How did we get here?
Following the enactment of the American Rescue Plan Act in early March, it was anticipated that the Biden administration would turn its attention to longer-term spending programs funded with various tax increases. These proposals were expected to incorporate key programs from then-candidate Biden’s campaign platform. To that end, the administration has announced two conceptually distinct legislative packages that include significant tax changes.
Each package includes a spending component and a revenue-raising component. Thus, the American Families Plan imposes $1.5 trillion in taxes on higher-income individuals to fund $1.8 trillion of spending on programs that will benefit middle- and lower-income individuals, both amounts measured over 10 years. Similarly, the American Jobs Plan and Made in America Tax Plan imposes $2.3 trillion in taxes on corporations and multinational businesses over 15 years in order to fund a corresponding amount of infrastructure investments over the next eight years.
Following the initial announcements, President Biden addressed these plans during a joint session of Congress on April 28. Most recently, the administration released the Greenbook to add new clarifications to the tax proposals. However, the focus is now on Congress where negotiations continue and are expected to result in meaningful changes to the legislative plans.
Keep reading for the full alert. To navigate to a specific section, click one of the links below:
- American Families Plan and individual tax changes
- American Jobs Plan and corporate and international tax changes
- Tax enforcement proposals
- What’s next for the legislative process?
The American Families Plan and individual tax changes
On April 28, the Biden administration released the first details of the American Families Plan. This plan would fund expanded social and educational programs through the imposition of additional taxes on higher-income taxpayers. The Greenbook has added several crucial details that clarify how these programs might be implemented.
Social and educational spending programs
In broad terms, the American Families Plan includes new spending in three broad categories: (1) education, (2) support for families and children, and (3) tax incentives for lower- and middle-income families. The education provisions include universal access to two years of prekindergarten and two years of community college, in addition to increased college tuition support to low- and middle-income families, increased teacher training, and increased support for minority-focused colleges and universities. The families and children provisions include subsidized childcare, increased training and wages for childcare workers, national paid leave programs of 12 weeks for new parents and three days for those who lose family members, and increased access to nutrition assistance for low-income students. While additional details will be needed, it appears that the leave programs may be structurally similarly to the paid leave and credit programs enacted in response to the COVID-19 pandemic in 2020 rather than government-administered programs. Namely, employers may be required to provide expanded paid leave, but may be eligible for payroll tax credits to partially offset the cost.
The primary items that implicate taxes are the incentives for families. Those will largely follow the model of the ARPA and will extend the broadened child tax credit, earned income tax credit, child and dependent care credit, and Affordable Care Act (ACA) insurance premium subsidies.
Tax increases on individuals
The American Families Plan follows the Biden campaign platform and targets tax increases for individual taxpayers over certain income thresholds. Depending on the program involved, the thresholds are anywhere between $400,000 and $1 million, but some key details are yet to be determined. Here are the key tax increases that have been proposed:
- Individual tax rate – The plan would increase the top individual tax rate from 37.0 to 39.6% beginning in 2022. The income threshold at which the top tax bracket applies would also be lowered in the following manner:
Taxpayer type 2021 – Current 37.0% 2022 – Proposed 39.6% Single $523,601 $452,701 Married filing jointly $628,301 $509,301 Married filing separately $314,150 $254,651 Head of household $523,601 $481,000
Taken together, these changes would restore the top income tax bracket to its position prior to the enactment of the Tax Cuts and Jobs Act (TCJA) on an inflation-adjusted basis. However, the proposals do not indicate that any other changes to the existing tax brackets would be made.
- Capital gains and dividends: The plan would make a fundamental change to the treatment of long-term capital gains and qualified dividends for certain taxpayers. This proposal would subject long-term capital gains and qualified dividends to the 39.6% top ordinary income tax rate to the extent that a taxpayer’s adjusted gross income (AGI) exceeds $1 million (or, $500,000 in the case of a married taxpayer filing separately). That income threshold would be indexed for inflation. The 3.8% net investment income tax (NIIT) would continue to apply to this income as well, bringing the total rate to 43.4%. The proposal would also be applied retroactively to April 28, 2021, which is the date that the American Families Plan was announced.
The effect of this proposal would be to create separate tax rules for taxpayers that are either above or below the applicable income threshold. For those with less than $1 million of AGI, the normal 0%, 15%, and 20% rates would apply to long-term capital gains and qualified dividends. For those above the income threshold, these types of income would instead be subject to the highest ordinary income tax bracket. As Congress considers this proposal, we’re carefully monitoring whether any changes will be made. Any of the three elements discussed above could be altered, including the effective date, which would result in meaningful changes to the ultimate impact.
- 3.8% taxes: NIIT and SECA: Under existing law individual taxpayers with modified adjusted gross income (MAGI) in excess of $250,000 for married couples filing jointly ($125,000 for those filing separately) and $200,000 for all other individual taxpayers are potentially subject to an additional 3.8% tax on certain income. For investment income the tax is provided in the form of the 3.8% NIIT. For self-employed taxpayers, including those with income from passthrough entities, the tax is provided in the form of the 2.9% tax on all self-employed earnings under the Self-Employed Contributions Act (SECA) and an additional 0.9% Medicare tax, for a total 3.8% of additional tax. However, certain business income for active owners is not subject to the NIIT, SECA tax, or the additional Medicare tax.
The plan would impose these 3.8% taxes “consistently” to taxpayers with income over $400,000 by “rationalizing” the NIIT and SECA taxes. This would be accomplished by two primary changes. First, gross income and gain from any trades or businesses that is not otherwise subject to self-employment taxes would be subject to NIIT for taxpayers with AGI in excess of $400,000. Second, the self-employment tax and additional Medicare tax rules would be modified to include the pass-through income of partners and S corporation shareholders who materially participate in the business. The amount of additional business income subject to self-employment tax would only include the amount in excess of $400,000 (but the $400,000 base would be reduced by any wages or other self-employment income earned by the taxpayer). The current exemptions for certain types of pass-through income (rents, dividends, and capital gains) would continue to be excluded from these rules.
- Transfers as realization events: The plan proposes the elimination of the “tax-free” basis step-up at death by creating new realization event rules covering transfers at death, gifts during life, and certain other transfers.
- Realization events and gain recognition – Subject to the exceptions described below, the plan would subject unrealized gains to taxation at three events. The first two events are transfers of property at death and the second are transfers of property by gift. These transfers would be subject to income tax as if the property was sold for its fair market value at that time but would also be subject to the estate or gift tax at that same fair market value, reduced by any income taxes owed as a result of the new realization regime. A third event involves transfers to or distributions from trusts (except grantor trusts), partnerships, and other noncorporate entities (e.g., LLCs). While it appears that this proposal is focused on transfers to trusts or partnerships used to facilitate transfers of family wealth (e.g., grantor retained annuity trusts, family limited partnerships, etc.), the lack of specificity has generated considerable concern regarding how it would apply to property contributions or distributions with respect to ordinary operating businesses.
- Specific exclusions – The plan would allow for six categories of exclusions from gain recognition, which are grounded in existing tax principles.
- Tax-basis coordination rules – The consequence of utilizing the $1 million exclusion discussed above is a denial of a tax-basis step-up at the time of the transfer. Otherwise, the realization rules result in a tax-basis step-up at the time of the transfer. This is different from the current rules whereby any property received from a decedent always obtains a basis step-up, even if the estate was too small to be subject to the estate tax.
- Deferred payment rules – If an exclusion is not available, then the deemed recognition event would require the payment of taxes. However, two special rules would be available to defer payments into the future. The first rule provides that the tax on unrealized gain relating to a family-owned and operated business would be deferred until the business is sold or ceases to be family-owned or operated. A second rule would provide for a 15-year fixed-rate payment plan for the tax on unrealized gains on nonliquid assets that can’t be easily converted to cash to pay the tax.
- A $1 million per-person lifetime exclusion ($2 million combined for a married couple, with portability for the surviving spouse) would exempt most taxpayers from this regime.
- Spousal transfers are also excluded from recognition.
- The $250,000 per-person exclusion for capital gains on a personal residence would be expanded to this regime and would apply to all residences. Portability rules would result in a $500,000 exclusion for a married couple.
- Unrealized gains on tangible personal property (other than collectibles) would be similarly excluded from recognition. This is meant to cover the personal effects of an individual.
- Unrealized gains would also be excluded where the property is transferred to a charity.
- Finally, the exclusion of gains on qualified small business stock pursuant to Section 1202 would apply to this regime as if the stock was sold.
- 90-year rule for unrealized appreciation: A final rule related to unrealized gains involves taxing the appreciation on long-term deferral for property held by trusts, partnerships, or other noncorporate entities. Specifically, property held by those entities would be subject to a forced recognition event if there has been no realization event during the prior 90 years. The first testing period for the 90-year rule is Jan. 1, 1940, so the first recognition event would be on Dec. 31, 2030. It’s currently unclear whether the deferred payment rule relating to family-owned and operated businesses discussed above will apply to the 90-year recognition event.
- Phaseout of like-kind exchanges: The plan describes the elimination of tax-deferred exchanges under Section 1031 for gains in excess of $500,000 (or, $1 million for a married couple filing jointly). Section 1031 was restricted to real property exchanges as part of the TJCA effective in 2018, and this would be a further narrowing of the tax benefits for like-kind exchanges. This is proposed to apply to exchanges completed after Dec. 31, 2021. It’s not clear how this proposal applies to partnerships that enter into like-kind exchanges.
- Excess business losses: The plan would make the excess business loss limitation permanent. That provision limits the ability of individual taxpayers to use business losses to offset nonbusiness income. It was originally enacted as part of the TCJA to be effective in 2018 with an expiration in 2025. It was then deferred by the Coronavirus Aid, Relief, and Economic Security (CARES) Act until 2021, and was then later extended one year until 2026. Therefore, this provision wouldn’t really have an effect until 2027 as compared to current law.
- Carried interest: Under prior law, a partner holding a carried interest (e.g., profits interests received in exchange for services in an investment fund partnership) would be eligible to obtain long-term capital gain treatment on allocations of capital gains from the partnership or a sale of the carried interest provided that the 1-year long-term holding period standards were met. The TCJA took this a step further by introducing Section 1061. Under that rule, a holder of a carried interest (an applicable partnership interest or API) must satisfy a three-year holding period in order to obtain long-term capital gain treatment. The holding period applies equally to the seller of an underlying asset (e.g., the sale by the investment fund) where the gain is allocated to the API holder or the API holder if the API is being sold. Thus, the TCJA essentially added an extended holding period requirement for carried interests, but otherwise left existing tax rules in place.
The Biden administration has proposed a new rule that would further target carried interests and would apply in addition to the existing Section 1061. This would operate by recharacterizing the income attributable to an investment services partnership interest (ISPI) as ordinary income at the partner level. This would apply to individual taxpayers that hold ISPIs and have taxable income in excess of $400,000. Section 1061 would remain in effect for taxpayers below the $400,000 taxable income threshold that hold APIs. The new proposal effectively supersedes existing tax rules, including those governing allocations of partnership income, and directly converts ISPI-related income to ordinary treatment regardless of the holding period of the underlying asset. Holders of ISPIs would also be subject to self-employment taxes on this income but would not be subject to NIIT.
Over the past decade, consistent attention has been paid to the tax treatment of carried interests. If the new proposals are enacted, then taxpayers will have three potential sets of rules to consider. Those with taxable income under the $400,00 threshold will be subject to Section 1061 with respect to their APIs. Those that are over $400,000 will be subject to the new rule with respect to their IPSIs. And, finally, long-term capital gains and qualified dividends attributable to partnership interests that are neither APIs nor ISPIs will be subject to ordinary tax rates if the taxpayers have AGI in excess of $1 million ($500,000 in the case of a married taxpayer filing separately).
What’s not included in the American Families Plan?
Several other individual tax changes have been discussed over the past several months that are excluded from this plan. Those items could always be added during congressional negotiations. In addition, Biden administration officials have stated that the exclusion of these items from the proposal shouldn’t be interpreted to mean that they are off the table. However, for the moment, the following items have not been explicitly targeted:
- Estate and gift tax changes – Beyond the reference above to the realization events at death, gift, transfer, or 90-year rule, broader changes to estate and gift taxes weren’t included. However, other proposals have been recently introduced in the Senate that would target these taxes.
- Qualified business income deduction (QBID) phaseout – The Biden campaign promoted a complete phaseout of QBID for taxpayers with income of over $400,000, rather than only applying the phaseout to certain service business income. If QBID is maintained, the 20% deduction could effectively reduce the 39.6% tax rate on business income to 31.7% (or reduce a tax rate that includes the NIIT from 43.4 to 34.7% if the deduction applied for self-employment tax purposes). That provision has been excluded from this plan, but a recent plan discussed by the Senate Finance Committee chairman would repeal QBID for all taxpayer’s when AGI exceeds $400,000.
- FICA tax reintroduction – Additionally, the Biden campaign proposed applying the 6.2% Federal Insurance Contributions Act (FICA) tax, and 12.4% portion of the self-employment tax, on earned income over $400,000. However, it wasn’t included in this proposal.
- State and local tax deduction limit – The plan doesn’t address a repeal of the $10,000 limit on the deduction for state and local taxes. Several congressional Democrats from high-tax states have publicly demanded a repeal or relaxation of this limitation in any tax bill, so it’s expected that this will be revisited to some degree.
The American Jobs Plan and corporate and international tax changes
On March 31, the Biden administration outlined plans for a sweeping infrastructure spending bill that would be funded through corporate and international tax changes. This includes two integrated plans, The American Jobs Plan and the Made in America Tax Plan. The American Jobs Plan focuses on the $2.3 trillion of infrastructure spending programs over the next eight years while the Made in America Tax Plan includes $2.3 trillion of tax increases over the next 15 years that are intended to fund the new spending.
This plan takes an expansive view of infrastructure and would include substantial investments in the following types of projects:
- Transportation infrastructure – The proposals include new funding for highways, bridges, ports, airports, and public transportation systems.
- Water, electric, and internet infrastructure – The plan would upgrade water systems, including replacing lead pipes, improve the electric power grid, and expand nationwide broadband internet coverage.
- Facility improvements – The plan includes investments in commercial buildings and affordable housing, as well as improvements to schools, colleges, and childcare facilities.
- Care economy – Proposals to create jobs and increase pay for essential homecare workers are also included.
- Research and development and workforce development – Finally, the plan includes support for research and development, improvements for manufacturers and small businesses, and new workforce development programs.
On June 24, President Biden and a bipartisan group of Senators announced agreement on infrastructure legislation that will include new spending but without significant new taxes. The focus of the bipartisan legislation will be traditional infrastructure, such as transportation, water, and broadband. The Administration and Congressional Democrats have indicated that the bipartisan infrastructure spending plan will advance on a separate track from the tax proposals included in the American Jobs Plan and Made in America Tax Plan as well as the spending programs in the American Families Plan.
Corporate tax and multinational business tax increases
The proposals included in the Made in America Tax Plan would significantly alter the amount of taxes paid by certain businesses, most notably corporations and businesses with international operations, including pass-through businesses. The Treasury Department previously issued a report describing the reasons for these tax proposals and the Greenbook provided greater detail. For a deeper discussion of the expected impact of these proposals, please see our international-specific article.
- Corporate tax rate increase – The proposal would increase the corporate tax rate from 21 to 28%. This would be effective for tax years beginning after Dec. 31, 2021. A coordination rule would apply a blended tax rate to fiscal years that begin in 2021 and end in 2022. Prior to 2018, the top corporate tax rate was 35% but was reduced to 21% by the TCJA. The Made in America Tax Plan doesn’t describe any graduated tax rates, so it’s anticipated that this would retain the flat rate structure that currently exists.
Any change in the corporate rate would cause businesses to reevaluate entity choice considerations and the changes proposed by the American Families Plan will be critical to this decision. Globally active businesses will need to revisit tax planning and modeling to determine the impact of the increased rates on their overall global effective rates and structuring decisions.
- Increasing global intangible low-tax income (GILTI) – The proposal includes the following significant changes to the current GILTI tax regime
- GILTI tax rate increase – The GILTI tax rate would increase to 21%. This would be achieved through reduction of the Section 250 deduction to 25% of GILTI income for corporate entities. If the Section 250 deduction were repealed completely, the tax rate on GILTI income could be high as 28%.
- Elimination of QBAI – The proposal eliminates the qualified business asset investment (QBAI) exclusion. That exclusion helps shelter the income of foreign entities from GILTI in an amount equal to up to 10% of qualified business assets. If eliminated, every dollar of income in a foreign subsidiary may be subject to GILTI.
- Per-country calculation – The proposal would require GILTI to be calculated on a per-country basis. This would prevent a loss in one country from offsetting income in another country to limit the amount of the U.S. owners GILTI inclusion.
- High-tax exemption – The proposal would repeal the high-tax exemption for both Subpart F income and GILTI.
- Fossil fuel income – The proposal would also repeal the exemption from GILTI for foreign oil and gas extraction income (FOGEI). A clarifying amendment would add income from shale oil and tar sands to the definitions of FOGEI and foreign oil related income (FORI). These changes mirror other proposals from the Biden administration that target tax incentives related to the fossil fuel industry.
Taken together, these proposals would largely roll back the “hybrid-territorial” system put in place under the TCJA, leaving very little opportunity for deferral of foreign subsidiary earnings. In effect, any earnings in a country that were taxed at less than 21% would be subject to incremental U.S. tax under the GILTI regime.
- Denial of deductions attributable to foreign exempt income – The proposal would expand existing rules that disallow deductions allocable to foreign gross income that is either exempt from tax or taxed at preferential rates.
- Elimination of foreign-derived intangible income (FDII) deduction – The FDII regime was meant to provide an incentive to develop more intangibles in the United States and “export” the value of those intangibles. This functions through a multistep calculation to determine a deduction that was meant to reduce the effective tax rate on export income. The proposal would eliminate the FDII deduction entirely.
- Foreign tax credit changes – The proposal would move to a country-by-country determination for foreign tax credits. The Biden administration believes this would aid in discouraging profit-shifting to low-tax jurisdictions by making it more difficult to blend foreign taxes from both high- and low-tax rate jurisdictions against an aggregate pool of foreign income. Paired with the proposed changes to the GILTI regime, the introduction of country-by-country reporting would further limit the ability of corporations to manage their global effective tax rates. This would be especially true if the present rules are maintained that prevent any carryover of foreign tax credits on GILTI income. The proposal would also modify rules relating to determining the source and character of items related to the disposition of an interest in a hybrid entity or a change in the tax classification of a hybrid entity.
- Interest expense deduction limitations – The proposal would apply a new rule limiting interest expense deductions of a multinational group that prepares consolidated financial statements in accordance with U.S. GAAP, IFRS, or other standards determined by the Treasury Department. The disallowance would be equal to the member’s excess net interest expense for U.S. tax purposes. That is determined by reference to the member’s net interest expense for tax and book purposes compared to the member’s share of interest expense determined based on its share of the group’s earnings. In effect, this would prevent a multinational group from incurring significant debt in the United States while maintaining little debt in other jurisdictions. This rule would apply in addition to the interest limitations enacted under the TCJA that, in 2022, defer interest deductions if they exceed 30% of a business’s income before considering the interest deductions.
- Repeal and replacement of the base erosion and anti-abuse tax (BEAT) regime – The BEAT operates as a minimum tax on U.S. businesses, whereby an alternative tax rate is applied to a corporation’s taxable income after certain foreign-related party deductions are added back. The administration asserts that the BEAT “[has] no teeth” and proposes to replace it with the stopping harmful inversions and low-taxed development (SHIELD) regime. The SHIELD more closely follows proposals among a variety of countries, whereby deductions would be disallowed for payments made to related entities in jurisdictions not meeting a global minimum tax threshold. There are some indications that the target rate would be the same 21% targeted for GILTI income. However, it’s likely that U.S. congressional action will advance more quickly than broader international negotiations, which could complicate this proposal. The BEAT regime applies if a corporation has more than $500 million of gross receipts in the United States. However, the SHIELD regime is proposed to apply if worldwide gross receipts exceed $500 million so the SHIELD regime could apply to many more taxpayers than BEAT.
- Expansion of inversion rules – Currently, special tax rules apply to businesses that participate in inversion transactions. Those are transactions involving U.S.-based companies that change their residency by merging with foreign companies. The proposal would alter the tests that determine whether a transaction is considered an inversion. That change is expected to result in more transactions being subject to the inversion tax rules.
- Tax incentives to encourage onshoring and discourage offshoring U.S. jobs – The proposal includes both positive and negative inducements for employers to retain jobs in the United States. The former include the creation of a new general business credit for businesses that: (a) reduce or eliminate a trade or business conducted outside the United States, and (b) start up, expand, or otherwise move that same trade or business to the United States. The credit would be equal to 10% of the eligible expenses incurred in connection with “reshoring” that business. Alternatively, the proposal would disallow tax deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business. The administration has stated that this would only apply to the direct expenses of physically moving operations and would not apply to indirect expenses incurred at the U.S. location that is closing.
- Minimum tax on global book income for very large businesses – The proposal would impose a 15% minimum tax on the book income of corporations showing more than $2 billion of book income. This would function as an alternative minimum tax with corporations calculating both their 15% book tentative minimum tax (BTMT) and their regular tax liability of 28% of U.S. taxable income. BTMT is equal to 15% of worldwide pre-tax book income, less book net operating loss deductions, less general business credits (including, R&D, clean energy, and housing credits), and less foreign tax credits. The coordination of other differences between book and tax income are yet to be determined. The $2 billion income threshold would cause this provision to apply to approximately no more than 100 corporations.
- State and local bonds for infrastructure – The proposals would also expand programs related to tax-advantaged bonds in order to promote infrastructure development. This would include the creation of new qualified school infrastructure bonds (QSIBs), which would fund development of schools or broadband internet to support digital learning. The QSIBs would operate similar to Build America Bonds, with bondholders receiving taxable interest through the receipt of federal tax credits or cash payments. In addition, the proposal would expand the category of private activity bonds eligible for tax-exempt treatment to include those related to public transit, passenger rail, and infrastructure for zero-emissions vehicles.
- Expansion of housing-based tax credits – The Greenbook provides additional details about proposals to expand tax credits related to real estate development. This would include an expansion of the Low-Income Housing Tax Credit (LIHTC) and a permanent extension of the New Markets Tax Credit (NMTC). Finally, a new tax credit, the Neighborhood Homes Investment Credit (NHIC), would be created. That credit would cover new construction or rehabilitation of single-family homes (including homes with up to four dwelling units), condominiums, and residences in housing cooperatives.
- Energy-related tax changes – The Biden plan proposes changes to tax incentives that generally reduce those available to the legacy energy industry and increase programs for renewable energy. Specifically, it would reduce tax incentives for fossil fuel businesses, extend production and investment tax credits for clean energy generation and storage, created a new tax incentive for long-distance transmission lines, expand tax incentives for electrical storage projects, extend the existing advanced energy tax credit, create tax incentives for carbon capture/sequestration, and provide tax incentives for individuals to purchase electric vehicles and appliances. It would also disallow deduction for offshoring jobs while providing a tax credit to bring jobs back to the United States.
Modification to partnership audit rules
The Greenbook included a new proposal that would amend the partnership audit regime in a taxpayer favorable manner. Under current law, when a partnership subject to these rules files an amended return (called an Administrative Adjustment Request or AAR), tax benefits from the AAR are generally shown as a nonrefundable credit on the current year tax return). If the taxpayer doesn’t have enough current year tax to absorb the credit, any excess is lost. This can cause partners to lose tax benefits originating from an AAR. The proposal would permit this credit to be refundable meaning that the partner will always receive a benefit in the current year regardless of the magnitude of its current year tax liability.
Tax enforcement proposals
Considerable attention has recently been paid to the enforcement activities of the IRS. For example, the Treasury Department Inspector General for Tax Administration issued an audit report highlighting the growing amount of uncollected taxes from high-income individuals. That report drew the focus of Democratic leadership on the House Ways and Means Committee and Senate Finance Committee.
Both the American Families Plan and Made in America Tax Plan include provisions dealing with tax enforcement. The American Families Plan would increase IRS funding by $80 billion over the next 10 years to support collection activities against high-income individuals and corporations. This unprecedented funding would increase the annual budget of the IRS by about two-thirds, but the funding is anticipated to collect at least $700 billion in additional tax revenue over the next 10 years by enforcing existing tax laws. The Made in America Tax Plan similarly includes a new initiative to ensure corporate tax compliance by increasing audits.
To aid in the renewed enforcement efforts, the plan will also significantly expand tax reporting requirements to provide more transparency to IRS examiners. One aspect of the proposal would result in the creation of a new comprehensive financial account information reporting regime, which would apply to all business and personal accounts with financial institutions (e.g., bank, loan, and investment accounts). A de minimis exception would apply to accounts below a gross flow threshold of $600 or fair market value of $600. A footnote in the Greenbook goes on to provide that income reporting requirements imposed on financial institutions would be expanded to all entities, including certain corporations, interest payments would be included in loan account reporting, and transferee information would be reported for all real estate transactions via Form 1099-S. Finally, the proposals would add reporting requirements for cryptocurrency exchanges and holdings.
What’s next for the legislative process?
As Congress considers these proposals, there are several factors to be considered.
- Timing – The first consideration is timing. The Biden administration and congressional leaders have recently focused attention on infrastructure spending bills. Initial indications are that such legislation will be pursued during July and August, likely without significant tax changes. That suggests that most of the tax proposals will be considered in the late summer or fall. However, several members of the tax writing committees in Congress have also indicated that they would like to pursue each piece of legislation simultaneously. Given the nature of the tax increases involved and the scope of the spending programs, it’s expected that considerable lobbying pressure will be applied. This will likely result in adjustments to many of the proposals and legislative developments that occur over several months, rather than the period of weeks that was common with COVID-19-related legislation.
- Balance of spending and funding – A second consideration is how much of the new spending must be paid for with revenue-raising provisions. The initial proposals from the Biden administration and Democratic senators included revenue-raising programs intended to offset most, if not all, of the new spending. However, nontraditional approaches have been taken by, for example, having eight years of spending in the American Jobs Plan offset by 15 years of revenue generated by the Made in America Tax Plan. It’s likely that the extent and scope of spending and revenue raising will be altered during congressional negotiations.
- Procedural considerations – Finally, the legislative process that’s utilized will impact what can be included in any legislation. Initial indications were that the vast majority of the tax proposals will advance through the budget reconciliation process, which only requires a simple majority vote in the Senate. As Democrats effectively control 51 votes in the Senate, this can provide a path to get legislation approved but would still require every Democratic senator to approve it. While the Democratic party is generally aligned on the overall goals of these plans, there is certainly not agreement on the details. However, the budget reconciliation process imposes limitations on the types of spending that can ultimately be included in any bill, which could cause a variety of programs to be narrowed or eliminated. After the bipartisan infrastructure framework was agreed to on June 24, it’s also possible that piece of legislation could progress on a traditional path while the remainder of the proposals, both spending and tax, could progress using the budget reconciliation process.
While it’s expected that the final bill or bills will be different in many respects from the proposed American Families Plan, American Jobs Plan, Made in America Tax Plan, and the Greenbook, the proposals do set an initial anchor point for negotiations. As such, the core aspects of at least some of the proposals will likely carry through to a final bill.
The legislative process to take up this plan is expected to take several months and will be subject to many legislative procedural hurdles. Recent experience from 2017 with the enactment of tax reform through the TCJA illustrates that significant tax legislation is possible with a single party having a slim majority in Congress, but it’s far from smooth sailing and happens over many months rather than weeks.
Continued negotiations and fine tuning of these proposals will complicate tax planning in the coming year as it will be difficult for many businesses to commit to strategies without knowing what tax regime will be in place in the future. In addition, it’s possible that the effective dates of certain proposals could still apply to 2021 activity, further complicating planning.
Still, many individuals and businesses are considering ways that they may be able to accelerate income and defer deductions in case tax rates do increase in the future. These opportunities have the potential to save significant tax dollars if executed properly. However, the most powerful strategies often take some lead time so the businesses that implement them most successful have often planned far in advance. Many businesses are also revisiting their international structures in order to be ready to implement changes under various scenarios.
If you have questions on these potential tax changes, please give us a call.