On October 28, 2021, the Biden administration issued a revised framework for the Build Back Better Act (BBBA). The new framework aims to cut the level of spending included in previous proposals to around $1.75 trillion while generating an offsetting amount of revenue through increasing certain taxes. This article discusses the tax provisions included in the newly issued framework and notes those that have been removed as of this writing.

Negotiations are on-going, and until a finalized version has been passed, there is always the possibility of further changes. Despite this uncertainty, the final bill is likely to include most of the tax provisions discussed here, so they provide a solid guide to understanding the taxation landscape for 2021 and beyond. As the proposal develops through continued negotiation, we will update our analysis and provide planning recommendations.

PROVISIONS INCLUDED IN THE REVISED FRAMEWORK

Qualified Small Business Stock Gain Exclusion (Section 1202)

• Under existing law, an individual may exclude 100% of the taxable gain recognized on the sale of qualified small business corporation stock (QSBS) for federal tax purposes. Many states conform to federal law, passing along the same tax benefit of section 1202.
• The current proposal limits the exclusion to 50% for individual taxpayers with adjusted gross income in excess of $400,000 and for all trust and estates regardless of their respective income level.

Corporate Minimum Tax

• The current proposal requires corporations with profits in excess of $1 billion to a pay a new 15% minimum tax on the adjusted financial statement income.
• In addition to the new minimum tax, U.S. corporations will pay a 1% surcharge on corporate stock buybacks for publicly traded companies.

Net Investment Income Tax (NIIT)

• Under existing law, the net investment income tax (NIIT) applies a 3.8% tax on certain passive income items including interest, dividends, capital gains, rent and royalty income, nonqualified annuities, and passive business income.
• The current proposal expands the scope of the NIIT to include not only passive income but also active trade or business income not already subject to FICA tax—Subpart F inclusions, GILTI income, Mark to market income, and Qualified electing fund inclusions.
• In addition, the NIIT will apply to the following groups based on modified adjusted gross income (MAGI):
  • Single taxpayers with MAGI in excess of $400,000.
  • Married filling joint taxpayers with MAGI in excess of $500,000
  • Trust and estates with MAGI in excess of $13,450.
  • MAGI is defined, as adjusted gross income reduced by any investment interest claimed as an itemized deduction, and/or in relation to taxable investment income.

Surcharge on High Income Taxpayers

• The current proposal establishes a new 5% surcharge on high-income individuals, trusts, and estates with MAGI exceeding these income thresholds:
  • Single and married taxpayers filing joint with MAGI in excess of $10,000,000, with an additional 3% at income levels greater than $25,000,000.
  • Trust and estates with MAGI in excess of $200,000, with an additional 3% at income levels greater than $500,000.

Excess Business Loss for Non-Corporate Taxpayers

• The 2017 Tax Cuts and Jobs Act (TCJA) set limitations on the deduction allowed for non-corporate taxpayers, with excess business losses attributable to a trade or business, whereby the taxpayer actively participates. The limitation was set at $250,000 ($500,000 for MFJ filers) and indexed annually for inflation.
• The 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES) amended previous legislation to restrict the limitation placed on excess business losses. The changes were made effective for tax years after December 31, 2020 and before December 31, 2026, but also retroactive for tax years 2018, 2019, and 2020 (assuming tax returns were filed prior to legislative change).
• Under the current proposal, excess business losses will be disallowed for non-corporate taxpayers beyond tax year 2025, a year earlier than under current law. As such, loss carryforwards would no longer be considered net operating losses (losses that are not taken into account until a future year of profit to reduce profit) but instead treated as excess business losses in futures years, limiting the allowable deduction that year to $250,000 and carrying the remainder forward to subsequent years.

Investment in IRS Audit Enforcement

• In an effort to maximize tax compliance by high earning individuals and entities, the current proposal also includes increased funding for the Internal Revenue Service to hire qualified enforcement agents and modernize outdated technology.

PRIOR PROPOSALS THAT ARE CURRENTLY ELIMINATED FROM THE FRAMEWORK

Individual Income Tax

• Increase in the Top Marginal Tax Rates: The top marginal tax rate will remain at 37% and is set to revert back to 39.6% for years ending after December 31, 2025.
• Increase in the Top Marginal Capital Gains Rates: Capital gains tax rate will remain at 20% for the highest bracket, falling from the proposed level of 25%.
• IRA and Retirement Plan Changes: The limitation on additional contributions to accounts exceeding $10,000,000 in total value have been removed.

Gift and Estate Tax

• Reduction to the Lifetime Gift and Estate Exemption: Individuals will retain the ability to transfer up to $11,700,000 (indexed annually for inflation) before triggering estate tax. The current level is set to revert back to $5,000,000 for years ending after December 31, 2025.
• Inclusion of Grantor Trust and Gain Recognition: Grantor trust will retain its character as an asset excludable from the estate, whereby the decedent is the deemed owner of the trust.
• Valuation Discounts: Taxpayers can continue to enjoy the benefit of valuation discounts when transferring assets to the next generation.

Passthrough Taxation

• Qualified Business Income Deduction: Section 199A will retain its original tax attributes as 20% deduction on qualified business income.