Build Back Better Act Includes Many Tax Provisions
The U.S. House of Representatives recently passed H.R. 5376, the Build Back Better Act, which includes a wide variety of budget and spending provisions, including many tax provisions.
Child Tax Credit
Among the tax provisions in the bill are a one-year extension of the expanded child tax credit, including the requirement that the IRS make advance payments of the credit throughout 2022 and permanent extension of refundability. Taxpayers whose adjusted gross income (AGI) exceeds $150,000 for joint filers, $112,500 for heads of household or $75,000 for other taxpayers would not be eligible for advance payments. For advance payments to those who file joint returns, one-half would be credited to each individual filing the joint return.
Premium Tax Credit
The bill addresses the expanded premium tax credit. The bill would increase the amounts for premium assistance in Sec. 36B through 2025, as well as extend through 2025 the rule that allows the premium tax credit to certain taxpayers whose household income exceeds 400 percent of the poverty line. Additionally, the bill would modify the employer-sponsored coverage affordability test through 2025, as well as allow certain low-income employees who are offered employer-provided health coverage to claim the credit through 2025. The bill would also exclude a portion of lump-sum Social Security benefit payments when determining household income for purposes of this credit, as well as exclude the first $3,500 of income of dependents who have not reached the age of 24. In addition, the bill would make permanent the Sec. 35 health coverage credit, currently scheduled to expire at the end of 2022.
Large Corporations Tax
The bill would enact a 15 percent minimum tax on the profits of corporations that report over $1 billion in profits to shareholders. Any corporation (other than an S corporation, regulated investment company or real estate investment trust) that for any three-year period has average annual adjusted financial statement income over $1 billion as defined in new Sec. 56A and, in the case of corporations with foreign parents, has annual adjusted financial statement income in excess of $100 million, would pay a 15 percent tax of its adjusted financial statement income for the year over the amount of its corporate AMT foreign tax credit.
FDII and GILTI Tax
The foreign-derived intangible income (FDII) deduction and global intangible low-taxed income (GILTI) deduction are also addressed by the bill. The bill would reduce the applicable percentage in Sec. 250(a) for the FDII deduction from 37.5 percent to 24.8 percent and the applicable percentage for the GILTI deduction from 50 percent to 28.5 percent. Additionally, the bill would allow the FDII deduction to be taken into account when determining a net operating loss deduction. Sec. 951A would be amended to have the GILTI provisions apply on a country-by-country basis, based on controlled foreign corporation taxable units.
Foreign Tax Credit
The bill addresses the foreign tax credit limitation. The bill would amend Sec. 904 to apply the limitation on a country-by-country basis, by taxable unit. Taxable units would include the taxpayer corporation itself, each foreign corporation of which the taxpayer is a shareholder, interests held by the taxpayer in a passthrough entity and any branch of the taxpayer. The bill would also repeal the carryback of the foreign tax credit. The changes would apply to tax years beginning after Dec. 31, 2022.
Green Energy Credit
Included in the bill are new and existing green energy incentives, generally arranged as two-tiered incentives providing a base rate or a bonus rate. The bonus rate is five times the base rate and would apply to projects that meet certain requirements. Individual taxpayers would be eligible for energy-related incentives under the bill, which would extend the Sec. 25C nonbusiness energy property credit to property placed in service before the end of 2031. Taxpayers would be given the option to elect to be treated as having made a payment of tax equal to the value of the credit they would otherwise be eligible for under various energy credits, rather than opting to carry the credit forward.
In regard to green energy and energy-efficiency, the bill would:
- Extend the credit for production of energy from renewable sources and the Sec. 48 investment credit for certain energy property. The incentive for solar and wind energy under Sec. 48 would be increased.
- Extend the Sec. 25D credit for residential energy-efficient property through 2033. It would a refundable credit for years after 2023. Qualified battery storage technology expenditures would be made eligible. The Sec. 45L credit for new energy-efficient homes would be extended through 2031 and would be increased and modified.
- Extend the Sec. 48C qualified advanced energy property credit through 2031 and provide a new investment credit worth up to 25 percent for advanced manufacturing facilities. The bill would create a credit for the production of solar polysilicon wafers, cells and modules and wind blades, nacelles, towers, and offshore wind foundations.
- Create an emissions-based incentive for electricity generating facilities. Taxpayers could choose between a production tax credit under new Sec. 45BB or an investment tax credit under new Sec. 48F.
- Create a technology-neutral tax credit for the domestic production of clean fuels.
The bill includes electric vehicle tax credits. The bill would provide for a refundable income tax credit of up to $8,500 for new qualified plug-in electric vehicles that cost up to $80,000 for vans, SUVs and trucks or $55,000 for other vehicles. The bill would provide a credit of up to $7,500 for two- or three-wheeled plug-in electric vehicles. The credit would phase out for taxpayers with AGI over $500,000 (married filing jointly) or $250,000 (single taxpayers). A credit would be available for the purchase of qualifying used electric vehicles and certain new electric bicycles. The bill would provide a credit of up to 30 percent of the basis of a fully electric vehicle or 15 percent of the basis of a hybrid vehicle for a qualified commercial vehicle placed in service by a taxpayer. In addition, the bill would extend the credit for the purchase of a qualified fuel cell motor vehicle and the alternative fuel vehicle refueling property credit through 2031.
There are provisions in the bill addressing retirement plans. The bill would prohibit further contributions to a Roth or traditional IRA for a tax year if the contributions would cause the total value of an individual's IRA and defined contribution retirement accounts as of the end of the prior tax year to exceed, or further exceed, $10 million. This would apply to individuals with income over $400,000 (single filers and married filing separately), $425,000 (heads of household) or $450,000 (married filing jointly). If an individual's combined traditional IRA, Roth IRA and defined contribution retirement account balances generally exceed $10 million at the end of a tax year and the individual meets the income thresholds, a minimum distribution would be required the following year. These provisions would be effective for tax years beginning after Dec. 31, 2028.
The bill would prohibit all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to a Roth IRA regardless of income level, effective for distributions, transfers and contributions made after Dec. 31, 2021. The bill would eliminate Roth conversions for both IRAs and employer-sponsored plans for single taxpayers or those married filing separately with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000 and heads of household with taxable income over $425,000. This provision would be effective in tax years beginning after Dec. 31, 2031.
Other tax provisions in the bill would:
- Extend changes to the earned income tax credit enacted by the American Rescue Plan Act (ARPA), P.L. 117-2, through 2022, with the increases indexed for inflation.
- Increase Sec. 164(b) limitation on deduction for state and local taxes from $10,000 to $80,000 ($40,000 for married filing separately and for trusts and estates) and extend the limitation through 2031.
- Enact a tax equal to 1 percent of the fair market value of any stock of a corporation that the corporation repurchases throughout the year, effective for repurchases after Dec. 31, 2021. The provision would apply to any domestic corporation the stock of which is traded on an established securities market.
- Add a new Sec. 163(n) limiting the amount of net interest expense of certain domestic corporations or foreign corporations engaged in a U.S. trade or business that are members in an international financial reporting group. The provision would limit the interest expense deduction to an "allowable percentage" of 110 percent of the domestic corporation's net interest expense.
- Amend Sec. 1202 to disallow the 75 percent and 100 percent exclusion of gain from the sale of stock if the taxpayer's AGI is over $400,000 or if the taxpayer is a trust or estate.
- Amend Sec. 1091 to make commodities, foreign currencies and cryptoassets subject to wash-sale rules.
- Amend Sec. 1411 to apply the tax to net investment income derived in the ordinary course of a trade or business for taxpayers with taxable income over $400,000 (single filers), $500,000 (married filing jointly or surviving spouses) or $250,000 (married filing separately).
- Make permanent the Sec. 461 limitation on excess losses of noncorporate taxpayers.
- Repeal the Sec. 6751(b) requirement for written supervisory approval of IRS penalties and provide more funding for IRS enforcement, technology and customer service.
- Increase the 9 percent housing credit and small state minimums under the low-income housing credit for the years 2022–2025 and create a new credit to encourage rehabilitation of deteriorated homes in distressed neighborhoods.
- Modify the Sec. 59A base-erosion and anti-abuse tax to gradually increase the applicable percentage from 10 percent to 12.5 percent in 2023, 15 percent in 2024 and 18 percent after 2024. Amounts would not be subject to the base-erosion and anti-abuse tax if they were subject to an effective rate of foreign tax of at least 15 percent (or 18 percent after 2024).
- Create a new Sec. 1A imposing a surcharge tax of the sum of 5 percent of the amount of the taxpayer's AGI that exceeds $10 million ($5 million for married filing separately; $200,000 for an estate or trust), plus 3 percent of the amount of the taxpayer's AGI that exceeds $25 million ($12.5 million for married filing separately; $500,000 for an estate or trust).
The Congressional Budget Office (CBO) estimates the bill would cost nearly $1.7 trillion and add $367 billion to the federal deficit over 10 years. Adding in $207 billion of nonscored revenue that is estimated to result from increased tax enforcement in the bill, the net total increase to the deficit would be $160 billion.
The bill now goes to the Senate for consideration.