The US House of Representatives passed a crucial part of President Joe Biden’s agenda by a vote of 220–213 on November 19, 2021.
The Build Back Better Act (BBBA) includes numerous provisions related to health care, climate change, immigration, education, social programs, and, of course, taxes.
Impact on the Deficit
The House vote came after the Congressional Budget Office (CBO) released its score on the legislation on November 18.
The CBO estimates that the legislation will increase the deficit by $367 billion over a 10-year period. However, the CBO score doesn’t take into account any additional revenue generated by improved compliance with federal tax laws.
The BBBA allocates $80 billion for the IRS to heighten enforcement (which the CBO included in its calculation), likely to target primarily high-wealth individuals, businesses, and overseas transactions. The US Treasury Department estimates increased IRS enforcement will lead to $400 billion in additional revenue over the 10-year period.
Significant Tax Proposals
Funding for the sweeping package largely comes from tax increases on high-income individuals and businesses, but the law also includes tax breaks for eligible taxpayers. Some of the most notable tax-related provisions include the following.
Individuals
- State and local tax deductions
- Child tax credit
- Premium tax credit
- High-income surtax
- Net investment income tax
- Excess business losses
- Qualified small business stock
- Retirement savings
Businesses
- Minimum corporate tax rate
- R&D expenses
- Excise tax on stock buybacks
- Business interest deductions
- International tax
Individual Proposals
State and Local Tax Deductions
The BBBA would amend the Tax Cuts and Jobs Act (TCJA) to raise the cap on the state and local tax deduction from $10,000 to $80,000 ($40,000 for married taxpayers filing separately) for tax years 2021 through 2031. The limit would return to $10,000 in 2032.
Child Tax Credit (CTC)
The American Rescue Plan Act (ARPA) expanded the CTC from $2,000 per child to $3,000 per child ages six through 17 and $3,600 per child under age six for 2021. The BBBA would extend the expansion through 2022.
Premium Tax Credit (PTC)
The ARPA expanded the availability of PTCs for health insurance purchased through Affordable Care Act exchanges (healthcare.gov, for example) for 2021 and 2022. The BBBA would extend the expansion through 2025.
High-Income Surtax
The BBBA would create a 5% surtax on individuals with a modified adjusted gross income (MAGI) that exceeds $10 million ($5 million for married taxpayers filing separately).
It adds another 3% surtax on MAGI exceeding $25 million ($12.5 million for married taxpayers filing separately). The surtax would take effect for 2022.
Net Investment Income Tax (NIIT)
The BBBA would expand the 3.8% NIIT to apply to the trade or business income of high-income individuals, regardless of whether they’re actively involved in the business.
Income Thresholds
- Over $500,000 for joint filers
- Over $400,000 for single filers
- Over $250,000 for married couples filing separately
The NIIT currently applies to business income only if the income is passive.
Excess Business Losses
The BBBA would make permanent the TCJA’s limit on the amount of excess business losses that pass-through entities and sole proprietors can use to offset ordinary income. It also would create a new carryforward for unused excess business losses, rather than carrying them forward as net operating losses.
Qualified Small Business Stock (QSBS)
The BBBA would eliminate the 75% and 100% exclusion rates and restore the AMT preference item for taxpayers with adjusted gross income of $400,000 or more for sales or exchanges of QSBS after September 13, 2021, subject to a binding contract exception. The provision would also apply to any trust or estate.
Retirement Savings
The BBBA includes several limitations on the ability of high-income taxpayers with large retirement account balances to utilize certain tax breaks.
For example, beginning in 2029, it would prohibit additional contributions to a Roth IRA or traditional IRA for a tax year if a taxpayer’s income exceeds a certain amount and the contributions would cause the total value of an individual’s IRA and defined contribution accounts to exceed $10 million as of the end of the prior tax year.
The bill also would impose new mandatory distribution requirements on such taxpayers. But some retirement-related provisions would go into effect as soon as 2022, such as ones that would restrict and, in some circumstances, eliminate Roth conversions.
Business Proposals
Minimum Corporate Tax Rate
The BBBA would impose a 15% minimum tax on the profit of corporations that report more than $1 billion in profit to shareholders, for tax years beginning after 2022.
R&D Expenses
The BBBA would extend the expensing of R&D costs under Section 174 through 2025. Expensing of Section 174 costs is currently set to expire for tax years beginning in 2022.
Excise Tax on Stock Buybacks
The BBBA includes a 1% excise tax on the fair market value of stock buybacks by publicly traded US corporations, which would be effective for repurchases after 2021.
Business Interest Deduction
The BBBA would add a new limit on the amount of net interest expense that certain corporations that are part of an international financial reporting group can deduct, for tax years beginning after 2022.
International Tax
The BBBA includes numerous international tax provisions:
- 15% corporate minimum tax
- Deduction limit
- Global intangible low-taxed income (GILTI) regime
- Foreign-derived intangible income (FDII)
- Foreign tax credit
- Base erosion anti-abuse tax (BEAT)
- Dividends received deduction (DRD)
- Reinstatement of code Section 958(b)(4)
Learn more about the details of these provisions.
Next Step: The Senate
Passed by the House, the bill must still fight its way through the Senate, where it faces additional debate. It’s likely the Senate will make changes to the bill, which could include changes to tax provisions passed by the House.
A Senate vote isn’t expected to take place until late December.
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For more details on how you or your company could be affected by these potential changes, contact your Moss Adams professional.