Watch These Proposed Tax Changes in the Build Back Better Act

This blog post was originally published November 4, 2021. It was updated November 10, 2021.

The U.S. House of Representatives has introduced multiple bills with the potential to change tax rates –most notably the Build Back Better Act, which contains several significant tax provisions. It’s not clear which – if any – of these provisions will become law, but it’s advisable to stay up-to-date on these proposed tax changes as you approach year-end tax planning conversations with your tax advisor.

Members of Congress are in heavy negotiations around the proposed legislation. We’ll update this blog post as information changes. For now, here’s a look at the proposals most likely to affect you or your business.

Stepped-up IRS enforcement

Under current proposals, the single biggest source of new tax revenue will come from the Internal Revenue Service (IRS) stepping up enforcement of existing laws, with a focus on cracking down on tax evasion. The proposals would significantly increase the IRS’ budget to enable the agency to do so.

The agency’s current budget is $12 billion – down 20% since 2010. Proposals would add another $80 billion to the IRS budget. This additional funding would be used for improvements such as hiring new agents, modernizing the agency’s technology and improving taxpayer service.

Proposed tax changes for individuals

• Surtax on high modified adjusted gross income (AGI) 
  • Proposed: Instead of increasing top income tax rates, the proposal would levy a surcharge on the modified AGI of individuals, estates and trusts. A 5% surtax would apply to modified AGI in excess of $10 million for a single filer, joint filer or head of household or in excess of $5 million for married taxpayers filing separately. An additional 3% surtax would apply to modified AGI in excess of $15 million (single, joint, head of household) or $12.5 million (married filing separately). This surcharge applies to all income, including capital gains. For estates and certain trusts, the 5% surcharge applies to income above $200,000, and the additional 3% surcharge kicks in for income above $500,000.
  • Current: There is no high-income surtax.
• Net investment income (NII) tax 
  • Proposed: Broaden the 3.8% NII or Medicare tax to cover active pass-through income for those who are material participants in the pass-through entity. This would apply to taxpayers with taxable income above $400,000 (single filer) or $500,000 (joint filer), and would not allow net operating losses to be taken into account as an offset. The definition of NII would be expanded to include more pass-through income, as well as operating income not subject to self-employment tax and all gains from sales of S corporations and partnerships.
  • Current: The 3.8% NII or Medicare tax applies to passive partnership interests, hedge fund investments, and any net investment income not derived in trade or business.
• Qualified small business stock (Section 1202) gains
  • Proposed: Reduce to 50% the exclusion from taxable income of gains from sales or exchanges of qualified small business stock (QSBS). This would apply only to individual taxpayers with AGI of $400,000 or those married filing jointly with AGI of $500,000. The remaining gain would be subject to tax as a long-term capital gain.
  • Current: 100% of the gain on sales or exchanges of QSBS is excluded from taxable income, for all taxpayers.
• State and local tax (SALT) deduction
  • Proposed: Increase the cap on deducting SALT from federal taxable income to $80,000 ($40,000 for an estate, trust, or married individual filing separately) through 2030. The effective date would make this change applicable starting with the 2021 tax year.
  • Current: Taxpayers can only deduct the first $10,000 of state and local taxes from their federal taxable income.
• Wash sale losses 
  • Proposed: Expand the wash sale rules to include foreign currencies, commodities and digital assets such as cryptocurrencies. Expand the related party rules to include spouse, dependents, controlled corporations and partnerships on an attribution basis.
  • Current: Losses cannot be realized for securities sales when “substantially identical” securities are acquired within 30 days before or after the trade date.

Proposed tax changes for businesses

• Global minimum corporate tax
  • Proposed: Impose a 15% global minimum tax on foreign profits of American companies. Move “country-by-country” system of determining how much foreign income a company must pay U.S. taxes on.
  • Current: The U.S. imposes a 10.5% global minimum tax rate on American companies. Companies “blend” the various tax rates they pay around the world to determine if they have met the minimum standard.
• Business loss carry-forward (Section 461(l))
  • Proposed: Prohibit noncorporate taxpayers from claiming business losses in excess of business income in any year, to the extent those losses exceed $500,000 for joint filers and $250,000 for individuals. Any carryforward losses remain categorized as excess business loss.
  • Current: Material business participants can indefinitely carry forward deductions on up to 80% of business losses. Carryforward losses are categorized as net operating losses.
• Corporate alternative minimum tax (AMT) on large corporations
  • Proposed: Impose a 15% corporate alternate minimum tax tax on book profits of any U.S. corporation earning more than $1 billion in book profits over a three-year period. The profits threshold would be calculated by aggregating profits of certain corporations under common ownership or control. This could possibly expand this tax to apply to portfolio managers of private equity funds and other corporations beyond the Fortune 500.
  • Current: There is no corporate minimum tax.
• Corporate stock buyback tax
  • Proposed: 1% surcharge on corporate stock buybacks, to be paid by the corporation.
  • Current: There is currently no tax on buybacks.

While continuing negotiations in Congress make it challenging to predict what tax legislation will be enacted, there are only a few weeks left for 2021 tax planning. Now is the time to consider any financial moves that need to be completed before the end of the year.

Contact your Kaufman Rossin tax advisor to discuss how proposed tax provisions may affect you or your business and what you can do now to prepare for the coming tax season.