The Democratic majority of the House Ways and Means Committee has released a summary of the tax proposals which may be included in the proposed $3.5 trillion budget reconciliation legislation. It is unlikely that all of these proposed tax changes will be incorporated in the final reconciliation bill. It is also possible that the bill may not become law at all. Senator Manchin has publicly stated that he will not vote in favor of a $3.5 trillion bill. That being said, much of what is in the proposed bill may be enacted soon.
Below is a brief summary of the proposed corporate and international tax law changes which, if enacted, would likely impact businesses:
Increase in the top marginal corporate tax rate and reinstatement of graduated tax rate:
- Increase the maximum corporate income tax rate from 21% to 26.5% on taxable income in excess of $5 million.
- Corporate adjusted gross income below $400,000 would be subject to a reduced tax rate of 18% from the current 21% rate.
- Corporate adjusted gross income between $400,000 and $5,000,000 would remain taxed at a marginal rate of 21%.
- This change would be effective for tax years beginning after December 31, 2021.
Limitation on Deduction of Interest Developments
- The interest deduction would be limited to 110% of net interest expense for domestic corporations that are part of an international financial reporting group.
- The interest limitation would only apply to domestic corporations whose average excess interest expense over interest includible over a three-year period exceeds $12 million.
- Section 163(j)(4), which applies the limitation on deductibility of business interest under section 163(j) to partnerships and corporations, would be modified so that the limitation on interest generally would apply at the partner or shareholder level instead of at the partnership or S corporation entity level.
- These changes would be effective for the tax years beginning after December 31, 2021.
Global Intangible Low-Taxed Income (“GILTI”) and Foreign-Derived Intangible Income (“FDII”)
- The section 250 deduction with respect to both GILTI (to 37.5%) and FDII (to 21.875%). In combination with the proposed 26.5% corporate rate, this results in an effective 16.5625% GILTI tax rate and a 20.7% FDII tax rate.
- The following items would be tested country-by-country instead of across countries: GILTI, net CFC tested income, net deemed tangible income return, qualified business asset investment, and interest expense.
- The determination of tested income would include foreign oil and gas extraction income (“FOGEI”) and any deductions properly allocable to FOGEI.
- Section 960(d)(1) would be amended to increase the deemed credit for paid taxes attributable to GILTI from 80% to 95% (and to 100% in the case of taxes paid or accrued to U.S. territories).
Modifications to Foreign Tax Credit Limitations
- Section 904 would be amended to require foreign tax credit determinations on a country-by-country basis for purposes of sections 904, 907, and 960. As a result, the foreign tax credit computations will require assigning each item of income and loss to a taxable unit of the taxpayer which is a tax resident of a country.
- The carryback of excess foreign tax credit would be repealed and the carryforward of any foreign tax credit would be limited to five years instead of the current ten.
Deduction for Foreign Source Portion of Dividends Limited to Controlled Foreign Corporations
- Section 245A would be amended to provide that the participation exemption applies to foreign portions of dividends received only from controlled foreign corporations.
- The new rules would be effective for taxable years of foreign corporations beginning after December 31, 2017.
Modifications to Base Erosion and Anti-Abuse Tax (“BEAT”)
- The BEAT rate in section 59A(b)(1)(A) is amended to 10% for tax years beginning after December 31, 2021, and before January 1, 2024; to 12.5% for tax years beginning after December 31, 2023, and before January 1, 2026; and to 15% for any tax year beginning after December 31, 2025.
- The base-erosion minimum tax amount would be determined taking into account tax credits.
Digital Assets Added to Constructive and Wash Sale Rules
- The current constructive sales rules prevent a taxpayer from locking in investment gains without realizing taxable gain, and the current wash sale rules prevent taxpayers from claiming tax losses while retaining an interest in the loss asset.
- Digital assets (e.g., NFTs, cryptocurrency, and other non-tangible investment assets) would be subject to the constructive sale and wash sale rules. The new rules would be effective for tax years beginning after December 31, 2021.
Limitation on Exclusion for Gain from Small Business Stock
- Under current law, certain gains arising from qualified small business stock may be excluded from taxable income for qualified taxpayers.
- Taxpayers with adjusted gross income equal to or exceeding $400,000 would not be permitted to exclude gain from the sale of small business stock. The provision would be effective on sales and exchanges occurring on or after September 13, 2021.
Temporary Rule to Allow S Corporation to Reorganize as Partnerships without Tax
- Eligible S corporations would be permitted to reorganize for tax purposes as partnerships without triggering tax. An S corporation electing to take advantage of this provision would be required to completely liquidate and transfer all of its assets and liabilities to a domestic tax partnership during the two-year period starting on January 1, 2022.
- Only S corporations which were in existence on May 13, 1996 would be eligible to reorganize pursuant to this provision.
Modifications of Rules for Partnership Interest Held in Connection with the Performance of Services
- Profits or carried interests in tax partnerships must have been held by a service provider for at least five years for any gains attributable therefrom to qualify as long term capital gains. The current holding period is three years.
- Section 1061 would apply to all assets eligible for long term capital gain rates and new rules for measuring the three or five year holding period are included.
- This provision would be effective for tax years beginning after December 31, 2021.
This alert addresses only tax law changes contained in the proposed legislation released by the House Ways and Means Committee. Additional legislative actions, including a “mark up” of the bill, a Committee vote, negotiation between the House and Senate in the reconciliation process, and Congressional parliamentary procedures (including, a so-called “Byrd bath” in the Senate) must be undertaken prior to any final enactment. Further, as many of the tax provisions are contained as revenue “offsets” for new spending, any reduction in proposed government spending programs will likely result in removal of certain tax increasing provisions. Some (if not all) of the tax law changes in this Tax Alert may not be enacted this year, or ever.
In addition to this alert, Gunster has prepared a separate alert addressing proposed changes to individual income taxes, estate tax, gift tax, and generation skipping transfer taxes. Gunster also is preparing alerts addressing other non-tax related changes.
Please click the following links for more information:
- Income, Estate, Gift and Generation Skipping Transfer Tax Alert
- Resources prepared and released by House Ways and Means Committee:
- Section by Section Summary
- Full Text (starting on page 525)
As none of the above changes have been enacted into law, relying on them may be premature. However, the above proposed changes may provide a window into what the future may hold. Any questions regarding the above should be discussed with your tax advisor.
Please do not hesitate to reach out to Gunster’s Tax Law team if you have any questions or need assistance.
