Skip to Content
Stephen Eckert Michael Monaghan Kurt Piwko Jennifer Keegan Josh Bemis
October 29, 2021 Article 14 min read
On October 28, the White House and Democratic leadership in Congress announced a framework deal on the Build Back Better Act (BBBA). Our tax experts discuss what’s happening in Congress, and what we know and don’t know about the BBBA. 
Walking up capital stepsOn Oct. 28, 2021, the White House and Democratic leadership in Congress announced a framework deal on the Build Back Better Act (BBBA). This reflects an evolution of the BBBA as core provisions continue to be modified during negotiations. Updated legislative text also emerged in the House, which largely corresponds with the framework deal. Although many steps remain in the process for the BBBA to become law, the framework represents a significant step forward. Here are our initial reactions to what these developments mean and what’s expected to come next.

What happened?

On September 15, the House Ways and Means Committee approved preliminary tax provisions of the BBBA. Since that time, the bill’s progress has slowed due to ongoing negotiations among Democratic members of Congress and the White House. A new breakthrough occurred on October 28 with the release of a framework deal. A few hours later, the House Rules Committee released updated legislative text that appears to follow much of that framework. However, that legislative text has not yet been publicly agreed to by key members of the House and Senate and that updated bill is not yet ready for a vote on the House floor.

We discussed the previous House Ways and Means draft of the BBBA in an alert describing the key tax proposals, a follow-up alert addressing the top surprises, quiet proposals with big impacts, and the expected proposals, and an alert discussing the estate, gift, and trust proposals.

What do we know about the framework and updated BBBA legislative text?

The BBBA framework includes broad social, environmental, and economic investment programs. The framework also makes significant changes to key tax provisions included in the previously released version of the BBBA. The most impactful clarifications from the framework and revised legislative text include:

  • Tax surcharge on individuals, estates, and trusts — The framework endorses the tax surcharge that was first announced in the Ways and Means version of the BBBA. However, the revised legislative text modifies this to include two tiers. Namely, individual taxpayers would be subject to a 5% surcharge on modified adjusted gross income (MAGI) in excess of $10 million and an additional 3% surcharge on MAGI in excess of $25 million. Those thresholds are reduced by 50% for married taxpayers filing separately (e.g., $5 million and $12.5 million). Estates and trusts would be subject to much lower thresholds of $200,000 and $500,000 of MAGI. Since the tax surcharge is levied on MAGI, it will apply to all types of income and will increase the effective tax rate applicable to capital gains, dividends, and ordinary income for applicable taxpayers.
  • Expansion of net investment income tax (NIIT) — The framework also adopts the expansion of the 3.8% NIIT that has been consistently advanced by the Biden administration and Democratic leadership in Congress. This would apply to taxpayers with MAGI in excess of $400,000 and would be assessed on all business income that is currently excluded from the NIIT to the extent that income is not already subject to self-employment tax.
  • Alternative minimum tax on large corporations — A new 15% minimum tax would be imposed on the financial statement profits of large corporations. Based on the updated legislative text, this would apply to corporations with average annual financial statement income over a three-year period in excess of $1 billion. Corporations in the U.S. that are subsidiaries of international financial reporting groups must also have income in excess of $100 million to be subject to this tax. Several types of corporate tax increases have been discussed over the past few months, but the framework utilizes this minimum tax on larger corporations in place of increasing the general corporate tax rate.
  • Excise tax on publicly traded corporate stock redemptions — The framework also announced a 1% surcharge on stock buybacks completed by publicly traded corporations. The 1% tax would be assessed on the fair market value of any stock repurchased by the corporation during the year and the payment of this tax would be non-deductible by the corporation. The new legislative text does include several exceptions, including non-taxable corporate reorganizations, repurchases from employer-sponsored retirement plans, repurchases that don’t exceed $1 million in the aggregate for the year, and repurchases that are classified as dividends.
  • Extension of excess business loss limitation — The framework and legislative text would make the excess business loss limitation permanent, which was first enacted as part of the Tax Cuts and Jobs Act (TCJA). This limitation prevents an individual taxpayer from annually utilizing more than $250,000 ($500,000 in the case of married taxpayers filing jointly) of net business losses to offset non-business income. The legislative text would also change the carryforward of any excess losses. Under existing law, any excess loss converts to a net operating loss in the next tax year and is available to offset non-business income in that year. Under the legislative text, the carryforward remains subject to the excess business loss limitation in succeeding years. This limitation is currently set to expire on Dec. 31, 2026, so the framework extension would take effect in 2027.
  • Business interest expense modifications — The framework is silent on the treatment of business interest expense deductions. However, the updated legislative text does include two significant modifications. This would turn off application of the business interest expense limitation under Section 163(j) at the partnership and S corporation level. Instead, that limitation would be applied by the ultimate passthrough owners that are corporations, individuals, estates, or trusts. One key change from the Ways and Means version is that any interest expense carryforwards wouldn’t be subject to a five-year utilization period and instead may carryforward indefinitely. The BBBA would also add a new limitation on the deductibility of interest expense of U.S. corporations that are members of international financial reporting groups where the U.S. corporation’s share of the worldwide interest expense exceeds 110% of its actual interest expense. The U.S. corporation’s share would be measured by its EBIDTA as compared to worldwide EBITDA.
  • Deferral of Section 174 — The updated legislation includes a deferral of the effective date of a 2017 change to the deductibility of research expenses under Section 174. With the deferral, research expenses would continue to be deductible and would become amortizable beginning in 2026.
  • Controlled group definition expansion — The BBBA would modify the rules under Section 52(b), which describe when business entities are considered to be under common control. This modification was previously included in the Ways and Means version of the BBBA, and the updated text includes that same provision without change. This was not mentioned in the framework deal and has garnered little public attention. However, it could have significant ramifications as there are many provisions of income tax law that are required to be applied consistently across taxpayers included in a controlled group.
  • Section 1202 phaseout — The framework did not announce any changes to the treatment of qualified small business stock (QSBS). However, the updated legislative text continues to include the phaseout found in the Ways and Means version of the BBBA whereby only a 50% exclusion would be available for individuals with MAGI in excess of $400,000.
  • Wash sales — The framework was silent on wash sales, but the legislative text maintained similar language to the previous version, which would make several significant changes to the wash sale rules. The first change is an expansion of the wash sale rules to include foreign currency, commodities, and digital assets (e.g., cryptocurrency). The rules would also be expanded to include related parties when determining whether the taxpayer has acquired substantially identical assets.
  • Child tax credit (CTC) extension — A signature program in the framework is an extension of the child tax credit. This was originally expanded for 2021 as part of the American Rescue Plan Act. The framework and legislative text would generally extend the enhanced CTC through 2022 and make the full refundability of the credit permanent.
  • Energy credits — The framework and legislative text would extend and modify a number of renewable energy and other related credits including wind, solar, geothermal, and other renewable energy-related activities. This also includes credits related to energy-efficient improvements to residential property and the deduction for energy-efficient improvements to commercial property. Credits for plug-in electric vehicles would be extended, modified, and generally increased with a more significant increase for vehicles with final assembly in a unionized U.S. facility.
  • Global minimum tax — A 15% country-by-country global minimum tax on the foreign profits of U.S. corporations would be applied in coordination with other countries. This item in the framework may be covered by the GILTI changes in the legislative text discussed below or may set up additional changes still to be negotiated.
  • Enhancement of the Base Erosion Anti-Abuse Tax (BEAT) — The framework provides for an undefined penalty tax rate applied to foreign corporations located in countries not complying with the OECD global minimum tax plan. The legislative text provides for a change to the BEAT rate to 10% in 2022, then phasing up to 18% in 2025. Modified taxable income would be computed without regard to base erosion tax benefits, without adjusting the basis of inventory property due to base erosion payments, by determining net operating losses without regard to any deduction that is a base erosion tax benefit, and according to other adjustments under rules similar to the rules applicable to the alternative minimum tax.
  • Base erosion payments would be amended to include amounts paid to a foreign related party that are required to be capitalized in inventory under Section 263A, as well as amounts paid to a foreign related party for inventory that exceed the costs of the property to the foreign related party. A safe harbor would be available to deem base erosion payments attributable to indirect costs of foreign related parties as 20% of the amount paid to the related party. The provision would provide an exception for payments subject to U.S. tax, and for payments to foreign parties if the taxpayer establishes that such amount was subject to an effective rate of foreign tax not less than the applicable BEAT rate. The provision would also limit the exception to the BEAT for taxpayers with a low base erosion percentage to taxable years beginning before Jan. 1, 2024. The provision would further provide that a taxpayer remains subject to BEAT for the next 10 years after it becomes subject to BEAT, even if it otherwise drops below the requirements that would otherwise subject it to BEAT.

  • Global Intangible Low-Taxed Income (GILTI), Foreign-Derived Intangible Income (FDII), and other international tax changes — The framework provides few details on international tax changes outside of the global minimum tax and BEAT. However, the updated BBBA text continues to include a variety of international changes from prior versions. Those include a modification of the Section 250 deduction with respect to both FDII (changed to 24.8%) and GILTI (changed to 28.5%). These deduction changes result in a 15% effective tax rate on GILTI and a 15.8% rate on FDII. GILTI would be calculated on a country-by-country basis, the QBAI threshold would be reduced from 10% to 5%, and tested losses would be carried forward. Similarly, foreign tax credits would be calculated on a country-by-country basis, while the haircut on foreign tax credits related to GILTI income would be reduced from 20% to 5% and permitting any excess credit on GILTI income to carryforward for five years. Foreign tax credit carrybacks would no longer be permitted. When measuring foreign source income in the GILTI basket, no deductions other than the Section 250 deductions and taxes attributable to the section 250 deduction would have to be allocated to that basket. Income and gains related to IC-DISCs or foreign sales corporations would be considered effectively connected income when received by a foreign person.
  • Increasing IRS funding for enforcement activities — The framework also announced new funding for the internal revenue service (IRS) to support increased tax enforcement activities. Congress has been increasingly focused on ways to reduce the tax gap, which is the uncollected but expected tax revenues. By increasing IRS funding, it’s expected that additional tax revenue would be realized over the coming years.

What might be excluded and what’s unclear?

Many tax proposals have been discussed by the Biden administration and Democratic leadership in Congress throughout 2021. The framework and updated text of the BBBA include a limited subset of those tax proposals. Based on current reporting, it appears that most of the tax proposals currently excluded are unlikely to be included in a final bill. However, the complete exclusion of those proposals will not be determined until Congress completes its deliberations. In the interim, the most significant tax provisions excluded from the framework are:

  • Individual income tax changes — Prior proposals consistently focused on increasing the top individual tax rate from 37.0% to 39.6% and increasing the maximum rate for long-term capital gains and qualified dividends to approximately 25%. Those changes have been excluded from both the framework and updated legislation. However, the individual tax surcharge discussed above will have the effect of increasing the tax rate on both ordinary income and capital gains for taxpayers above the applicable thresholds. Additionally, the top individual tax rate is otherwise scheduled to increase to 39.6% in 2026 when many of the tax provisions of the TCJA sunset.
  • Qualified business income deduction (QBID) — The 20% QBID has been targeted by prior proposals, which would have reduced or eliminated the benefits of the deduction to higher-income individuals. However, the framework and updated BBBA eschew any modifications to QBID. That deduction is currently set to expire at the end of 2025, so the elimination of modifications may mean that the existing rules will be allowed to run their normal course before expiration.
  • State and local tax deduction limitation (SALT cap) — Like the September 15 version of the BBBA, the framework doesn’t include a change to the $10,000 annual limitation on the deductibility of state and local taxes by individuals that was imposed by the TCJA. Recent proposals have focused on the possibility of repealing application of the SALT cap for two years followed by a reimposition of the limitation. The unpopularity of the SALT cap among taxpayers and significant pressure from members of Congress in higher-tax states may prompt Democratic leaders to revisit addressing the SALT cap as negotiations continue.
  • Retirement program changes — The Ways and Means version of the BBBA included several changes impacting retirement accounts, such as precluding Roth IRA conversions for higher-income individuals and modifying rules for IRA contributions and required minimum distributions. Most of those proposals have all been excluded from the framework and updated BBBA text.
  • Corporate income tax changes — Similar to the exclusion of individual income tax rate changes, the framework and updated BBBA text exclude changes to the general corporate income tax rate. Instead, the framework relies on an alternative minimum tax for large corporations.
  • S corporation restructuring — The Ways and Means draft included an unexpected provision that would allow certain older S corporations to convert to partnership form on a tax-free basis. That proposal has been excluded from both the framework and updated legislative text.
  • Partnership tax changes — Senator Wyden, the Chair of the Senate Finance Committee, previously proposed expansive modifications to the partnership tax rules. Those have not been included in the current legislation but might be revisited when the BBBA moves to the Senate for consideration.
  • Carried interest modifications — The framework and updated BBBA exclude rules applicable to carried interests. The prior Ways and Means version of the bill enhanced existing rules under Section 1061 that would have made it much more difficult for carried interest holders to obtain long-term capital gain treatment. However, as of now, those changes have been excluded.
  • Estate and gift tax changes — The Ways and Means version of the BBBA included many significant changes for both estate and gift taxes and the tax treatment of trusts. Those included a restoration of the unified credit from $11,700,000 per person to approximately $6,000,000 per person, including grantor trusts in the grantor’s estate, treating sales between a grantor trust and its grantor as a taxable transaction and eliminating the estate and gift tax valuation discount for transfers of entities holding nonbusiness assets. All of those changes have been excluded from the framework and the updated version of the BBBA.

What’s next?

Amid BBBA negotiations, the bipartisan Infrastructure Investment and Jobs Act (Infrastructure Act) has been waiting for a final vote in the House since the Senate passed the bill on August 10. Democratic leadership has pushed for a final vote on the Infrastructure Act, but so far has been unable to convince enough members of the House to proceed with a vote in the absence of an agreement on the BBBA. The recent developments, including the framework announcement and updated legislative text, are significant developments in the path toward enactment of both the Infrastructure Act and the BBBA. However, complicated negotiations remain as Democratic leadership moves from the broad framework agreement to the creation of final legislation.

The next two weeks are expected to be critical to determining whether these bills will ultimately be enacted. Congress recently took action to extend the debt ceiling, government funding, and surface transportation funding, but those extended deadlines are all set to expire in early December. As such, all efforts are focused on continued resolution of the remaining disputes on the BBBA among Democratic members of Congress.

Continue to monitor our Outlook on Tax Rates and Policy Changes for updates as the BBBA works its way through Congress.

Looking for expert advice?

Subscribe now