investment tax credit for certain energy property. The incentive for solar and wind energy under Sec. 48 is increased.

Taxpayers are given the option to elect to be treated as having made a payment of tax equal to the value of the credit they would otherwise be eligible for under various energy credits, rather than opting to carry the credit forward.

The bill also provides various other green energy production tax incentives, including a nuclear power production credit and a credit for production of clean hydrogen.

Individual taxpayers would be eligible for various green energy and energy-efficiency incentives under the bill. The bill extends the Sec. 25C nonbusiness energy property credit to property placed in service before the end of 2031. It also modifies and extends the credit.

The bill would extend the Sec. 25D credit for residential energy-efficient property through 2033 (it is currently scheduled to expire after 2023). It would a refundable credit for years after 2023. Qualified battery storage technology expenditures would be made eligible for the credit. The Sec. 45L credit for new energy-efficient homes would be extended through 2031 and would be increased and modified.

The bill extends the Sec. 48C qualified advanced energy property credit through 2031 and provides a new investment tax credit worth up to 25% for advanced manufacturing facilities. The bill also creates a credit for the production of solar polysilicon wafers, cells, and modules and wind blades, nacelles, towers, and offshore wind foundations.

The bill also creates an emissions-based incentive for electricity generating facilities. Taxpayers are able to choose between a production tax credit under new Sec. 45BB or an investment tax credit under new Sec. 48F.

The bill also creates a technology-neutral tax credit for the domestic production of clean fuels.

Electric vehicle tax credits

The bill provides for a refundable income tax credit of up to $8,500 for new qualified plug-in electric drive motor vehicles. The credit would be available for qualified electric vehicles that cost up to $80,000 (for vans, SUVs, and trucks) or $55,000 (for other vehicles). The bill would also provide a credit of up to $7,500 for two- or three-wheeled plug-in electric vehicles. The credit would phase out for taxpayers with AGI over $500,000 (married taxpayers filing jointly) or $250,000 (single taxpayers). A smaller credit would be available for the purchase of qualifying used electric vehicles. The bill also provides a credit for the purchase of certain new electric bicycles.

The bill would provide a credit for any qualified commercial electric vehicle placed in service by a taxpayer. The credit would equal up to 30% of the basis of a fully electric vehicle or 15% of the basis of a hybrid vehicle.

The bill also extends the credit for the purchase of a qualified fuel cell motor vehicle and the alternative fuel vehicle refueling property credit through 2031.

The bill eliminates the temporary suspension of the exclusion for qualified bicycle commuting benefits and increases the maximum benefit from $20 per month to $81 per month.

Retirement plans

The bill prohibits further contributions to a Roth or traditional IRA for a tax year if the contributions would cause the total value of an individual's IRA and defined contribution retirement accounts as of the end of the prior tax year to exceed (or further exceed) $10 million. The limitation would apply to individuals with income over $400,000 (single filers and married filing separately), $425,000 (heads of household), or $450,000 (married taxpayers filing jointly).

If an individual's combined traditional IRA, Roth IRA, and defined contribution retirement account balances generally exceed $10 million at the end of a tax year and the individual meets these same income thresholds, a minimum distribution would be required for the following year.

These provisions would be effective for tax years beginning after Dec. 31, 2028.

The bill prohibits all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to a Roth IRA regardless of income level, effective for distributions, transfers, and contributions made after Dec. 31, 2021.

The bill also eliminates 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 household with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers, and contributions made in tax years beginning after Dec. 31, 2031.

Housing credits

The bill would increase the 9% housing credit and small state minimums under the low-income housing credit for the years 2022–2025 and makes other changes to the credit. It also creates a new neighborhood homes credit to encourage rehabilitation of deteriorated homes in distressed neighborhoods. The new credit would be administered by the states, and rehabilitated homes would have to be owner occupied in order for investors to receive the credit.

IRS

The bill would repeal the Sec. 6751(b) requirement for written supervisory approval of IRS penalties. The bill would also provide more funding for IRS enforcement, technology, and customer service.

AICPA advocacy on the bill

The AICPA has been advocating on important issues to the profession and tax policy and submitted several comment letters on the tax provisions in the Build Back Better legislation and other legislation under consideration. The AICPA submitted to Congress comments on the House Ways and Means Committee version of the bill and comments on the Rules Committee version, as well as comments on the minimum tax on book income and comments on proposed Subchapter K partnership taxation changes. In addition, the AICPA recently submitted to Congress its tax legislative compendium suggestions of noncontroversial technical and simplification proposals for consideration in the legislation.

— Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is the JofA's editor-in-chief, tax.

https://www.journalofaccountancy.com/news/2021/nov/tax-provisions-build-back-better-act.html