On November 19, 2021, HR 5376, the 2,476-page bill, commonly known as the Build Back Better Act, passed the United States House of Representatives by a vote of 220-213.
The House vote on HR 5376 came after the Congressional Budget Office released its cost estimates for the proposed legislation. He estimates that HR 5376 will cost nearly $ 1.7 trillion and add $ 367 billion to the federal deficit over 10 years.
HR 5376 began with significant changes to our tax laws, including significant increases in corporate, personal, trust and estate tax rates, significant increases in capital gains tax rates, l taxation of the unrealized earnings of the ultra-rich, a huge cut in the unified credit, a surtax on the tax on high-income individuals, trusts and estates, the widening of the application of the income tax net of investments, the elimination of rebates on donations and transfers in the event of death, and additional restrictions on the application of the qualifying business income deduction.
Much to the delight of most American taxpayers, HR 5376, as passed by the House, is a dwarf, in terms of tax provisions, compared to its original form. As tax law, at least as it stands, it’s a lot of ado about nothing.
However, American taxpayers should not be cheering for the legislation in its current form. It will likely be significantly amended by the Senate, repeating many of its original provisions (with or without modification). In fact, Skopos Labs reports that the bill, as passed by the House, has a 10% chance of being enacted.
HR 5376, at its heart, provides funds, establishes new programs and otherwise amends existing provisions in the law to improve a wide range of programs, including education, child care, health care and the protection of the environment.
While it may not be worth spending too much time focusing on HR 5376, as its tax provisions will be drastically changed by the Senate, it is worth briefly noting what is in the bill. and what may be missing.
The following provisions were originally found in HR 5376, but are nowhere to be found in legislation passed by the House:
- HR 5376 does not contain the revisions expected in Subchapter K. These provisions will likely be discussed in the Senate with Senator Ron Wyden (D-Or), Chairman of the Senate Finance Committee, taking the oar. We must keep a close eye on these provisions because they, if adopted, will radically change the taxation of partnerships.
- Section 138201 of the original HR 5376 increased the top marginal tax rate for individuals, trusts and estates to 39.6%. It was eliminated from the bill passed by the House.
- Section 138202 of the original HR 5376 increased the top marginal personal capital gains tax rate to 25%. This provision was deleted from the bill passed by the House.
- Section 138101 of the original HR 5376 restored progressive corporate tax rates and raised the maximum rate to 26.5% (with a 3% surtax for corporations with income above $ 10 million) and prescribes a flat tax rate for personal services companies of 26.5%. This provision was deleted in the bill passed by the House.
- Article 138210 of the original HR 5376 eliminated (with one small exception) discounting the value of assets transferred by gift or upon death. This provision is not found anywhere in the bill passed by the House.
- Currently, the unified credit is $ 11.7 million ($ 10 million adjusted for inflation). Original HR 5376 section 138207 proposed to reduce credit to pre-TCJA levels. Nowhere in the bill passed by the House is there any mention of any amendment to the unified credit. Additionally, the original HR 5376 proposed havoc on the taxation of transferor trusts commonly used for estate planning purposes. None of these provisions are found in the bill passed by the House.
Notable tax provisions
There are several tax provisions in HR 5376 that are noteworthy, but we must keep in mind that they may not survive or may be substantially changed in the legislative process:
- HR 5376 maintains limitations on Individual Retirement Account (IRA) and Roth IRA contributions by high income taxpayers with large retirement account balances by prohibiting such additions and imposing an excise tax on all contributions paid in excess of the applicable limits contained in article 138301 of the invoice. It also retains the increases in minimum distributions required for high income taxpayers with large account balances contained in section 138302 of the bill.
- Unlike the original bill, HR 5376 reinstates the SALT deduction to a limited degree. It increases the deduction until 2030 from $ 10,000 to $ 80,000 ($ 40,000 for marriages filed separately and trusts and estates). Be aware, however, that there is a strong movement in the Senate led by Senator Bernie Sanders (I-Vt) to limit the application of any SALT relief to taxpayers with income below specified amounts.
- HR 5376 adds a provision that imposes a tax on the profits of large companies. Any company (other than an S company, a regulated investment company or a real estate investment trust) which, for a period of three years, has an average annual income adjusted from the financial statements (to be defined in the new article 56A) more than $ 1 billion and, in the case of corporations with a foreign parent company, whose annual adjusted financial statement income exceeds $ 100 million, will be subject to a tax of 15% of its adjusted financial statement income for the year on the amount of its foreign AMT tax credit for corporations.
- HR 5376 adds a provision that imposes a 1 percent tax based on the fair market value of any publicly traded shares of a domestic company that the company repurchases.
- HR 5376 retains its original provisions limiting the application of section 1202 of the Code to a 50 percent exclusion for taxpayers with adjusted gross income greater than $ 400,000.
- HR 5376 amends section 1411 of the Code, extending its application to income derived in the ordinary course of a business or commercial activity for taxpayers with taxable income greater than $ 400,000 (sole filers), $ 500,000 (taxpayers married declaring jointly or surviving spouses) or $ 250,000 (married taxpayers declaring separately).
- HR 5376 makes permanent the limitation in Section 461 of the Unincorporated Taxpayer Excessive Losses Code enacted as part of the Tax Cuts and Jobs Act.
- HR 5376 creates a new Section 1A of the Code, imposing a surtax (in addition to any other income tax imposed) on high income individuals, estates and trusts. The surtax is equal to the sum of 5% of the amount of the taxpayer’s somewhat modified adjusted gross income in excess of $ 10 million ($ 5 million for married taxpayers filing separately; $ 200,000 for an estate or trust), plus 3 % of the amount of the taxpayer’s adjusted tax gross income exceeds $ 25 million ($ 12.5 million for married taxpayers filing separately; $ 500,000 for an estate or trust). In the original HR 5376, the surtax was 3% (instead of 5%) and applied to lower income thresholds (adjusted gross income “exceeding $ 5,000,000 for married people filing jointly, heads of family and individual filers; $ 2,500,000 for married people filing separately and $ 100,000 for trusts and estates).
A provision that has not received much press but is worthy of note
Likely due to the lobbying efforts of a single or a small group of shareholders of S companies, section 138509 of HR 5376 creates a huge planning opportunity for some S companies. It gives some S companies a window of opportunity. two years to reorganize into partnerships with no negative tax impact.
Section 332 of the Internal Revenue Code provides that no gain or loss shall be recognized on the receipt by a company of property distributed in full liquidation of another company, provided that (1) the company receiving the property has control, as defined in section 1504 (a) (2), of the shares of the distributing company; (2) there is cancellation or complete repurchase of all the shares of the distributing company; and (3) the transfer of all property takes place in the taxation year or the distribution is part of a series of distributions in accordance with a liquidation plan under which the transfer of all property is completed in three years from the end of the taxation year in which the first of the series of distributions under the plan is made.
Under Section 138509 of HR 5376, the liquidation (provided certain conditions are met) of an S corporation will be treated as a full liquidation under Section 332 (b) of the Code, and the resulting partnership will be treated as a company that is 80 percent Distributed (within the meaning of Section 337 (c) of the Code).
The corporation (including any predecessor corporation) must have been an S corporation on May 13, 1996, and thereafter until the date on which the qualifying wind-up is completed.
The liquidation must take place in one or more transactions within the two-year period beginning December 31, 2021 and must constitute the complete liquidation of Company S, and substantially all of the assets and liabilities of Company S must, due to the transactions, be transferred to a domestic partnership.
The S corporation must make a choice in the manner that the secretary may require no later than the due date for filing its income tax return for the taxation year in which this liquidation is completed.
If this provision survives the Senate and somehow becomes law, S corporations with highly valued assets (e.g. real estate), provided they meet the specified conditions, will have the opportunity to convert to the status of a tax-free partnership. Keep an eye on this provision as the legislative process continues.
I will continue to monitor the tax provisions of current legislation. While we were hoping to see the new law enacted well before the end of the year, like many tax professionals, I am starting to get impatient. We need to know where the tax laws are going to help taxpayers plan their efforts. Hopefully lawmakers will soon reach consensus on the legislation.