Senate releases Build Back Better Act tax changes as progress slows
On December 11, the Senate Finance Committee released preliminary text for the revised tax changes in the Senate’s version of the Build Back Better Act (BBBA). On December 15, Congress also passed an extension of the debt ceiling through the end of 2022 and the annual defense spending bill. While those actions helped clear the Congressional agenda before the end of the year, negotiations over additional changes to the BBBA have slowed. These developments indicate that the BBBA is potentially weeks or months away from completion. Here are our reactions to these developments and what we expect to see next.
What happened and what’s next?
The House passed its version of the BBBA on November 19 and sent it to the Senate, with the expectation that the Senate would make additional changes. Additional details about the tax changes included in the House version of the bill can be found in our previous alert. During the past two weeks, Senate committees began releasing draft text for various portions of the BBBA. The Finance Committee also released draft legislative text including its tax changes on December 11, but further clarifications will be forthcoming.
Congress has also completed several other pressing matters this month. On December 2, one day before government funding expired, Congress passed a short-term spending bill extending government funding through Feb. 18, 2022, and President Biden signed the bill into law the following day. On December 15, Congress also passed an extension of the debt ceiling through the end of 2022 and the bipartisan National Defense Authorization Act for Fiscal Year 2022. Those actions helped clear the path for Congress to potentially focus its attention on the BBBA.
The BBBA previously had momentum and appeared to be nearing completion before year end. However, current reporting indicates that the bill is not expected to advance until at least January. In a statement released on December 16, President Biden acknowledged the ongoing negotiations with Senator Manchin and the challenges that remain to be completed. The first challenge is that substantive aspects of the BBBA are still being negotiated and changes will likely be required. The second challenge is presented by the Senate’s strict procedural rules for budget reconciliation bills, which require approval by the Senate Parliamentarian. The Parliamentarian’s review of the current legislative text has not been completed and additional review will be required for any new changes. Taken together, these developments suggest that the BBBA is weeks or months away from completion rather than days or weeks.
Senate modifications to the BBBA tax sections
The Senate Finance Committee text largely mirrors the House-passed version of the BBBA, with limited modifications. This means that it continues to exclude increases to the tax rates on ordinary income, capital gains, and corporations. Instead, it relies on the tax surcharge on the modified adjusted gross income of high-income taxpayers and the minimum tax on the book income of large corporations. The bill also includes changes impacting high-income taxpayers through an expansion of the net investment income tax to non-passive income and limitations on the use of individual retirement accounts. However, some important changes were made, including:
- State and local deduction cap — The $80,000 state and local tax deduction cap that was approved by the House has been removed from the new draft and replaced with an empty placeholder, subject to further negotiations. This continues to be one of the more contentious tax topics in the negotiations. Various proposals have been offered to either adjust the amount of available deductions or impose an income-based phase-out to the increased deductions. The final changes to this proposal will likely not occur until the very end of deliberations.
- Application of high-income surcharge to partnership audit rules — A technical modification would alter the application of the tax surcharge of up to 8% when determining imputed underpayments under the partnership audit rules. This would apply with respect to any partnership adjustments that are allocable to individuals, estates, or trusts that have modified adjusted gross income (MAGI) below the thresholds for either the 5% or additional 3% surcharge.
- Alternative minimum tax on large corporations — The Senate text expands and clarifies the types of income considered for purposes of determining adjusted financial statement income under the 15% corporate alternative minimum tax on book income. These modifications are technical in nature and in part respond to early criticisms of the book tax proposal.
- Inversion transactions — A new provision was added to tighten restrictions on inversion transactions. That type of transaction may occur when a foreign corporation acquires a domestic corporation or partnership. The Senate text would reduce the post-transaction ownership threshold from 80% to 65% to treat the foreign acquiring corporation as a domestic corporation. It would also reduce the ownership threshold from 60% to 50% to trigger the recognition of inversion gain by the expatriated domestic entity.
- Modifications to other international tax rules — The Senate text would also modify the portions of the House bill related to international taxation. The new business interest expense limitation for members of international reporting groups would be modified to include an alternative computation based on the adjusted basis of assets rather than EBITDA. The Base Erosion and Anti-Abuse Tax (BEAT) would also be adjusted with respect to the treatment of indirect costs. Finally, the rules relating to dividend received deductions from foreign corporations under Section 245A would be modified.
What should taxpayers do now to prepare?
A limited number of tax changes in the BBBA would take effect in 2021, including the modifications to the Section 1202 small business stock gain exclusion and changes to the excess business loss limitation. The House-passed BBBA would modify the SALT cap for 2021, but the effective date for a Senate change is not yet known. Other tax changes proposed in the BBBA would not take effect until 2022 or later years.
There is limited time left before year end to complete any planning actions. However, taxpayers do have the opportunity to evaluate the timing of significant income, such as the recognition of gain from the sale of a business or significant assets. If enacted as currently drafted, the expansion of the net investment income tax and the high-income surcharge will both go into effect in 2022 and may have a meaningful impact on the tax liabilities of taxpayers exceeding the applicable income thresholds. Taxpayers should also consider the best time to recognize depreciation, business expenses, and other deductions to help reduce taxable income if they are nearing these income thresholds.
Reviewing the accounting methods and tax accounting policies taxpayers use in their businesses will also be important. Accounting methods are an important tool for maximizing a business’s tax strategy, and its particularly important to reevaluate accounting methods when tax changes are on the horizon. We previously discussed strategies for taxpayers to maximize the tax accounting methods they use in a changing tax landscape. Some of those strategies require action during the year, but others can be completed into the new year.
Comprehensive summary of the draft tax changes in the BBBA
Individual income tax changes
- Increase to the state and local tax deduction cap — The Senate text contains a placeholder for a compromise on the deduction for state and local taxes. The House version would increase the annual limitation from $10,000 to $80,000. However, negotiations in the Senate have focused on both the amount of allowable deductions and the income-based population of taxpayers that would be allowed additional deductions.
- Tax surcharge on individuals, estates, and trusts — Individual taxpayers would be subject to a 5% surcharge on their modified adjusted gross income (MAGI) exceeding $10 million and an additional 3% surcharge on MAGI exceeding $25 million. Married taxpayers who file separately would be subject to the surcharge on MAGI exceeding $5 million and $12.5 million, respectively. Trusts would be subject to the surcharge for MAGI exceeding much lower thresholds of $200,000 and $500,000. These changes apply to tax years beginning after Dec. 31, 2021.
- Impact of new high-income surcharge to other tax rules — Several existing tax rules calculate tax liability based on the highest individual income tax rate. The surcharge discussed above would be coordinated with those provisions so that the 8% surcharge would be included in measuring the highest rate. These changes would apply to tax years beginning after Dec. 31, 2021.
- Installment sales — Taxpayers must pay interest on the deferred tax when installment obligations exceed $5 million in a tax year. Deferred tax is measured based on the highest applicable capital gain tax rate. That rate would now include the full 8% surcharge.
- Fiscal year pass-through entities — Certain pass-through entities with fiscal tax years are required to make a deposit for the deferred tax resulting from the owners having a different tax year than the pass-through entity. This deferred tax amount is generally measured at the highest individual tax rate plus 1%. That rate would now also include the full 8% surcharge.
- Partnership audit rules — Beginning in 2018, many partnerships are subject to new rules whereby the partnership is assessed any tax resulting from an IRS examination or an amended return. That tax is measured at the highest individual tax rate. However, the Senate text would exclude such tax from being calculated based on a rate that includes the high-income surcharge, provided the taxpayer is a non-corporate taxpayer with income not exceeding the income thresholds for the high-income surcharge.
- Partnership withholding on foreign partners — The withholding tax on foreign partners’ share of effectively connected income of a U.S. trade or business will be required to be calculated by applying both the highest applicable tax rate, including the new 8% surcharge, to the foreign partner’s share of effectively connected income.
- Expansion of net investment income tax (NIIT) — Business income is currently subject to the NIIT only if the taxpayer is a passive owner in the business. The Senate text follows the House version and would subject the business income of active owners to this tax if their MAGI exceeds $500,000 for joint filers, $250,000 for married-filing-separate filers, and $400,000 for all other taxpayers. The inclusion of active business income in the NIIT calculation would be phased in over the next $100,000 of MAGI above the threshold ($50,000 for married taxpayers filing separately). Any business income subject to self-employment tax, or exempt from self-employment tax because they are subject to a foreign jurisdiction’s employment taxes, wouldn’t be subject to this rule. With respect to trusts and estates, active business income would always be included in the NIIT. These changes apply to tax years beginning after Dec. 31, 2021.
- Refund claims extended for married same-sex couples — Following the federal recognition of same-sex marriage in 2012, couples who were lawfully married under state law were generally permitted to amend their returns dating back to 2010 in order to obtain refunds to the extent that a joint return resulted in a lower tax liability. For couples married prior to 2010, no refund claims were permitted. The BBBA would permit refund claims dating back to the year of marriage and filed for any tax year up until the due date of a taxpayer’s 2021 tax return. The due date for the 2021 tax return includes an extension, so applicable taxpayers may have until Oct. 15, 2022 to complete these filings.
- Excess business loss limitation made permanent — The $250,000 limit for excess business losses ($500,000 in the case of joint returns), which is scheduled to expire at the end of 2026, would be made permanent. The BBBA would also no longer allow excess business losses to convert to net operating losses when being carried forward to the next tax year. Instead, the carryforward excess business loss would be retested in the excess business loss limitation in the succeeding year. These changes apply to tax years beginning after Dec. 31, 2020.
- Section 1202 small business stock — Under current law, up to 100% of the income from the sale of qualified small business stock can be excluded from income under Section 1202. That exclusion is also subject to a maximum dollar amount. Under the BBBA, this exclusion would be capped at 50% for taxpayers with adjusted gross income (AGI) exceeding $400,000 and for all trusts and estates. These changes apply to sales and exchanges occurring on or after Sept. 13, 2021, except for sales and exchanges occurring after that date but pursuant to a written binding contract in place on Sept. 13, 2021.
- Extension of the child tax credit (CTC) — The increased CTC, including monthly advance payments as enacted by the American Rescue Plan Act (ARPA), would be extended through 2022. The full refundability of the CTC would also be made permanent. This provision is a key aspect of current negotiations, so it may be adjusted in the coming weeks.
- Earned income tax credit (EITC) expansion — The EITC for taxpayers without qualifying children would be made permanent. The calculation is modified to allow taxpayers to use their prior year income for the credit calculation for the 2022 tax year when the taxpayer’s prior year income exceeds current-year income.
- Energy credits — The BBBA creates, expands, or increases credits to taxpayers for energy property, such as windows and doors, residential energy-efficient property, new energy-efficient homes, qualified expenses from participating in a state-based wildfire mitigation program, new plug-in electric motor vehicles, qualified fuel cell motor vehicles, and specified new electric bicycles. These changes generally apply to expenditures made after Dec. 31, 2021 or Dec. 31, 2022.
- Income exclusion for conservation subsidies — Water conservation and storm water and wastewater management subsidies provided to taxpayers by state or local governments, public utilities, or storm water management providers would be excluded from gross income. These changes apply to amounts received after Dec. 31, 2018.
- Above-the-line deduction for union dues and uniforms — The BBBA would provide an above-the-line deduction of up to $250 for employee union dues and a separate $250 deduction for uniforms or work clothing required as a condition of employment and not suitable for everyday wear. These deductions are effective for tax years beginning after Dec. 31, 2021, and the union due deduction expires for years ending after Dec. 31, 2024, while the uniform deduction expires for years ending after Dec. 31, 2025.
- Wash sales — The wash-sale rules would be expanded to include commodities, currencies, and digital assets such as cryptocurrency. The test for determining whether a taxpayer acquired substantially identical assets is expanded to consider acquisitions by related parties. These changes apply to sales, dispositions, and terminations after Dec. 31, 2021.
- Section 1259 constructive sales — When a taxpayer takes specified offsetting positions to previously owned positions, the constructive sale rules treat the transaction as a sale of the previously owned position. Positions subject to the constructive sale rule would be expanded to include digital assets. These changes generally apply to contracts entered into after the date of enactment of the BBBA.
Retirement plans changes
- Limits on IRA and other retirement accounts of high-income taxpayers — New restrictions would be imposed on the IRAs and other retirement accounts of taxpayers with income exceeding $400,000 for single or married taxpayers filing separately, $450,000 for married taxpayers filing jointly, and $425,000 for heads of household. Such taxpayers would be prohibited from making further contributions to a traditional IRA, Roth IRA, or certain defined contribution plans in a year if the total value of the accounts at the end of the prior tax year exceeded $10 million. Taxpayers would also be required to take a distribution from these retirement accounts equal to 50% of the amount that the taxpayer’s aggregate account balance that exceeds $10 million. If these accounts exceeded $20 million, an additional distribution would be required equal to the lesser of (1) 100% of the excess over $20 million or (2) the entire balance of any Roth accounts. These changes apply to tax years beginning after Dec. 31, 2028.
- Limits on “backdoor Roth conversions” — Nondeductible contributions to traditional IRAs or specified retirement plans would be prohibited from being converted to a Roth IRA. This prohibits “backdoor Roth conversions,” which were permitted for high-income taxpayers starting in 2010. This prohibition would be effective for distributions, transfers, and contributions made after Dec. 31, 2021.
- Prohibition on Roth conversions for high-income taxpayers — Conversions of a traditional IRA or other retirement account into a Roth account would be prohibited for taxpayers with taxable income exceeding $400,000 for single or married taxpayers filing separately, $450,000 for married taxpayers filing jointly, and $425,000 for heads of household. This change would apply to distributions, transfers, and contributions made in taxable years beginning after Dec. 31, 2031.
- Extended statute of limitation of IRA noncompliance — The statute of limitation for IRA noncompliance for valuation-related misreporting and prohibited transactions would be extended from three years to six years. These changes apply to tax years to which the current three-year limitation period ends after Dec. 31, 2021.
- Holding a DISC or FSC in an IRA — The BBBA would prohibit IRAs and Roth IRAs from holding stock in a DISC or FSC if the DISC or FSC receives payments from an entity owned at least 10% by the individual for whose benefit the IRA is maintained. Constructive ownership rules would apply in making this determination. These changes apply to stock held or acquired on or after Dec. 31, 2021.
General business changes
- Controlled group definition expansion — Businesses under common control must be treated as a single entity for many tax purposes. The BBBA would expand the common control definition, which currently only includes entities that operate trades or businesses, to include entities conducting investment activities or activities involving research and experimentation. These changes apply to tax years beginning after Dec. 31, 2021.
- Business interest expense modifications — The BBBA shifts the business interest expense limitation under Section 163(j) from being applied at the partnership and S corporation level and applies it instead to the owners of the partnership or S corporation. These changes apply to tax years beginning after Dec. 31, 2022.
- Research and experimentation expenses — The BBBA delays the effective date for a previously enacted provision requiring taxpayers to capitalize and amortize research and experimental expenditures. The BBBA would change the effective date of this requirement from Jan. 1, 2022 to Jan. 1, 2026.
- Research credit claimed on payroll tax returns — Under current law, certain small taxpayers are permitted to claim up to $250,000 of research credits on their payroll tax return. This permits that portion of the credit to be monetized to the extent the company doesn’t currently have any income taxes to claim the credit against. The BBBA would double this limitation to $500,000 for tax years beginning after Dec. 31, 2021.
- Possessions economic activity credit — A new economic activity credit would be established equal to 20% of wages and allocable employee fringe benefits paid to employees of active businesses in U.S. possessions or territories, up to $50,000 for each full-time employee (i.e., maximum $10,000 credit per employee). Small employers are eligible for a larger credit. These changes apply to tax years beginning after the date of enactment.
- Tax treatment of assistance to certain farm loan borrowers — Certain payments to farm loan borrowers, as set out in the ARPA, would be excludable from the payee’s gross income and the expenses incurred with respect to the loan proceeds will still be deductible. These changes take effect upon the date of enactment.
- Limitation on credit for clinical testing expenses — The application of the clinical testing expenses credit would be narrowed to apply only to expenses related to clinical testing of certain drugs, which is conducted before the drugs are approved for any use. These changes apply to tax years beginning after Dec. 31, 2021.
- Reinstatement and expansion of employer-provided fringe benefits for bicycle commuting — The income exclusion for bicycle commuting employee benefits would be reinstated, and the maximum benefit is increased from $20/month to $81/month. These changes apply to tax years beginning after Dec. 31, 2021.
- Employer-provided childcare credit — The business credit for employer-provided childcare expenses would be increased from 25 to 50% of qualifying expenses, and the limit on the maximum allowable credit is increased from $150,000 to $500,000. These changes apply to tax years beginning after Dec. 31, 2021 and beginning before Jan. 1, 2026.
- Deduction for sound recordings — The BBBA would expand the deduction of up to $150,000 permitted for the cost of any qualified film production, television production, or live theatrical production, to include qualified sound recordings. Costs in excess of this amount can be subject to capitalization. The provision is effective for productions commencing in taxable years ending after the date of enactment and expires on Dec. 31, 2025.
- Deduction for lawyer expenses on contingency fee cases — The BBBA would allow plaintiffs’ attorneys to deduct out of pocket litigation costs in the year they are incurred, rather than waiting until the conclusion of the litigation. The provision applies to costs in taxable years beginning after the date of enactment.
- Tax credit for compensation of local news journalists —The BBBA would create a refundable employment tax credit for wages paid to local new journalists. The credit is equal to 50% of the first $12,500 per quarter for the first four quarters and 30% for each quarter thereafter. The credit applies to quarters beginning after the date of enactment and expires after Dec. 31, 2025.
- Termination of employer credit for paid family and medical leave — The termination date of the employer credit for paid family and medical leave would be accelerated to expire for wages paid after Dec. 31, 2023.
Corporate income tax
- Alternative minimum tax on large corporations — A new tax of 15% would be imposed on the financial statement income of corporations with an average annual financial statement income exceeding $1 billion over a three-year period ending in the applicable tax year. Corporations that are members of an international financial reporting group which have a foreign corporate parent will be subject to the tax if the adjusted financial statement income of the corporation and all foreign members of such group exceed $1 billion, and the corporation’s own adjusted financial statement income exceeds $100 million, over a three-year period. The Senate text expands and clarifies the types of income considered for determining adjusted financial statement income. These changes apply to tax years beginning after Dec. 31, 2022.
- Excise tax on publicly traded corporate stock redemptions — A new 1% excise tax would be applied to the fair market value of any stock that a publicly traded corporation repurchases. Certain transactions are excluded, including repurchases occurring as part of a tax-free reorganization, repurchased stock contributed to employee pension or similar plans, transactions where the total value of the stock repurchased in a single year is less than $1 million, repurchases where the purchaser is a dealer in securities, the repurchase is by a real estate investment trust or a regulated investment company, and repurchases taxed as a dividend. These changes apply to repurchases occurring after Dec. 31, 2021.
- Limitation on deduction of excessive employee compensation — Certain public corporations are not permitted to deduct excessive employee compensation for certain employees. The BBBA requires aggregation of related corporations for purposes of this rule. Compensation covered by this rule is clarified to include performance-based compensation, post-termination compensation, commission, and compensation payments made by parties other than the corporation. These changes apply to tax years beginning after Dec. 31, 2021.
- Modifications to treatment of worthless stock and securities — This provision would clarify that losses relating to worthless securities are realized on the date the event establishing worthlessness occurs and that losses on abandoned securities are realized on the date of abandonment. Partnership abandonments would be treated as capital losses and partnership debt would also be eligible to be treated as corporate debt for purposes of determining the treatment of a worthless security. The rule would also defer the deduction on the liquidation or dissolution of a worthless corporation until all property received from the corporation was cancelled, lapsed, expired, terminated, or sold to a third party. These changes apply to tax years beginning after Dec. 31, 2021, except for the liquidation/dissolution provision, which applies to transactions occurring after the date of enactment.
- Adjusted basis limitation for divisive reorganizations — A new rule would require recognition of gain by the distributing corporation in certain divisive reorganizations. This applies when the sum of the liabilities assumed by the controlled corporation, the amount of money and property transferred to the creditors, and the qualified property transferred to the creditors exceeds the basis in the assets transferred between the distributing and the controlled corporations. These changes apply to reorganizations occurring after the date of enactment but would except certain transactions subject to a binding agreement as of that date.
- Business interest expense modifications — The BBBA creates a new interest deduction limitation on U.S. corporations in international financial reporting groups when the U.S. corporation’s allocable portion of the group’s worldwide interest expense is greater than 110% of the U.S. corporation’s reported interest expense. The U.S. corporation’s share would be determined based on the proportion of its EBITDA compared to that of the worldwide group. The common parent of the international financial reporting group may elect into an alternative calculation of the domestic corporation’s allocable share of the net interest expense using the aggregate adjusted bases of the assets instead of EBITDA. These changes apply to tax years beginning after Dec. 31, 2022.
- Modifications to the Base Erosion Anti-Abuse Tax (BEAT) – The BEAT tax rate would be set at 10% in 2022 and is increased in phases 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. These changes apply to tax years beginning after Dec. 31, 2021.
- Reduced deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) — The deductions allowed under Section 250 for FDII and GILTI would be decreased. The deduction for FDII would be reduced to 24.8% and the deduction for GILTI would be reduced to 28.5%. This results in a 15% GILTI rate and a 15.8% FDII rate. These changes would apply to tax years beginning after Dec. 31, 2022.
- Modifications to GILTI inclusion and related foreign tax credit (FTC) — The GILTI inclusion would be required to be calculated on a country-by-country basis and the qualified business asset investment percentage is reduced from 10 to 5%. The FTC haircut would also be reduced from 20 to 5%, except when foreign income taxes are paid or accrued to a possession of the United States. These changes apply to tax years beginning after Dec. 31, 2022.
- Modifications to FTC — The FTC calculation would be modified to not consider any amount paid by a dual capacity taxpayer to a foreign country, to the extent it exceeds that country’s income tax, for taxes paid or accrued after Dec. 31, 2021. The FTC calculation would also be calculated on a country-by-country basis, carrybacks of excess FTC would be eliminated, and carryforwards would be allowed up to five years. These changes apply to taxable years beginning after Dec. 31, 2022, but beginning in 2030, FTCs can be carried forward for 10 years.
- Increased limitations on inversion transactions – A new provision was added that would tighten existing rules related to inversion transactions. That type of transaction may occur when a foreign corporation acquires a domestic corporation or partnership. The Senate text would reduce the post-transaction ownership threshold from 80% to 65% to treat the foreign acquiring corporation as a domestic corporation. It would also reduce the ownership threshold from 60% to 50% to trigger the recognition of inversion gain by the expatriated domestic entity.
- Repeal of one-month deferral election for tax year of specified foreign corporations — Under current law, certain specified foreign corporations may elect a tax year beginning one month earlier than the majority U.S. shareholder’s tax year. The BBBA would repeal this election. This change applies to tax years beginning after Nov. 30, 2022.
- Expansion of foreign oil-related income — The definition of foreign oil-related income for purposes of Section 970 would be expanded beyond oil and gas wells to include oil shale or tar sands. These changes apply to tax years beginning after Dec. 31, 2021.
- Expanding deduction for foreign source portion of dividends — The 100% participation exemption for foreign portions of dividends received from specified 10% owned foreign corporations, would be limited to only apply to foreign portions of dividends received from controlled foreign corporations (CFCs), and the participation exemption for 10% owned foreign corporations which are not CFCs is reduced to 65%. If a domestic corporation is a United States shareholder to a CFC and a 10% owned foreign corporation, and the CFC receives a dividend from the 10% owner foreign corporation, the amount includable in the United States shareholder’s gross income shall treated as if that amount was the foreign source portion of a dividend, which allows for the United States shareholder to take a Section 245A deduction with regard to that income. These changes apply to taxable years beginning after, and distributions made after, the date of enactment.
- Limitation on Foreign Base Company Sales and Services Income — The Foreign Base Company Sales and Services Income for purposes of determining Subpart F income would be limited to U.S. residents and pass-throughs with a branch located in the United States. These changes apply to tax years beginning after Dec. 31, 2021.
- Expansion of extraordinary dividends — The category of extraordinary dividends would be expanded to include disqualified CFC dividends. However, domestic partnerships and trusts will be excluded from being treated as U.S. shareholders for purposes of extraordinary dividends. These changes apply to distributions made after the date of enactment.
- Treatment of gain from the sale, exchange, or distributions by a domestic international sales corporation (DISC) or foreign sales corporation (FSC) — The gain from a sale or exchange of DISC or FSC stock to certain foreign shareholders, or the distribution by a DISC or FSC to certain foreign shareholders, would be treated as income effectively connected to a U.S. trade or business, which requires the gain to be taxable in the United States. These changes apply to distributions made on or after Dec. 31, 2021.
- Tax on nonresident alien individuals — The portfolio interest exception for tax on nonresident alien individuals would be narrowed to exclude any person who owns 10% or more of the total vote or value of the stock of the corporation at issue, beginning after the date of enactment. The definition of a dividend equivalent payment, which is taxed like a U.S.-sourced dividend, is expanded for payments made on or after Dec. 31, 2022, to include certain principal contracts and similar payments from specified partnerships.
- Modification of passive foreign investment company (PFIC) rules for guaranty insurance companies — The test for determining whether a company qualifies as a PFIC would be modified to allow financial guaranty insurance companies to include unearned premium reserves in its applicable insurance liability for purposes of the test. The BBBA also clarifies certain financial reporting requirements and expands regulatory authority to impose additional tax reporting requirements. The changes to financial and tax reporting take effect on the date of enactment, and all other changes apply to taxable years beginning after Dec. 31, 2017.
- Adjustments to earnings and profits (E&P) of controlled foreign corporations (CFC) — The rule for determining E&P of a CFC would be modified to not take certain adjustments into account. These changes apply to the tax years of CFCs ending after the date of enactment of the BBBA and to the tax years of U.S. shareholders in which or with which the tax years of the CFCs end.
- Energy credits, modifications, and extensions — The BBBA creates or modifies several clean energy production and non-production credits, including credits for electricity produced from certain renewable and clean resources, nuclear power, solar and wind production facilities in low-income communities, and clean energy property such as electric vehicles and renewable diesel. These changes have varying effective dates.
- Elective payment for renewable energy property and electricity — Taxpayers making elections with respect to certain renewable energy credits would be allowed to treat the credit as a payment against tax imposed in the same taxable year in which the credit was determined. These changes apply to tax years beginning after Dec. 31, 2021.
- Qualified environmental justice program credit — Higher education institutions would be entitled to a competitive refundable credit for 20% of the costs associated with an environmental justice program. Credits would be permitted up to $1 billion in aggregate each year from 2022 through 2031.
- Energy-efficient commercial buildings deduction — The maximum deduction for energy-efficient commercial buildings under Section 179D would be increased on a sliding scale-based on the level of efficiency achieved. This change applies to tax years beginning after Dec. 31, 2021. A deduction would also be created for certain retrofit building property, based on decrease in energy usage intensity. This change applies to property placed in service after Dec. 31, 2021. All provisions would expire after Dec. 31, 2031.
- Cost recovery for qualified property and facilities — Any facility described in the clean electricity production credit would be depreciable on the accelerated cost recovery system of depreciation over five years. These changes apply to property produced after Dec. 31, 2026.
- Reinstatement of superfund tax — The Hazardous Superfund Financing Rate tax would be reinstated at 16.4 cents per gallon on crude oil and imported petroleum products and reinstates the tax on taxable chemicals. These changes take effect on July 1, 2022.
- Extension of Black Lung Disability Trust Fund Tax — The tax on coal mined in the United States that funds the Black Lung Disability Trust Fund would be extended through Dec. 31, 2025.
- Refunds for taxes paid on removal of taxable fuel — Taxpayers who remove taxable fuel from a terminal may claim a refund for the tax paid if it results in a double tax on the fuel, unless the fuel is dyed. The BBBA would create a new refund system for taxpayers to claim a refund for a second tax paid on eligible dyed fuels. These changes apply to fuel products removed on or after the date that is 180 days after the date of enactment.
Tax reporting and enforcement
- Increased IRS funding for enforcement activities — The BBBA would appropriate approximately $80 billion through 2031 for IRS taxpayer services, enforcement, operations support, and business systems modernization.
- Increased 1099 reporting — Payments made in settlement of third-party network transactions exceeding $600 in a single calendar year would be added to the list of reportable payments, and the third-party settlement organization would be required to file a return with respect to the payments made. These changes apply to calendar years beginning after Dec. 31, 2021.
- Modification of restrictions on assessing penalties — The rule requiring that an assessment of penalties must have IRS supervisor approval before it is first presented to the taxpayer is eliminated retroactively to when this provision was first enacted in 1998. However, quarterly reporting would be required of each IRS supervisor to certify whether administrative policies intended to ensure voluntary compliance have been met with respect to notices of penalty issued by IRS employees. The quarterly reporting applies to notices of penalty issued after the date of enactment and will not affect taxpayers’ liability for any penalty under the Tax Code.