US Treasury Issues Green Book Providing Additional Details Regarding the Biden Administration’s Tax Plans
The US Treasury Department issued its green book, providing fuller details of the Made in America Tax Plan, which proposes corporate tax changes to finance the American Jobs Plan – the first piece of the Biden administration’s infrastructure plan. It also provides more specifics about the American Families Plan, which contains a number of tax provisions targeting high-income individuals and providing for increased IRS enforcement activity to pay for additional infrastructure investments and tax credits aimed toward children and families.
The purpose of the green book is to provide a detailed explanation of the administration’s revenue proposals and the impact of those proposals on projected revenues for the federal government over the 10-year budget window, a Revenue Score. As such, it provides the greatest detail to date on many of the Biden administration’s tax proposals. This is the first green book Treasury has issued since the Trump administration discontinued the practice beginning with Fiscal Year 2017.
The green book includes effective dates for each of the administration’s revenue proposals, which is necessary to estimate a Revenue Score for the proposals. The proposal to make the capital gains tax rate increase retroactive to the date of announcement in April 2021 has already garnered significant attention. As things move forward, Congress will utilize its own scorekeepers to estimate its own Revenue Scores for legislation and will likely consider different effective dates from those in the green book. As a result, the Biden administration’s revenue proposals set forth in the green book are merely a starting point for negotiations in Congress and are largely aspirational. The Democrats hold narrow majorities in the House and Senate and lawmakers from both parties have indicated they do not support all of the administration’s proposals.
Individual Tax Provisions
The green book provides the following additional details regarding the tax changes proposed in the American Families Plan:
Raising the top marginal income tax rate for individuals to 39.6% from 37%. The rate increase would be effective for taxable years beginning on or after December 31, 2021. In taxable year 2022, the 39.6% marginal tax rate would apply to taxable income over $509,300 for married individuals filing a joint return and $452,700 for unmarried individuals. After 2022, the thresholds would be indexed for inflation.
Raising the top tax rate for long-term capital gains and qualified dividends for taxpayers with adjusted gross income of more than $1 million. Capital gains would be taxed at ordinary income tax rates to the extent that the taxpayer’s income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022. Coupled with the proposed change to the top ordinary income tax rate, the highest capital gains tax rate, including the net investment income tax (NIIT), would be 43.4%. The proposal would be effective for gains required to be recognized after the date of announcement, which has been interpreted to mean late April 2021 when the Biden administration released its American Families Plan. This proposed retroactive effective date has grabbed headlines and is merely a starting point for negotiations.
Treating gifts and bequests of property as income tax realization events for gains in excess of $1 million per person. Under the proposal, the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer. A transfer of property into, and distribution in kind from, a trust (including charitable split-interest trusts to the extent of the presumably proportionate interest transferred to the non-charitable beneficiary), partnership, or other non-corporate entity is a recognition event. A transfer into a grantor trust that is deemed to be wholly owned and revocable by the donor is not a recognition event.
Gain on unrealized appreciation also would be recognized by a trust, partnership or other non-corporate entity that is the owner of transferred property if that property has not been the subject of a recognition event within the prior 90 years, with such testing period beginning on January 1, 1940. Thus, under the proposal, gain on unrealized appreciation on these assets would be taxed on December 31, 2030.
Certain exclusions would apply:
- A $1 million per-person exclusion would be indexed for inflation after 2022 and would be portable to the decedent’s surviving spouse under the same rules that apply to portability for estate and gift tax purposes (making the exclusion effectively $2 million per married couple).
- Transfers by a decedent to a U.S. spouse or to charity would carry over the basis of the decedent. Capital gain would not be recognized until the surviving spouse disposes of the asset or dies and appreciated property transferred to charity would not generate a taxable capital gain.
- Gain on tangible personal property such as household furnishings and personal effects would be excluded (excluding collectibles).
- The $250,000 per-person exclusion under current law for capital gain on a principal residence would apply to all residences and would be portable to the decedent’s surviving spouse, making the exclusion effectively $500,000 per couple.
- The exclusion under current law for capital gain on qualified small business stock would also continue to apply.
For a donor, the amount of the gain realized would be the excess of the asset’s fair market value (FMV) on the date of the gift over the donor’s basis in that asset. For a decedent, the amount of gain would be the excess of the asset’s FMV on the decedent’s date of death over the decedent’s basis in that asset. For this purpose, the FMV of a transferred partial interest is the proportional share of the entire property’s FMV, seeming to disallow discounts unless the interest owned was an already discounted asset. That gain would be taxable income to the decedent on the federal gift or estate tax return or on a separate capital gains return. The use of capital losses and carry-forwards from transfers at death would be allowed against capital gains income and up to $3,000 of ordinary income on the decedent’s final income tax return and the tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent’s estate (if any). The proposal is silent as to gains realized by gift with respect to capital losses and the impact on any gift tax payable.
The payment of tax on the appreciation of certain family owned and operated businesses would not be due until the business is sold or ceases to be family owned and operated. A 15-year fixed-rate-payment plan would be available for the tax on illiquid appreciated assets transferred at death.
The proposal would be effective for gains on property transferred by gift, and on property owned at death by decedents dying after December 31, 2021 and on certain property owned by trusts, partnerships and other non-corporate entities on January 1, 2022.
Repealing real estate like-kind exchanges for gains greater than $500,000. The proposal would allow the deferral of gain on real property up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing a joint return) each year for real property exchanges that are like kind. Any gains from like-kind exchanges in excess of $500,000 (or $1 million in the case of married individuals filing a joint return) during a taxable year would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange. Personal property like-kind exchanges were previously repealed by the Tax Cuts and Jobs Act. The proposal would be effective for exchanges completed in taxable years beginning after December 31, 2021.
Permanently extending the limitation on excess business losses of non-corporate taxpayers under Sec. 461(l). For taxable years beginning after December 31, 2020, and before January 1, 2027, non-corporate taxpayers may not deduct an excess business loss from taxable income. Instead, these losses are carried forward to subsequent taxable years as net operating losses. This limitation would become permanent.
Requiring that income and gains received from carried interest be taxed as ordinary income. The proposal would replace Sec. 1061 for taxpayers with taxable income (from all sources) in excess of $400,000 with a new regime that treats their distributive share of income or gain on the sale of the partnership interest as ordinary regardless of the character of the income at the partnership level. The proposal would be effective for taxable years beginning after December 31, 2021.
Applying the 3.8% Medicare tax to all income and earnings over $400,000. The proposal would ensure that all trade or business income of taxpayers with income over $400,000 is subject to the 3.8% Medicare tax, either through the NIIT or Self Employed Contributions Act (SECA) tax. The NIIT would apply to all gross income and gains from a trade or business that are not already subject to SECA tax. Limited partners and LLC members who provide services and materially participate in their partnerships and LLCs would be subject to SECA tax on their distributive shares of partnership or LLC income to the extent that this income exceeds certain threshold amounts. S corporation owners who materially participate in the trade or business would be subject to SECA taxes on their distributive shares of the business’s income to the extent that this income exceeds certain threshold amounts. Material participation standards would apply to individuals who participate in a business in which they have a direct or indirect ownership interest. The proposal would be effective for taxable years beginning after December 31, 2021.
Notably Absent. The following items, which may be revived or revisited as the negotiations continue, were not included in the green book:
- Eliminating the Sec. 199A 20% deduction on pass-through income (currently set to expire in 2026).
- Capping the value of itemized deductions to 28%.
- Imposing FICA tax on income over $400,000.
- Changing the estate and gift tax exemption thresholds or rates.
- Eliminating the $10,000 cap on state and local tax deductions (currently set to expire in 2026).
Tax Compliance and Administration
Imposing new reporting requirements and improving compliance. The proposal would create a new comprehensive financial account information reporting regime. It would expand broker information reporting with respect to cryptocurrency assets and beef up IRS’s enforcement efforts through increased funding and enforcement initiatives.
Business Tax Provisions
The green book provides the following additional details regarding the tax changes proposed in the Made in America Tax Plan:
Raising the corporate income tax rate to 28% from 21%. The proposal would be effective for taxable years beginning after December 31, 2021. For taxable years beginning after January 1, 2021 and before January 1, 2022, the tax rate would be equal to 21%, plus 7% times the portion of the taxable year that occurs in 2022.
Adding a 15% minimum tax on the financial statement income of large multinational corporations. The tax would apply to corporations with worldwide book income in excess of $2 billion. Taxpayers would calculate book tentative minimum tax (BTMT) equal to 15% of worldwide pre-tax book income (calculated after subtracting book net operating loss deductions from book income), less general business credits (including research and development, clean energy and housing tax credits) and foreign tax credits. The book income tax equals the excess, if any, of tentative minimum tax over regular tax. Additionally, taxpayers would be allowed to claim a book tax credit (generated by a positive book tax liability) against regular tax in future years, but this credit could not reduce tax liability below book tentative minimum tax in that year. The proposal would be effective for taxable years beginning after December 31, 2021.
Making a number of revisions to the minimum tax on global intangible low-taxed income (GILTI), including:
- Raising the effective rate on GILTI to 21% from 10.5% by reducing the GILTI deduction to 25%.
- Applying GILTI on a jurisdiction-by-jurisdiction basis.
- Repealing the exemption for 10% deemed tangible income return.
These proposals would be effective for taxable years beginning after December 31, 2021.
Additional proposals to reform the global minimum tax regime include the following:
- Requiring a separate foreign tax credit limitation for each foreign jurisdiction and applying a similar jurisdiction-by-jurisdiction apportionment with respect to a U.S. taxpayer’s foreign branch income.
- Repealing the high-tax exemption to Subpart F income and repealing the cross-reference to that provision in the global minimum tax rules in Sec. 951A.
- Envisioning certain coordinating rules with the OECD/Inclusive Framework Pillar Two agreement on global minimum taxation (if a consensus is reached).
These proposals would be effective for taxable years beginning after December 31, 2021.
Repealing the Sec. 250 deduction (for foreign-derived intangible income (FDII)). The proposal would be effective for taxable years beginning after December 31, 2021.
Replacing the Base Erosion and Anti-Abuse Tax (BEAT) minimum tax regime with a new Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) rule and encourage foreign countries to enact a minimum tax. The proposal would repeal the BEAT, replacing it with a new rule disallowing deductions to domestic corporations or branches by reference to low-taxed income of entities that are members of the same financial reporting group (including a member that is the common foreign parent, in the case of a foreign-parented controlled group). Specifically, under the SHIELD rule, a deduction (whether related or unrelated party deductions) would be disallowed to a domestic corporation or branch, in whole or in part, by reference to all gross payments that are made (or deemed made) to low-taxed members, which is any financial reporting group member whose income is subject to (or deemed subject to) an effective tax rate that is below a designated minimum tax rate. The designated minimum tax rate will be determined by reference to the rate agreed to under Pillar Two. If SHIELD is in effect before a Pillar Two agreement has been reached, the designated minimum tax rate trigger will be the proposed 21% U.S. global minimum tax rate. The proposal to repeal BEAT and replace with SHIELD would be effective for taxable years beginning after December 31, 2022.
Imposing additional limits under Sec. 163(j) for multinational groups for deducting business interest expense. A financial reporting group member’s deduction for interest expense generally would be limited if the member has net interest expense for U.S. tax purposes and the member’s net interest expense for financial reporting purposes (computed on a separate company basis) exceeds the member’s proportionate share of the financial reporting group’s net interest expense reported on the group’s consolidated financial statements (excess financial statement net interest expense). A member’s proportionate share of the financial reporting group’s net interest expense would be determined based on the member’s proportionate share of the group’s earnings (computed by adding back net interest expense, tax expense, depreciation, depletion and amortization) reflected in the financial reporting group’s consolidated financial statements. When a financial reporting group member has excess financial statement net interest expense, a deduction will be disallowed for the member’s excess net interest expense for U.S. tax purposes. The proposal includes definitional and operational rules, including certain exceptions and rules coordinating with Sec. 163(j). The proposal would be effective for taxable years beginning after December 31, 2021.
Expanding anti-inversion rules. From the date of enactment, the proposal would broaden the definition of an inversion transaction by replacing the 80% test with a greater-than-50% test and eliminating the 60% test. The proposal would also provide that, regardless of the level of shareholder continuity, an inversion transaction occurs if (1) immediately prior to the acquisition, the FMV of the domestic entity is greater than the FMV of the foreign-acquiring corporation, (2) after the acquisition the expanded affiliated group is primarily managed and controlled in the United States, and (3) the expanded affiliated group does not conduct substantial business activities in the country in which the foreign-acquiring corporation is created or organized. The proposal would expand the scope of the rules to include a direct or indirect acquisition of substantially all the assets of a trade or business of a domestic corporation, domestic partnership or the U.S. assets of a foreign partnership. Furthermore, a distribution of stock of a foreign corporation by a domestic corporation or a partnership that represents either substantially all of the assets or substantially all of the assets constituting a trade or business of the distributing corporation or partnership would be treated as a direct or indirect acquisition of substantially all of the assets or trade or business assets, respectively, of the distributing corporation or partnership. The proposal would be effective for transactions that are completed after the date of enactment.
Disallowing deductions for exempt or tax-preferred foreign gross income. The proposal would expand the application of Sec. 265 to disallow deductions allocable to a class of foreign gross income that is exempt from tax or taxed at a preferential rate through a deduction. The proposal would provide rules for determining the amount of disallowed deductions when only a partial deduction is allowed under Sec. 245A with respect to a dividend or a partial Sec. 250 deduction with respect to a global minimum tax inclusion. The proposal would be effective for taxable years beginning after December 31, 2021.
Limiting foreign tax credits from the sales of hybrid entities. The proposal would apply the principles of Sec. 338(h)(16) to determine the source and character of any item recognized in connection with a direct or indirect disposition of an interest in a specified hybrid entity and to a change in the classification of an entity that is not recognized for foreign tax purposes (for example, due to an election under the entity classification regulations). The proposal would be effective for transactions occurring after the date of enactment.
Providing tax incentives for locating jobs and business activity in the United States and removing tax deductions for shipping jobs overseas. The proposal would create a new general business tax credit equal to 10% of the eligible expenses paid or incurred in connection with onshoring a U.S. trade or business. The proposal would disallow deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business. The proposal would be effective for expenses paid or incurred after the date of enactment.
Eliminating fossil fuel tax preferences. The proposal would repeal a number of oil and gas-related tax preferences.
Adding or modifying numerous credits and incentives. The proposal would include numerous credits related to renewable energy and economic and community development incentives.
The details of the Biden administration’s tax proposals and effective dates included in the green book are merely a starting point for negotiations with Congress during the annual budget process. As a result, the details contained in the green book are likely to change, including the effective dates. At this point, the mood in Washington, D.C. is that any individual income tax changes are facing an uphill battle. Increasing taxes seems to be uniformly opposed by congressional Republicans. Among Democrats, some appear to be hesitant about the tax proposals. In particular, the proposed top capital gain rate and corporate tax rates may be too high, the anti-step up in basis proposal may go too far and the international tax changes may be too complex to address in the tight legislative time frame that is currently being contemplated. Attention will shift to the mid-term elections by early next year and time is of the essence if these proposals are to move forward. Currently, we expect that the negotiations will continue for several months and legislative text of the Biden administration’s tax proposals may not be available until the fall.