Tax Legislation Advances As Part of Reconcilation Bill

After almost 40 hours of debate over four days, the House Ways and Means Committee on September 15 approved a tax package that would increase rates on high-net-worth individuals and corporations and affect cross-border activity and pass-through entities, advancing the tax elements of the Biden administration’s “Build Back Better” agenda.

The package advanced on a largely party-line 24-19 vote – no Republicans voted for it, and only one Democrat, Rep. Stephanie Murphy, D-Fla., voted against it.

As the next step in the legislative process, the legislation now goes to the House Budget Committee, where it will be combined with bills from other House committees and eventually brought before the full House for a vote as the reconciliation legislation.    

Individuals

The draft legislation would raise the top individual marginal tax rate from the current 37% to 39.6% for taxable income over $450,000 for married individuals filing jointly and surviving spouses, $425,000 for head of households, $400,000 for single individuals, $225,000 for married individuals filing separately, and $12,500 for estates and trusts. The proposal would be effective for taxable years beginning after December 31, 2021.

 

The capital gains tax rate would rise to 25% from 20% for transactions by high-income individuals made after Sept. 13, 2021.

 

The bill would also create a 3% surcharge on modified gross adjusted income above $5 million, and set a limit on contributions to large individual retirement accounts.

 

The bill would extend the holding period to obtain long-term capital gains treatment for gain allocated to carried interest partners from three to five years. The three-year holding period would remain in effect with respect to any income attributable to real property trades or businesses and for taxpayers (other than an estate or trust) with adjusted gross income of less than $400,000.

Business Provisions

The legislation would introduce a graduated income tax rate structure for most corporations, with a top corporate tax rate of 26.5%. Corporations with taxable income that does not exceed $400,000 would be subject to a new 18% tax rate (lower than the current 21% rate), while those with income that exceeds $400,000 but does not exceed $5 million would be subject to a 21% tax rate, and those with income in excess of $5 million would be subject to the top 26.5% rate.

 

On the international front, the bill would reduce the Section 250 deduction for global intangible low-taxed Income (GILTI) to 37.5%, resulting in an effective tax rate of 16.5% based on a corporate tax rate of 26.5%. The GILTI would be calculated on a country-by-country basis.

 

Other international tax provisions include:

  • The deduction for qualified business asset investment (QBAI) would be reduced to 5%;
  • The foreign tax credit haircut would be reduced to 5%;
  • The tax on foreign-derived intangible income would rise to an effective rate of 20.7% based on a corporate tax rate of 26.5%;
  • Excess foreign tax credit carryforwards would be allowed for five years but carrybacks would be disallowed; and
  • A new limitation on interest expense deductions for some multinational corporations would be introduced.

What is not in the bill

The Ways and Means tax bill does not include any changes to the cap on individual itemized deductions for state and local taxes, which was introduced in 2017’s tax reform. Ways and Means Chairman Richard Neal (D-MA) has said he is committed to include “meaningful SALT relief” in the final legislation.

A provision to end the tax-free step-up in basis above a $1 million threshold that was proposed by the Biden administration is also not included in the Ways and Means bill.

Feel free to reach out to us to discuss how changes may impact you.

Written by Todd Simmens. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com

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