Outlook on tax changes amid numerous 2022 challenges
Tax proposals from the Biden administration and related legislative developments were omnipresent throughout most of 2021. Ultimately, the most significant proposal failed to be enacted as the Build Back Better Act (BBBA) was halted in December. More recently, the Biden administration revisited those proposals by announcing its proposed 2023 budget, and the Treasury Department released its annual Greenbook containing further analysis of the administration’s proposals. While many of the proposed tax changes are familiar, the legislative outlook is dramatically different in 2022 as Congress grapples with numerous priorities and political challenges during an election year. Here are our reactions to these tax proposals and what we expect to see during the remainder of 2022.
Setting the stage: Recap of 2021 tax legislation
Last year, the Biden administration announced plans to enact sweeping tax changes that would fund both social and educational spending and infrastructure investments. As Congress considered those proposals, they were separated into two bills:
- Infrastructure. The first to advance, the Infrastructure Investment and Jobs Act, was limited to infrastructure spending along with a few small tax changes. That bill was negotiated in a bipartisan manner and was ultimately enacted in November 2021.
- BBBA. While the BBBA legislative process was initiated earlier in the year, deliberations became more public after the completion of the Infrastructure Act. The House passed its version two weeks later, and by mid-December, the Senate had released draft text of its version. However, at that point progress stalled as it became clear that there were not sufficient Democratic votes in the Senate to complete the bill.
Since December, the BBBA has remained on hold with no clear path for advancement. More limited tax proposals have been discussed in Congress but have also failed to be completed. For example, proposals to change the required capitalization of research and experimentation expenses under Section 174, which took effect on Jan. 1, 2022, have not materialized.
2022 tax proposals: Some old, some new, and others excluded
Most of the tax changes included in the updated proposals will be familiar to those who followed the developments during 2021. A comprehensive summary of those proposals is included in the Comprehensive summary of the tax changes in the 2023 budget proposal section below. However, a careful reading will yield the following conclusions:
- Return of items from the 2021 Greenbook. Several changes proposed by the Biden administration last year were excluded from Congressional negotiations over the BBBA. Some of those proposals have returned in the 2022 Greenbook, such as proposals to tax transfers at death or by gift and increasing the top capital gain rate to 39.6% for high income taxpayers. This likely reflects the Biden administration restating its preferred tax changes irrespective of what might ultimately be negotiated by Congress.
- Exclusion of BBBA items negotiated in Congress. Other tax changes that were negotiated by Congress, but which were not originally proposed by the Biden administration, have again not been included in the administration’s proposals. Examples include modification of the state and local tax deduction limitation (the SALT cap) and the 5–8% tax surcharge on high-income individuals. These are likely excluded for the same reason as stated above.
- New additions but overall reduction in the number of tax changes. Some surprises are found in new proposals, such as a 20% minimum tax on income, including unrealized gains, for households worth over $100 million. However, there is also a reduction in the scope of certain tax changes, including the exclusion of many items that were technical in nature.
What’s next: Tax proposals balanced with other challenges
After the first quarter of 2022, it’s clear that the path for tax legislation this year will be very different from 2021. As a starting point, the political headwinds that the BBBA ran into last year in Congress remain. In addition, the Biden administration and Congress face major economic and geopolitical challenges. When forecasting the rest of 2022, here are the key factors that we expect to impact the legislative path for any tax changes:
- Inflation, supply chains, and international trade. Economic challenges are a top priority for the White House and Congress this year. The most recent inflation data reinforced concerns and there remains uncertainty about the future of the economy based on actions of the Federal Reserve. Continued supply chain challenges are also causing businesses to ask difficult questions and evaluate new strategies. Set among this backdrop, Congress is currently negotiating legislation to support the production of semiconductor chips, strengthen supply chains, and advance research and development. The most likely tax changes that might be included in this type of legislation would be tax credits and incentives targeting specific industries, which would fit within the broader goals of the bill rather than broad-based tax changes such as tax rate increases. For example, legislation was recently introduced that would alter the tax rules for last-in, first-out (LIFO) inventory accounting for auto dealers, which could find a home in this bill. Otherwise, many Democrats have indicated that this bill should be “clean,” meaning that unrelated tax changes wouldn’t be included.
- Geopolitical challenges. Geopolitical issues, including the war in Ukraine, amplify the challenges facing the U.S. government. They also further impact the economic concerns of businesses related to supply chains and international trade. Congress previously passed legislation to provide aid to Ukraine and impose sanctions against Russia and Belarus. Moving forward, it’s likely that further legislative actions related to these matters may well take priority over other domestic tax matters.
- Global tax reform initiative. More than 130 countries representing more than 90% of global GDP have agreed to cooperate on a two-pillar plan to reform the taxation of multinational companies. The first pillar would impact how a company allocates its profits to jurisdictions while the second pillar would seek to set a minimum level of tax that must be imposed on business profits. The United States is one of the countries that agreed to pursue these goals, but it will take legislative action to come in line with the ultimate agreement. The breadth of members in this group will put pressure on Congress to act. However, the process will still take several years at least to fully implement around the globe. While the specific proposals would impact only a very limited number of businesses, the ideas may serve as the backdrop for further reform of the U.S. taxation of foreign income.
- Midterm elections. The 2022 calendar is also expected to impose both practical and substantive limitations on the ability of major tax legislation to advance. Midterm elections are scheduled for November, so legislative sessions will be impacted by the need to conduct campaign activities. The leadup to the election may also impact the substantive nature of bills that are considered due to the campaign platforms of incumbent members. Following that election, it’s not uncommon for a lame-duck Congress to entertain tax changes in a final year-end legislation. Historically, tax extender legislation has been completed at that time of year and unrelated tax changes often get enacted alongside tax extenders. This year, post-election legislation could be an opportunity to make changes that have broader support in Congress, such as altering required capitalization of research and experimentation expenses under Sec. 174.
- Other areas of focus. Other legislative proposals are always developing in the background. Congress has continually debated revisions to retirement plans and President Biden’s recent executive order directing agencies to examine the benefits and risks of cryptocurrencies and other digital assets could be a prelude to new legislative developments in 2022. For context, limited tax changes related to digital assets were included in the Infrastructure Act and proposed for the BBBA.
Taken together, these challenges make it highly unlikely that a significant tax package on the scale of the BBBA will advance during 2022. That means that the most recent proposals from the Biden administration might be considered aspirational in nature rather than an indication of the legislation that will actually be completed this year. Instead, we anticipate that narrower tax changes could be integrated into more targeted types of bills. For example, business incentives and credits could find a home in an economic competition bill or other relief package, legislation to fund the IRS could include tax enforcement and reporting changes, and limited tax increases could be used to fund more targeted spending programs, such as energy-related and prescription drug pricing provisions.
What can taxpayers do now?
Tax planning in 2022 will also be different from 2021, since it’s expected to occur during a year of potentially limited tax changes but significant business and economic challenges. In the current environment, businesses and individuals should revisit existing tax rules as a means of confronting the broader economic and supply chain challenges. For example, accounting method planning may provide opportunities to better manage cash flows through revisiting revenue recognition or the impact of inflation. Conducting an analysis of research and experimentation costs could also limit the impact of new Sec. 174 capitalization and amortization requirements in the absence of a legislative change to such rules. Revisiting the employee retention credit for 2020 and 2021 may yield opportunities to claim refunds and further bolster current cashflow.
While the current political climate and the factors affecting legislation appear to conspire against new tax changes, taxpayers should continue to monitor our Outlook on tax rates and policy changes resource center for updates. In the event, however unlikely, that meaningful tax changes advance in 2022, taxpayers will have at least some degree of advanced notice as those changes work their way through Congress. The recent proposals from the Biden administration signal the items that could potentially be included in tax legislation. However, if the experience of 2021 is any guide, it’s expected that significant changes would be made by Congress during legislative negotiations.
Comprehensive summary of the tax changes in the 2023 budget proposal
Many of the tax proposals included in the 2023 budget proposal are summarized below. These have been grouped by:
- Individual and estate/gift tax changes
- General business tax changes
- Corporate income tax changes
- International tax changes
- Tax rules related to digital assets
- Tax reporting and enforcement changes
Each of those categories further segregate the new proposals from those that were included in either the Biden administration’s 2021 proposals or the BBBA.
Individual and estate/gift tax changes
Newly proposed changes: Individual tax changes included in the 2023 budget proposal that are new this year:
- New individual minimum tax. The proposal would create a new minimum 20% tax imposed on all income, including unrealized capital gains, for taxpayers worth over $100 million. The first-year amount would be payable over nine years and subsequent year amounts may be paid over five years. Tax on unrealized gains would be creditable against the future taxes imposed when the gains are realized. The proposal includes several other technical rules to deal with issues such as how to credit prepayments upon events like a charitable gift and the treatment of illiquid taxpayers. While various proposals to directly target the wealthiest individuals have been previously discussed among members of the Democratic party, this is the first time since taking office that the Biden administration has proposed such a tax.
- Modifications to grantor trusts. For tax purposes, certain revocable trusts, called grantor trusts, are treated as if the trust and the grantor are one taxpayer. A grantor-retained annuity trust (GRAT) is an irrevocable trust in which the grantor retains an annuity interest in the trust permitting the grantor to transfer all asset value in excess of the annuity tax-free. The proposal would create a minimum gift tax value for GRAT remainder interests equal to the greater of 25% of the value of the assets transferred to the GRAT or $500,000 (capped at the value of the assets transferred). It would also prohibit annuity decreases and nontaxable acquisitions of assets by the grantor and require GRAT terms to be a minimum of 10 years and a maximum of the life expectancy of the annuitant plus 10 years. These changes would significantly limit the tax planning potential of GRATs.
- Narrowed generation-skipping transfer (GST) tax exemption. The GST tax applies to gifts and bequests by transferors to transferees who are two or more generations younger than the transferor. Transferors have a lifetime GST tax exemption (totaling $12.06 million for the 2022 tax year) that can be allocated to transfers made to a grandchild or other “skip person.” The proposal would narrow the GST exemption to apply only to either: (1) direct skips and taxable distributions to beneficiaries no more than two generations below the transferor, and to younger generation beneficiaries who were alive at the creation of the trust; and (2) taxable terminations that occur while one of the persons listed above is a beneficiary of the trust. A special timing rule is proposed to treat any pre-enactment trust as being newly created on the date of enactment, so the GST exemption may not last for the duration of the trust.
- Special use property valuation. The special use valuation election permits estates that hold certain land, such as farm and ranch land, to elect to value that property under its current use rather than including its development potential. The proposal would increase the cap on the maximum valuation decrease to $11.7 million for qualified real property under this election.
- Valuation consistency rules for promissory notes. The proposal would create a valuation consistency rule for taxpayers valuing notes used in estate and gift transactions. This would require that the discount rate be limited to the greater of the actual interest rate on the note, or the applicable minimum interest rate for the term of the note that remains on the date of death. This would apply to valuations as of a valuation date on or after the date of introduction of legislation. The Treasury secretary would also be provided with regulatory authority to create limited exceptions to this rule.
- Donor-advised funds. Certain private funds are required to make a minimum yearly qualifying distribution of a portion of noncharitable assets, and if the foundation fails to meet this requirement, a 30% excise tax is applied to the undistributed amount. Currently, distributions to donor-advised funds (DAFs) satisfy the qualifying distribution requirement. The proposal would clarify that a distribution from a private foundation to a DAF doesn’t constitute a qualifying distribution unless: (1) the DAF funds are expended as a qualifying distribution by the end of the following year, and (2) the private foundation maintains adequate records confirming that such qualifying distribution occurred on time.
- Cancellation of debt income (CODI) exclusion for student debt. Generally, debt that’s cancelled or forgiven is treated as taxable income to the debtor in the year of cancellation or forgiveness. The proposal includes a new provision that would make permanent the income current exclusion for qualifying student loan forgiveness under Sec. 108, which is set to expire at the end of 2025.
- Adoption credit. Taxpayers who adopt children are generally eligible for a nonrefundable tax credit for 100% of certain adoption expenses and an exclusion from gross income for certain adoption expenses that are reimbursed by an employer. The proposal would make the credit fully refundable irrespective of tax liability and would allow for the refundability of carryforward credits from prior adoptions. It would also expand the adoption credit to apply to families in qualifying guardianship arrangements
- Employer-provided fixed indemnity health plans. Fixed payment indemnity health plans pay a pre-determined amount per-incident or per-day to the plan participants rather than reimbursing for actual medical costs incurred. The proposal would clarify that the income exclusion for employer-provided fixed indemnity plans only applies to the amount paid for specific medical expenses and that fixed payment amounts paid without regard to the actual cost of medical expenses will not be excluded from income.
Proposals from 2021: Individual tax changes in the 2023 budget that were included in last year’s budget proposal or a version of the BBBA:
- Increased top ordinary tax rates. The top tax rate would be increased from 37 to 39.6% for taxpayers with taxable income exceeding $400,000 for single individuals, $450,000 for married taxpayers filing jointly, $225,000 for married filing separately, and $425,000 for head of household taxpayers.
- Capital gains and dividends. Long-term capital gains and qualified dividends are generally subject to preferential income tax rates. The proposal would apply the highest ordinary income tax rate (plus net investment income tax) to long-term capital gains and qualified dividends 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). The proposal would apply to gains recognized and dividends received after the date of enactment. The AGI threshold would also be indexed for inflation after 2023.
- Apply ordinary income rates to carried interest. Ordinary income tax rates would be applied at the partner level to income from an investment services partnership interest for taxpayers with taxable income exceeding $400,000. The rules under existing Sec. 1061 would apply to carried interests for taxpayers with income below the threshold.
- Transfers as realization events. When someone gives appreciated property as a gift, the recipient takes the donor’s basis in the appreciated asset and does not recognize the gain until the asset is disposed in a taxable transaction. When appreciated property is inherited, the basis of the appreciated property is stepped up to fair market value at the time of the asset on the date of the decedent’s death, but the donor doesn’t recognize gain subject to income tax upon the transfer (although the transfer may still be subject to the estate tax). The proposal would require transfers of appreciated property by gift or death to be treated as taxable events, subject to specified exclusions.
- 90-year gain recognition rule. As a companion to the realization event rule above, another new rule would require that a trust, partnership, or other noncorporate entity that’s the owner of property that has not had a recognition event within the prior 90 years must recognize the unrealized appreciation in the property. The first recognition event under this rule would occur on Dec. 31, 2030.
- Gain recognition on like-kind exchanges. Owners of appreciated real property can generally defer gain on an exchange of the appreciated property, if the property received is real property of a “like-kind.” The proposal would repeal this gain deferral for any gain in excess of $500,000 or $1 million for married taxpayers filing jointly.
- Disallowance of certain conservation easement deductions. Charitable deductions for a partnership’s conservation easement contribution would be disallowed if the contribution value exceeds 2.5 times the sum of each partner’s adjusted basis in the partnership unless a three-year holding period is satisfied. This rule would apply retroactively to 2016 or 2018, depending on the facts.
General business changes
Newly proposed changes: Below are the general business tax changes included in the 2023 budget proposal that are new this year.
- Restrictions on Sec. 734(b) benefits for related shareholders. Partnerships that make a Sec. 754 election may adjust the basis of the nondistributed partnership property following certain distributions to a partner under Sec. 734(b). The plan would revise the basis step-up rules to restrict remaining partners from receiving the benefit of a basis step up under Sec. 734(b) if the partner is related to the distributee partner, until such time as the distributee partner disposes of the distributed property in a taxable transaction.
- Depreciation recapture. A portion of gain from the sale of a capital asset may be treated as ordinary income to the extent it reflects previous depreciation deducted. Depreciation recapture on Sec. 1250 property (buildings or certain other real property) is generally taxed at a maximum 25% rate. Depreciation recapture on Sec. 1250 property is only taxed as ordinary income to the extent it exceeds the cumulative allowances under the straight-line method. The proposal would require that 100% of the cumulative depreciation deductions on Sec. 1250 property would be treated as ordinary income, up to the amount of the gain recognized. This rule would apply to taxpayers with adjusted gross income (AGI) above $400,000. It would also only apply to depreciation deductions claimed after the effective date of the change, so partnerships and S corporations would be required to report the portion of Sec. 1250 gain under both the existing and new rules.
- Expanded benefits for low-income housing tax credits (LIHTC). Higher subsidies are permitted where necessary for LIHTC developments to become financially feasible. Higher subsidies aren’t permitted for LIHTC developments funded by Qualified Private Activity Bonds (PABs) unless they are in specified geographies. The proposal would allow the higher subsidy to be extended to PAB-financed buildings not within specified geographic areas under certain circumstances.
- Nonqualified deferred compensation withholding. Employees generally don’t recognize income on compensation in a nonqualified deferred compensation plan (NQDC) until the NQDC compensation is distributed to the employee. However, if the NQDC arrangement fails to meet applicable requirements, then the employee must include such amount in income and is subject to an additional 20% tax, plus interest in some cases. The proposal would require employers to withhold the additional 20% tax and interest that employees owe when the plan doesn’t meet the compliance requirements.
- Taxation of on-demand pay. The proposal would create new clarifying rules applicable to employment compensation arrangements that allow employees to access compensation as it is earned and prior to a regularly scheduled pay date.
- Post-retirement medical and life insurance modifications. The proposal would require post-retirement benefits to be funded on a level basis over the longer of the working lives of covered employees or 10 years. If the employer commits to maintain the benefits over a period of at least 10 years this requirement will not apply.
- Modifications to interest expense disallowance for business-owned life insurance. The proposal would repeal a rule allowing businesses to deduct interest expense related to life insurance contracts covering employees, officers, and directors. However, the exception for policies covering 20% business owners would be retained.
- Tax modifications for certain insurance companies. The proposal would make two changes to tax rules related to insurance companies. The first would require covered insurance companies to establish an Untaxed Income Account (UIA) and subject amounts distributed or deemed distributed from the UIA to the corporate income tax plus a penalty. This would only apply to certain small, closely held insurance companies that are most commonly used in the context of captive insurance arrangements. The second would involve technical corrections to TCJA-related provisions for capitalization rates and the list of “long-tail” lines of business.
- Clarification of ultimate purchaser for diesel fuel exportation. The proposal would add a statutory definition for the term “ultimate purchaser” for purposes of determining the recipient of federal excise tax rebates resulting from diesel fuel or kerosene exportation.
Proposals from 2021: Below are the general business tax changes in the 2023 budget that were included in last year’s budget proposal or a version of the BBBA.
- Make permanent the New Markets Tax Credit (NMTC). The NMTC is a credit for up to 39% of qualified investments in a qualified community development entity. The proposal would make the NMTC permanent and provide for a new yearly allocation of $5 billion for each year after 2025, which would be indexed to inflation after 2026.
- Eliminate fossil fuel tax preferences. The proposal would eliminate a number of tax credits and other tax preference rules related to the ownership, development, or sale of fossil fuels or related property.
- Oil spill liability trust fund (OSLTF) excise tax and superfund excise tax modifications. The proposal would eliminate the ability of certain fossil fuel products to qualify for a drawback of an excise tax to fund the OSLTF when those products are exported. The proposal assumes the superfund excise tax will be reinstated by the BBBA and would expand the superfund excise tax to apply to additional crude products.
Corporate income tax changes
Newly proposed changes: Below are the corporate income tax changes included in the 2023 budget proposal that are new this year.
- Modified definition of “control” under Sec. 368(c). For purposes of most corporate tax rules, whether a corporation is “controlled” by another person is determined under the test in Sec. 368(c). The proposal would change the definition of control under Sec. 368(c) to require at least 80% of the total voting power and at least 80% of the total value of the stock of a corporation.
- Shareholder liability for corporate taxes. The proposal would impose secondary liability for corporate taxes on the shareholders that sell their controlling interest in certain corporations. This would only apply to corporations that hold significant passive assets or are subject to sale. If the corporation is assessed a tax and doesn’t pay, the selling shareholders would be liable for the corporation’s unpaid taxes, additions to tax, interest, and penalties, up to the amount of the sales proceeds the shareholders received in selling their stock.
Proposals from 2021: Below are the general business tax changes in the 2023 budget that were included in last year’s budget proposal or a version of the BBBA.
International tax changes
Newly proposed changes: Below are the international income tax changes included in the 2023 budget proposal that are new this year.
- Replace Base Erosion Anti-Abuse Tax (BEAT) with the Undertaxed Profits Rule (UTPR). The BEAT applies to certain corporate taxpayers with substantial gross receipts that make deductible payments to foreign related parties above a specified threshold. The plan would replace the BEAT with a UTPR, which denies deductions to the extent that the low-taxed income of a member of a financial reporting group is not subject to a local top-up tax (see below) for the low-taxed income of a subsidiary within its financial reporting group. The UTPR is based on model legislation developed by the OECD as part of its “Pillar 2” initiative. The UTPR would apply only to financial reporting groups that have global annual revenue of at least $850 million in at least two of the prior four years.
- Qualified Domestic Minimum Top-Up Tax (QDMTT). The QDMTT is also based on model legislation promulgated by the OECD. Its purpose is to ensure that companies pay a “minimum” tax that will top them up to a 15% minimum rate. As envisaged by the OECD, this provision could override certain tax credits. However, the Biden administration states that the U.S. version of the QDMTT would ensure that taxpayers continue to benefit from credits and incentives related to promoting U.S. jobs and investment. The QDMTT would be in addition to the “Book Minimum Tax” proposal in the BBBA.
- Qualified electing funds. Passive foreign investing company (PFIC) investors are subject to additional tax for excess distributions from a PFIC, which includes gain from the disposition of PFIC stock. If a PFIC investor makes a qualified electing fund (QEF) election, the investor pays tax on its pro rata share of the ordinary income and long-term capital gain of the PFIC annually instead of being subject to the tax on excess distributions. The proposal expands options for PFIC investors to make a QEF election, including making retroactive elections.
- Expanded Sec. 6038 reporting. Sec. 6038 requires a U.S. person who controls a foreign business entity to report certain information with respect to such entity. Foreign business entities include foreign corporations and foreign partnerships. The proposal expands the Sec. 6038 reporting requirement by treating any taxable unit, including branches and disregarded entities, in a foreign jurisdiction as a foreign business entity. This is to facilitate the proposed country-by-country rules applicable to Subpart F, global intangible low-taxed income (GILTI), and the foreign tax credit (FTC), discussed further below.
- Simplified FTC reporting for individuals. U.S. individuals who pay foreign income taxes on investment income are allowed a U.S. income tax credit for the foreign taxes paid, subject to a complex set of limitations. However, when the foreign tax credit is below a certain threshold, an individual can claim the credit without having to perform any of the underlying computations. The proposal increases the $300 (or $600 for a joint return) threshold for the FTC limitation exception up to $600 (or $1,200 for a joint return). The income threshold would be indexed for inflation.
- Expatriation reporting. All taxpayers who relinquish their U.S. citizen status or are no longer permanent residents, referred to as “expatriates,” must meet certain reporting requirements, including filing Form 8854. Certain expatriates must pay a mark-to-market exit tax on their worldwide assets. The statute of limitation for assessments of federal income tax is generally three years after the filing of a return unless an exception applies. The proposal would extend the statute of limitation for assessing mark-to-market income tax to three years after Form 8854 is filed and would authorize the Treasury to provide relief from the expatriation rules for certain lower-income taxpayers with limited U.S. ties.
- Foreign exchange rates for individuals. The proposal would modify existing rules for foreign currency transactions to allow individuals to use one average foreign currency rate per year to calculate qualified compensation. The proposal would also increase the personal exemption for foreign currency gain from $200 to $500 and allow individuals to deduct foreign currency losses related to a mortgage on a personal residence.
Proposals from 2021: Below are the international tax changes in the 2023 budget that were included in last year’s budget proposal or a version of the BBBA.
- Country-by-country calculations. The proposal assumes that the country-by-country methodology for calculating GILTI, Subpart F income, and FTC that was included in the BBBA will be passed into law.
- Onshoring tax credit. The proposal would create a 10% general business credit for eligible expenses from onshoring a U.S. trade or business.
- Offshoring deduction disallowances. The proposal would disallow tax deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business.
Tax rules related to digital assets
Newly proposed changes: Below are the digital assets tax changes included in the 2023 budget proposal that are new this year.
- Expand the mark-to-market rules. The proposal would expand the existing rules that allow dealers and traders of securities to make a mark-to-market elections to digital assets. This would be completed by creating a new category of assets: actively traded digital assets and derivatives on, or hedges of, those digital assets.
- Expand reporting requirements under Sec. 6038D. Individuals holding certain foreign financial assets with an aggregate value of $50,000 or more during a taxable year are required to report certain information about the assets on their return. The proposal would expand the reporting requirement to apply to accounts that hold digital assets maintained by foreign exchanges or service providers. The reporting requirements will only apply if the aggregate value of all applicable categories of certain foreign assets, including applicable digital assets, exceeds $50,000.
- Clarify securities loan rules. Gain or loss is generally not recognized on loans of certain securities if the securities returned to the transferor are identical to the securities lent and other requirements are met. The proposal would expand existing securities loan rules to apply to loans of actively digital assets.
Proposals from 2021: Below are the digital assets tax changes in the 2023 budget that were included in last year’s budget proposal or a version of the BBBA.
- Reporting requirements for digital assets brokers. A broker is required to report information about its customers to the IRS, including customer identity, proceeds from sales of securities and commodities, and other information. A broker is a dealer, barter exchange, or a person who is a middleman for property or services transactions. The proposal would expand existing rules to require brokers of digital assets, which includes U.S. digital asset exchanges, to report information relating to their customers and the substantial foreign owners of passive entities holding digital assets.
Tax reporting and enforcement changes
Newly proposed changes: Below are the digital assets tax changes included in the 2023 budget proposal that are new this year.
- Partnership audit modifications. The partnership audit rules separate the treatment of income taxes from the treatment of self-employment income tax and net investment income tax. The proposal would include items of self-employment income tax and net investment income tax in the definition of a BBA Partnership-Related-Item, along with income taxes, and would apply the highest rate of tax to those items.
- Disclosure of positions contrary to a regulation. The proposal would impose an affirmative requirement on taxpayers to disclose a position on their tax return that’s contrary to a regulation whereas that reporting regime is currently voluntary only if a taxpayer desires to limit the potential for certain penalties to be assessed.
- Expand the definition of executor. The proposal would alter the definition of an executor by making it applicable for all tax purposes and granting authority for the Treasury Department to create rules resolving conflicts where multiple parties are executors.
- Trusts with estimated value over $300,000. The proposal would create a new requirement for trusts administered in the United States with an estimated value exceeding $300,000 or with a gross income exceeding $10,000 to report specified information about the trust’s assets to the IRS on an annual basis.
- Extend the period for certain estate and gift tax liens. Current law provides an automatic lien on all gifts made by a donor and generally on all property in a decedent’s estate to enforce the collection of gift and estate tax liabilities from the donor or the decedent’s estate. The lien remains in effect for 10 years from the date of the gift for gift tax, or the date of the decedent’s death for estate tax, unless the tax is sooner paid in full. The proposal would extend the automatic tax liens beyond the 10-year period to cover any deferral or installment period for unpaid estate and gift taxes.
- Statute of limitation for qualified opportunity fund reporting. If a taxpayer invests an eligible amount in a Qualified Opportunity Fund, the taxpayer can elect to defer the related gain. The taxpayer will not have to include the deferred gain in its income until the earlier of Dec. 31, 2026, or on the date of a specified inclusion event. The proposal would modify the statute of limitation for taxpayers who fail to properly report an inclusion event to expire three years after the date the IRS is provided with sufficient information to assess the amount of tax owed.
- Statute of limitation for omissions exceeding $100 million of gross income. The proposal would extend the three-year statute of limitation to six years for returns omitting more than $100 million of gross income.
- Expanded financial institution reporting on foreign persons. The proposal expands the reporting requirements imposed on financial institutions to require such institutions to report certain information about accounts maintained at a U.S. office and held by a foreign person, including account balances, non-U.S. source payments, and gross proceeds from the sale or redemption of property held with respect to a financial account held by a foreign person. The proposal would also require financial institutions to report information about passive entities and their substantial foreign owners.
Proposals from 2021: Below are the tax reporting and enforcement changes in the 2023 budget that were included in last year’s budget proposal or a version of the BBBA.
- Partnership audit net negative adjustments. The partnership audit rules require partners to include in their reporting year taxes the amount of tax that would have occurred in the tax year under audit, and all years between the audited year and the reporting year, if the adjustments resulting from the audit had been taken into account by those partners in those tax years. However, if that tax adjustment results in a net reduction in tax, the partner treats the adjustment as a nonrefundable credit that doesn’t carryforward so it can only use that benefit on its reporting year return to the extent of its tax liability. If its tax liability is less than the credit amount, the excess is permanently lost. The proposal would permit this adjustment to be treated as a refundable credit.
- Modifications to paid preparer penalties. The proposal would increase preparer penalties for willful, reckless, or unreasonable understatements, as well as for other forms of noncompliance, and expand IRS oversight of paid preparers.
- E-filing. The proposal would expand Treasury’s authority to require electronic filing of returns or forms for taxpayers reporting larger amounts or for complex business entities.