Tax legislation is moving full speed ahead in Congress. The behind-the-scenes preliminary work for the summer is done, and congressional leaders are making a concerted effort to complete their legislation in the coming weeks. Congress currently aims to move a $3.5 trillion reconciliation package as part of the administration’s Build Back Better strategy. While we have provided updates on the general themes of this tax legislation, we are now at the stage where we have actual proposed legislation to review and analyze. Here’s our findings:
On September 13, 2021, the House Ways & Means Committee unveiled the tax provisions of its package that would fund much of the reconciliation package. These revenue-raising tax measures have been talked about all year, and while nothing is final yet, you can now read the specific proposals. As expected, the package includes many tax hikes for individuals and businesses. We have included a Section-by-Section Summary of these tax changes as well as a description of these measures and budget estimates from the Staff of the Joint Committee on Taxation (JCT).
The tax package contains several expected changes but left out other items thought to be included. Here is a brief overview of several selected highlights from the Ways & Means proposal:
The current flat rate of 21% would be raised to 26.5% but only apply to companies with taxable income over $5 million. The 21% rate continues to apply for income under $5 million. In addition, a new lower rate of 18% would apply on the first $400,000 of income. Further, in the proposed legislation, a Personal Service Corporation (PSC) would be subject to the new top rate of 26.5%. These rate changes take effect in 2022.
The top rate for individual taxpayers would increase from 37% to 39.6%. The new rate would apply in 2022 for married taxpayers filing jointly with taxable income greater than $450,000 and for single taxpayers with taxable income greater than $400,000. The 35% tax bracket would also be significantly reduced.
There were suggestions to raise the 20% capital gains rate to the top ordinary rate of 39.6%. However, but the House proposal today would increase the rate to 25% (up to 28.8% by including the 3.8% net investment income tax (NIIT tax)). The new higher capital gains tax would kick in with taxable income greater than $450,000 for married filing jointly and $400,000 for single taxpayers. The proposed 25% rate would apply for tax years ending after September 13, 2021. Further, there would be a mix of capital gains rate for 2021 with the lower 20% for the first portion of the year and a higher rate for the last portion of year. This will be a complicated calculation, and there is a binding contract exception for transactions in place as of September 13, 2021.
This special provision applies to certain qualifying businesses (operating as C Corporations), in which a stockholder can exclude 100% of the gain from the sale of stock if held at least five years. The proposal would limit this tax incentive for taxpayers with adjusted gross income (AGI) over $400,000.
The 3.8% tax rate applies for various portfolio and passive income sources but exempts certain active business income. The proposal would apply this 3.8% to active income for taxpayers with AGI above $500,000 (MFJ) and $400,000 (single) in 2022.
The proposal would limit the 20% deduction for qualified business income for certain high-income individuals in 2022. The maximum allowable deduction would be $500,000 (MFJ), $400,000 (single) and $10,000 (trusts and estates). For example, the $500,000 dollar limit would mean that an owner of a business with $2.5 million of taxable income would be able to claim the full business income deduction subject to other restrictions.
A new 3% excise surtax would apply to taxpayers with AGI over $5 million per year. Note, this new tax would apply to trusts and estates with over $100,000. This new tax would take effect in 2022.
The current estate and gift tax exemption would be cut in half in 2022. This was set to occur in 2026 under the current law. In addition, certain valuation discounts would not be allowed on gifts of “passive” or “nonbusiness” assets in 2022.
There are several proposed changes related to IDGTs, one of which would trigger tax on the sale of property to the grantor trust as being to an outside third-party. These changes are effective on September 13, 2021 (the date these proposals were introduced).
The proposal would limit the amounts accumulated in IRAs (including Roth IRAs). There are provisions that cause these larger plans to distribute balances more rapidly and other changes to limit the “back door” Roth IRAs for individuals with income over $450,000 (MFJ) and $400,000 (single).
There were numerous changes to reform how multi-national corporations are taxed. One proposal would lower the deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI). After factoring in the new corporate tax rate of 26.5% (noted above), the FDII tax rate would be 20.7%, and the GILTI rate would be 16.56%. There are also several other proposed changes with GILTI, as well as changes with foreign tax credit limitations.
Two items were absent from the proposal (these could be introduced later). First, there was no change to the “step-up in basis” for property held by a decedent. There were several recommendations to eliminate this step-up. Next, there was talk of removing or modifying the $10,000 limit on state and local taxes (SALT) deduction. However, nothing was included in the proposal today.
Finally, there are other aspects of the bill that offer various tax incentives to taxpayers, such as tax-favored bonds to renovate disadvantaged communities; green energy programs; enhanced Work Opportunity Tax Credits (WOTC); and “social safety net” incentives for education, child tax credits and child care savings.
Next Steps
The Ways & Means Committee will conduct mark-up hearings this week, and it is expected this proposal will pass and then be voted on by all members in the House. The Senate is also moving ahead with its version of tax legislation for reconciliation. The Senate version is expected to be released this week and is projected to be similar, but not identical, to the House Ways & Means proposal. It will be a hectic legislative pace in the coming weeks – stay tuned. Please contact your Sikich advisor with any questions you have.
About our authors
Jim Brandenburg
Jim Brandenburg, CPA, has extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.
Tom Bayer
Thomas E. Bayer, CPA, CExP, has more than 25 years of experience providing a broad range of accounting, tax, and business advisory services to commercial clients across various industries and Sikich offices. Tom has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He puts his business succession planning abilities and knowledge to work firm-wide, serving clients in advisory services across the country.
Glen Birnbaum
Glen Birnbaum, CPA, ABV, ASA, CVA, CM&AA, is a partner with over 20 years of experience valuing closely held businesses. Glen provides expert accounting and tax advisory services for a range of entities, including those in the agriculture, manufacturing and construction industries. He excels in delivering tax and succession planning services to his clients, who value his commitment to strengthening their businesses.
