Below is a rundown of the ten biggest proposed tax changes in the White House’s new plan.
1. Major enforcement increase at the IRS. The single biggest source of new revenue in the administration’s plan consists of massively beefing up enforcement at the IRS to close the taxgap, the difference between what is owed to the IRS in taxes and what is actually collected. Former IRS commissioner Charles Rossotti and current Treasury official Natasha Sarin have said the tax agency could raise as much as $1.4 trillion in additional tax revenue with better data, technology and personnel.
2. Overhaul of the international tax code. The White house plan changes this in two ways – both by raising the new global minimum tax to a higher rate of 15 percent, and by moving to a “country-by-country” system to prevent a company from blending its global tax rate. At the same time, Treasury Secretary Janet L. Yellen is seeking a global tax deal in which most countries would agree to a new global minimum tax floor, which proponents say would discourage firms from relocating abroad despite the higher U.S. rate.
3. 15 percent corporate minimum tax. Since the 2017 GOP tax cut, the number of Fortune500 companies paying $0 in federal income tax has continued to grow. One analysis found 55 corporations paid no federal income tax on more than $40 billion in book profits last year, including brand names such as Nike and FedEx. The White House’s plan would aim to put an end to that practice, establishing a new minimum tax of 15 percent on all U.S. corporations earning more than $1 billion a year in book profits. The minimum tax would be assessed on book or financial statement income reported to shareholders rather than on profits reported to the IRS.
4. A new tax on businesses. To pay for the Affordable Care Act, President Barack Obama approved a new 3.8 percent tax on net investment income. Biden is proposing to broaden the tax to include active owners of S-corporations. This tax would apply to individuals with income over $400,000 and married taxpayers with income over $500,000.
5. Excess Business Loss Limitation. The excess business loss limitation of $500,000 from pass through entities would be made permanent. In addition, the excess business losses would remain in the “business loss” bucket and would not be converted to a net operating loss in future years. This will limit the ability for pass through business losses to offset other forms of income like wages, and investment income.
6. New surtax on those earnings above $10 million. Biden’s latest tax proposal includes a version of a plan first introduced by House Democrats to add a new 5 percent tax on individuals with annual adjusted gross income above $10 million, as well as an additional 3 percent tax on income above $25 million. The 5 percent tax also applies to trust or estate income over $200,000 and the 3 percent tax applies to trust or estate income over $500,000.
7. Taxing stock buybacks. The Build Back Better plan also included a new tax on large corporations that buy shares of their own companies, a move that increases the company’s stock price to the benefit of its shareholders. The intent of the provision is for these stock buybacks to be taxed the same way as corporate dividends –the traditional method for corporations to give money back to their investors. The administration has provided few details but said the stock buyback plan would consist of a 1 percent surcharge.
8. Wash Sale rules apply to cryptocurrency. Wash sale rules do not currently apply to cryptocurrency sales and purchases but the Build Back Better plan would subject cryptocurrency transactions to the same wash sale rules as other investments like stocks.
9. Section 1202 Qualified Small Business Stock Income Exclusion. The exclusion from income for the sale of Section 1202 qualified small business stock would be limited to 50% of the gain for taxpayer’s with AGI exceeding $400,000.
10. Tax credit for electric vehicles. Tax credits up to $12,500 may be available for new electric vehicle purchases beginning 1/1/22. The $7,500 credit for fully electric vehicles would remain but an additional $500 would be available for vehicles with batteries assembled in the US and an additional $4,500 would be available for vehicles produced in the US by union labor.
Tesla and General Motors vehicles were previously excluded from the electric vehicles credit in recent years since those manufacturers sold over 200,000 qualifying vehicles in the US. This provision would make some Tesla models (3 and Y) potentially eligible for an $8,000 credit starting in 2022 and some GM models eligible for up to $12,500 in credits.
Vehicles above the following limits will be ineligible for the credit: $55,000 for sedans, $69,000 for SUVs and $74,000 for trucks.
The credit phases out for those with income over $400,000 for single or $800,000 for married.
If you have any questions about this legislation, please email or call your Lopata, Flegel & Company contact, or call the firm at 314-514-8881.
