Gibson Dunn | Biden Administration Releases Fiscal Year 2022 Budget, Together With a “Greenbook” Providing Detailed Descriptions of Proposed Changes to Federal Tax Law and Accompanying Revenue Estimates

May 29, 2021
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Background
On May 28, 2021, the Administration launched its fiscal yr (FY) 2022 Budget, outlining a plan for $6 trillion of federal spending and $4.1 trillion in income for FY 2022 alone. Each yr, the White House publishes the President’s Budget request for the upcoming fiscal yr, which begins on October 1st. The President’s Budget lays out the Administration’s proposals for discretionary spending, income and borrowing and usually marks the opening of a dialog with Congress that culminates in appropriations payments and, on a parallel path, tax expenditure and revenue-raising laws.
Detailed descriptions of the Administration’s legislative tax proposals have traditionally been offered in a “Greenbook” that features income estimates generated by economists in Treasury’s Office of Tax Policy.[1] With the December 2017 enactment of sweeping adjustments to the federal tax legislation in laws generally generally known as the “Tax Cuts and Jobs Act” (the “TCJA”),[2] the prior administration didn’t publish a separate doc laying out new tax legislative proposals. Thus, for the primary time because the Obama Administration’s FY 2017 Budget (launched in February 2016), the President’s FY 2022 Budget contains a Greenbook with detailed proposals for adjustments to the federal tax legislation, together with provisions that may modify, increase or add to present tax expenditures and revenue-raising measures.
Although the Greenbook is just the opening chapter within the FY 2022 price range and appropriations course of, the present unified Democratic management of each the White House and of Congress, albeit every House of Congress by small margins, means that a minimum of some of its proposals have a important, though under no circumstances sure, chance of shifting ahead as half of the Appropriations course of or in separate items of laws like an infrastructure invoice. Most notably, the slender Democratic majority within the House and the potential use of “reconciliation” procedures in an evenly divided Senate enable Democratic Senators, if all of them agree, to go laws in Congress with out assist from Senate Republicans. The prospect of Democrats enacting laws into legislation with out Republican buy-in gives a new dynamic this yr and makes this essentially the most anticipated set of administration legislative tax proposals in latest reminiscence.
The following summaries concentrate on tax expenditure and revenue-raising proposals within the Greenbook that have an effect on enterprise taxpayers and their house owners, as follows:

Part I: Increased Rates for Corporations and Individuals
Part II: Elimination of Certain Significant Benefits
Part III: Sea Changes for International Tax
Part IV: Changes to Prioritize Clean Energy
Part V: Improve Compliance and Tax Administration

PART I: INCREASED RATES FOR CORPORATIONS AND INDIVIDUALS
Corporate Income Tax Rate Raised to 28%
The Greenbook proposes to improve the federal revenue tax price on C firms from 21 p.c to 28 p.c, efficient for taxable years starting after the top of 2021 (with a phase-in rule for taxpayers which have a non-calendar taxable yr).
Recent feedback by President Biden precipitated many to anticipate a proposed improve to 25 p.c, fairly than 28 p.c, and it stays potential that the Administration will find yourself agreeing to a smaller company price improve. An elevated company revenue tax price could incentivize firms to speed up revenue into the 2021 calendar yr and to defer deductions till a later calendar yr. This proposal may additionally encourage the use of passthrough entities (though taxpayers should additionally take note of the proposed improve in particular person charges). Moreover, the proposed improve would push the company price properly above the 23.51 p.c common price for buying and selling companions within the Organisation for Economic Co-Operation and Development (the “OECD”), elevating once more the long-standing stress between avoiding a “race to the underside” on charges and strengthening the worldwide tax competitiveness of U.S.-based firms.
It is noteworthy that in proposing a rise within the company price, the Greenbook makes no reference to repealing or modifying the deduction for qualifying enterprise revenue of sure passthrough entities (e.g., partnerships and S firms) beneath Internal Revenue Code (the “Code”) part 199A. That provision was included within the TCJA late within the legislative drafting course of so as to create parity between firms and enterprise operated in passthrough type, resembling partnerships, S firms, and sole proprietorships. Setting the company price at 28 p.c (together with the proposed elimination of decrease charges on certified dividends above said thresholds) could have a tendency to shift the inducement in the wrong way, though Code part 199A is scheduled to expire in 2025.
Corporate taxpayers with GAAP-based monetary statements can have to take into account the affect of any price improve on the values of their deferred tax property and liabilities.
New 15 Percent Minimum Tax on Book Earnings of Large Corporations
The Greenbook proposes a 15 p.c minimal tax on worldwide pre-tax e book revenue for firms whose e book revenue exceeds $2 billion yearly.
This proposal, taken along with the proposal for disallowing curiosity deductions, would additional combine revenue tax remedy with monetary assertion accounting remedy. Historically, these therapies have operated independently, however started to be built-in for restricted functions with the enactment of Code part 451(b) in 2017. The hyperlink to monetary assertion remedy is one of two proposals within the Greenbook (together with the proposed SHIELD provision mentioned beneath) that may considerably increase reliance on third-party accounting requirements to decide federal tax legal responsibility, a notable shift from the long-standing assumption, acknowledged by the Supreme Court in Thor Power Tool Co. v. United States, that there are “differing targets of tax and monetary accounting” and the dangers and challenges related to conforming them. It would additionally re-introduce the complexity of parallel units of tax guidelines that Congress sought to remove when it repealed the company different minimal tax as half of the TCJA.
The proposal could be efficient for taxable years starting after December 31, 2021.
Top Marginal Tax Rate for Individuals Raised to 39.6%
Under present legislation, the highest marginal revenue tax price for people is 37 p.c (earlier than accounting for the extra 3.8 p.c tax price on web funding revenue), however would revert to 39.6 p.c (once more, earlier than accounting for the extra 3.8 p.c tax price on web funding revenue) for taxable years starting on and after January 1, 2026. In 2021, the highest marginal price applies to taxable revenue that exceeds $628,300 (for married {couples} submitting collectively) or $523,600 (for single filers).
The Greenbook proposes that, starting in 2022, the brand new 39.6 p.c (earlier than accounting for the extra 3.8 p.c tax price on web funding revenue) prime marginal revenue tax price would apply to taxable revenue that exceeds $509,300 (for married {couples} submitting collectively) or $452,700 (for single filers); the thresholds could be adjusted for inflation in taxable years after 2022. The proposed improve in particular person tax charges was not accompanied by a repeal of the limitation on deductibility of state and native taxes.
Tax Certain Capital Gains at Ordinary Income Rates for High Earners
Currently, particular person taxpayers are taxed at preferential charges on their long-term capital features and certified dividends as in contrast to atypical revenue—the present highest price for long-term capital features and certified dividends is 20 p.c (23.8 p.c, together with the online funding revenue tax, if relevant).
The Greenbook proposes to tax people’ long-term capital features and certified dividends at atypical revenue tax charges to the extent that the person’s adjusted gross revenue exceeds $1 million ($500,000 for married submitting individually), listed for inflation after 2022. For instance, a person with $200,000 of long-term capital features and $900,000 of wages would have $100,000 of long-term capital features taxed at atypical revenue charges (the $100,000 extra over $1 million).
Other than a temporary interval of time after passage of the Tax Reform Act of 1986, capital features have acquired preferential federal revenue tax remedy because the Nineteen Twenties. The Greenbook proposal will add to the long-standing debate on the deserves of this choice and undoubtedly trigger taxpayers to take into account methods wherein they’ll defer or keep away from recognition occasions.The proposal would additionally take away a historic tax incentive to maintain capital property for one yr, probably leading to earlier and extra frequent tendencies of property held for 10 or 11 months.
The proposal could be efficient for achieve acknowledged after the date of the announcement (understood to be April 28, 2021, the date when President Biden introduced the proposal as half of the American Families Plan). As with different elements of the Greenbook proposals, the efficient date may change in the course of the Budget reconciliation course of.
“Deemed” or “Forced” Realization – New Realization Events for Gifts, at Death and for Certain Partnerships and Trusts
Under basic tax rules, taxpayers take note of will increase and decreases within the worth of their property solely on the time of a realization occasion, resembling a sale. Currently, items and transfers upon dying usually are not handled as taxable occasions. This is the case on transfers on dying, although the inheritor usually takes a “stepped up” truthful market worth foundation within the decedent’s property upon dying, with no revenue tax due at the moment.
Under the Greenbook proposal, donors and decedents would acknowledge capital achieve upon a switch to a donee or inheritor, as relevant, based mostly on the asset’s truthful market worth on the time of switch. A decedent could be permitted to use capital losses and carry-forwards to offset such capital features.
The proposal would require the popularity of unrealized appreciation by partnerships, trusts, and different non-corporate entities which can be the house owners of the property if that property has not been topic to a recognition occasion within the prior 90 years. Because the look-back interval begins January 1, 1940, this facet of the proposal wouldn’t change into operational till December 31, 2030. The operational elements of this proposal – resembling which property could be taxed, who would bear the incidence of tax, and the extent of adjustment to foundation – usually are not addressed by the Greenbook.
The proposal additionally would deal with in any other case tax-deferred contributions to, or distributions from, partnerships, trusts, and different non-corporate entities as taxable occasions. The description of this facet of the proposal within the Greenbook is startling in its breadth. That is, if taken actually the proposal would upend the bedrock rules in partnership taxation that contributions to and distributions by partnerships usually are tax free. Presumably, the proposal was supposed to deal with oblique donative transfers, and it’s hoped that clarification will likely be forthcoming in brief order.
Exclusions would apply to property transferred to U.S. spouses and charities. Additionally, there could be a $1 million per-person exclusion (usually $2 million per married couple) that may be listed for inflation. Payment of tax could be deferred within the case of sure family-owned and -operated companies (which aren’t outlined however would presumably be modeled on the cost extension provisions for property taxes in Code part 6166) till the curiosity within the enterprise is offered or the enterprise ceases to be family-owned and -operated. Additionally, the proposal would enable a 15-year fixed-rate cost plan for the tax on appreciated property transferred at dying (excluding sure liquid property and transfers of companies for which the deferral election is made). This proposal has the potential to create substantial liquidity points for carefully held companies. As proposed, no change could be made to the exclusion of sure capital features beneath Code part 1202.
The proposal usually could be efficient starting January 1, 2022.
Eliminate Gap in Medicare Taxes for High Earners
The present 3.8 p.c “web funding revenue tax” usually applies to passive revenue and features acknowledged by high-income people, together with commerce or enterprise revenue earned by taxpayers who don’t materially take part within the enterprise. The separate 3.8 p.c “SECA” tax presently applies to self-employment earnings of high-income taxpayers—each taxes are supposed to fund Medicare and are sometimes colloquially referred to as “Medicare” taxes.
Neither type of Medicare tax presently applies to restricted companions (many taxpayers consider that sure members of restricted legal responsibility firms categorized as partnerships for federal revenue tax functions are “restricted companions” for this objective) and S company shareholders (who’re topic to Medicare tax solely on “cheap compensation” paid in an worker capability) who’re handled as materially collaborating in a commerce or enterprise. The Biden Administration likens this hole to a loophole as a result of sure high-income taxpayers’ distributive share of enterprise revenue could escape Medicare taxation.
The Greenbook proposal would topic all commerce or enterprise revenue of high-income taxpayers (earned revenue exceeding $400,000) to the three.8 p.c Medicare tax (both by the online funding revenue tax or the SECA tax) and would apply to taxable years starting on or after January 1, 2022. The Greenbook bases this alteration on truthful and environment friendly tax administration. “Different remedy [for owners of different types of passthrough entities] is unfair, inefficient, distorts selection of organizational type, and gives tax planning alternatives for enterprise house owners, notably these with excessive revenue, to keep away from paying tax.” Notwithstanding that clarification, the proposal goes to some lengths to be sure that it doesn’t affect taxpayers with lower than $400,000 in earned revenue, though it’s noteworthy that the proposal is express in saying that this threshold wouldn’t be listed for inflation. It can be noteworthy that the exclusion for these decrease revenue taxpayers is linked to earned revenue fairly than “taxable revenue (from all sources),” which is used elsewhere within the Greenbook because the set off for proposed denial of capital achieve remedy for carried curiosity.
PART II: ELIMINATION OF CERTAIN SIGNIFICANT BENEFITS
Tax Carried Interests as Ordinary Income
The Greenbook, following within the footsteps of many beforehand proposed payments, proposes to tax a accomplice’s share of earnings from, and achieve from the disposition of, an “funding companies partnership curiosity” as atypical revenue, regardless of the character of the revenue on the partnership degree.
Under present legislation, partnerships are usually ready to difficulty a partnership curiosity to a service supplier who then holds the curiosity as a capital asset, with the character of the accomplice’s share of earnings from the partnership being decided by reference to the character of the earnings within the fingers of the partnership. Thus, if the partnership acknowledges capital achieve, the service supplier’s share of such revenue would usually likewise be capital achieve. These fairness grants could take the shape of a “earnings curiosity,” which is referred to as a “carried curiosity” within the personal fairness context, an “incentive allocation” within the hedge fund context, or a “promote” in the true property context. The TCJA restricted the power to acknowledge long-term capital achieve with respect to these earnings pursuits by enacting Code part 1061, which usually treats achieve acknowledged with respect to sure partnership pursuits held for lower than three years as short-term capital achieve.
The Greenbook proposal would remove this profit, however just for companions whose taxable revenue (from all sources) exceeds $400,000. Partners whose taxable revenue doesn’t exceed $400,000 would proceed to be topic to Code part 1061, which usually treats achieve acknowledged with respect to sure partnership pursuits or partnership property held for lower than three years as short-term . The “cliff” impact of this proposal would add appreciable complexity to the tax legislation, requiring a parallel set of guidelines which will apply in a different way to completely different members of the identical partnership.
The proposal would apply to earnings pursuits held by individuals who present companies to a partnership that’s an “funding partnership.” A partnership could be an funding partnership if (i) considerably all of its property are investment-type property and (ii) greater than half of the partnership’s contributed capital is from companions whose partnership curiosity is an funding (i.e., companions in whose fingers the partnership curiosity isn’t held in reference to a commerce or enterprise). The proposal wouldn’t apply to a partnership curiosity attributable to any capital contributed by the service supplier. The proposal contains sure anti-abuse guidelines supposed to stop the avoidance of the recharacterization rule by the use of compensatory preparations apart from partnership pursuits.
It seems that essentially the most important variations between the proposal within the Greenbook and present legislation beneath Code part 1061 could be (i) limitless time length (Code part 1061 applies solely to recharacterize long-term capital achieve acknowledged with respect to an asset held for 3 years or much less), (ii) remedy of the recharacterized quantity as atypical revenue fairly than short-term capital achieve (there isn’t any price differential, however there may very well be sourcing and different variations), and (iii) subjecting the revenue to SECA.
Given that closing Treasury laws beneath Code part 1061 have been launched solely this yr, the proposal to repeal and change Code part 1061 in sure instances is considerably shocking, though comparable proposals have just lately been launched in Congress. If enacted, this proposal may meaningfully affect the taxation of people within the personal fairness, hedge fund, and actual property industries, and different service suppliers receiving a earnings curiosity as a type of compensation. It ought to be famous that if the proposal ending the preferential remedy of long-term capital achieve can be enacted, this carried curiosity proposal would materially have an effect on solely earnings pursuits holders with taxable revenue beneath $1 million (the edge within the long-term capital achieve proposal).
The provision could be efficient for taxable years starting after December 31, 2021.
Make Permanent Excess Business Loss Limitation of Noncorporate Taxpayers
The TCJA requires that “extra enterprise losses” be carried ahead as web working losses fairly than deducted presently. Very usually, an extra enterprise loss is the quantity of losses from a enterprise that exceeds the sum of the features from enterprise actions and a said threshold ($524,000 for married {couples} submitting collectively and $262,000 for different taxpayers).
Under present legislation, the surplus enterprise loss provision expires in 2027; the Greenbook would make the availability everlasting.
Severely Limit Deferral of Gain from Like-Kind Exchanges
Code part 1031 presently gives for non-recognition of achieve on exchanges of actual property for different like-kind actual property (like-kind exchanges). The Greenbook proposes to restrict the applicability of Code part 1031 to exchanges that defer achieve of lower than $500,000 (or $1 million within the case of married people submitting a joint return) in a taxable yr. The proposal doesn’t index the exclusion quantities to inflation, though it does apply these quantities on an annual foundation.
This proposal represents a important change for the true property, oil and gasoline, and mineral industries, which collectively interact in billions of {dollars} of like-kind exchanges per yr. In explicit, the proposal may considerably affect the enterprise of REITs, which should distribute a minimum of 90 p.c of their taxable revenue per yr and typically use Code part 1031 to scale back the quantity of revenue topic to this distribution requirement so as to maintain extra money available to full different actual property purchases. Further, oil and gasoline “acreage swaps” and mineral curiosity exchanges may very well be severely restricted. If enacted, the $500,000 / $1 million exclusion included within the proposal may create an incentive to divide property and make partial, tax-deferred tendencies. It may additionally create an incentive for taxpayers to use tenant-in-common or different pooled buildings, like tax partnerships, to facilitate transactions with out triggering taxation.
The proposal could be efficient for exchanges accomplished in taxable years starting after December 31, 2021.
PART III: SEA CHANGES FOR INTERNATIONAL TAX
The TCJA launched sweeping reform on worldwide tax issues with the aim of incentivizing multinational firms to stay within the United States. Along these traces, not solely did the TCJA decrease the U.S. company revenue tax price and present a 100 p.c dividends-received deduction for sure offshore dividends, however it additionally launched new obstacles and penalties to discourage so-called inversions and established the worldwide intangible low-tax revenue (GILTI) and base erosion anti-avoidance regimes to usually present a minimal degree of tax on sure international earnings.
The Greenbook, as described in additional element beneath, proposes to—once more—usher in complete adjustments and unscramble some of the TCJA complexity. Interestingly, a number of of these proposals are reminiscent of comparable proposals made by the OECD. In truth, the Greenbook mentions the OECD 4 instances (in contrast to zero mentions within the JCT’s Blue Book for the TCJA), suggesting a willingness to discover frequent floor with the OECD on some rules of worldwide taxation.
The proposed adjustments to the worldwide tax regime come lower than 4 years after passage of the TCJA and inject a new degree of uncertainty and instability into U.S.-based firms’ selections across the world deployment of capital. Moreover, the IRS is simply now starting to audit many of the returns filed for the 2018 tax yr, the primary yr wherein TCJA was in full impact. Beyond the front-end planning challenges for taxpayers, enactment of the Greenbook proposals will increase important administrability points for the IRS as it really works with taxpayers to kind by a number of interlocking however materially completely different regimes for taxing cross-border actions.
Revised Global Minimum Tax Regime                 
The Greenbook proposal would improve the efficient tax price of U.S. multinational firms by overhauling the GILTI regime. Specifically, the so-called “QBAI” (or certified enterprise asset revenue) exemption could be eradicated, with the end result that a U.S. shareholder’s whole web examined revenue could be topic to tax (i.e., web examined revenue would not be offset by a deemed 10 p.c return on sure depreciable tangible property).
The elimination of the QBAI exemption would take away the final fig leaf of the quasi-territorial tax system that was introduced with a lot fanfare in 2017. If enacted, the United States will stake new floor within the worldwide tax enviornment by requiring U.S. shareholders to pay tax on all earnings in international firms, as in contrast to most nations that tax analogous shareholders solely on sure international earnings (e.g., company earnings from low-tax nations or passive revenue). Moreover, since all international earnings would now be taxed, the Code part 245A dividend-received exemption would change into more and more irrelevant, because the earnings underlying the dividends would usually have been taxed beneath subpart F or GILTI on the time the international company earned the revenue.
It can be price noting that QBAI is usually tangible property eligible for depreciation, resembling buildings or equipment, however QBAI doesn’t embrace property that aren’t depreciable (resembling land) nor intangible property. As a end result, the elimination of QBAI could disproportionately have an effect on firms with extra tangible property, fairly than firms whose worth is primarily intangible property (like mental property). In addition, the cost-benefit evaluation of a potential Code part 338(g) election, which frequently arises in cross-border acquisitions, will change provided that the step-up in asset foundation will not produce a tax profit within the type of QBAI to scale back future GILTI inclusions, although Code part 338(g) elections nonetheless produce other advantages.
The proposal would additionally successfully improve the GILTI price by decreasing the Code part 250 deduction from 50 p.c to 25 p.c. Under present legislation, U.S. shareholders are entitled to a 50 p.c deduction towards a 21 p.c tax price, leading to an efficient 10.5 p.c GILTI price. The Greenbook proposal, nevertheless, would scale back the deduction to 25 p.c. Taken along with the proposed company price improve to 28 p.c, this alteration would end in an efficient GILTI price of 21 p.c. Interestingly, the Greenbook’s proposal doesn’t eliminate the Code part 250 deduction. Rather, it achieves the 21 p.c price by altering the share of the deduction. This method suggests a willingness to use the relative proportion deduction as a approach to attain a compromise on the general bundle.
Consistent with the final improve in company tax charges, this alteration to the efficient GILTI price could encourage taxpayers to speed up achieve recognition transactions and/or defer deductions.
In addition, the Greenbook proposes that U.S. shareholders of a managed international company (“CFC”) calculate their world minimal tax on a country-by-country foundation. In different phrases, a U.S. shareholder’s world minimal tax inclusion, and tax on such inclusion, could be decided individually for every nation wherein it or its CFCs function, fairly than allowing taxes paid to higher-taxed jurisdictions to scale back the residual U.S. tax paid on revenue earned in lower-taxed international jurisdictions. This proposed change ends in a separate international tax credit score limitation for every nation.
The Greenbook doesn’t recommend any adjustments to the 80 p.c limitation that presently applies to GILTI international tax credit. If the 80 p.c limitation nonetheless exists, GILTI will likely be exempt from additional U.S. tax solely whether it is topic to international taxation at a price of a minimum of 26.25 p.c, since 20 p.c (or 5.25) of the international tax credit score is disallowed beneath present legislation.
Finally, this proposal would additionally repeal the excessive tax exemption to subpart F revenue and repeal the cross-reference to that provision within the world minimal tax guidelines in Code part 951A. This proposal would finish the controversy over the Treasury Regulations that offered a excessive tax exemption for GILTI.
In a proposal that’s exceptional for its potential deference to the OECD, these basic guidelines could be adjusted for foreign-parented multinational teams (in line with the OECD/G20 Inclusive Framework on BEPS undertaking’s Pillar Two proposal (the “Pillar Two”)).
These guidelines could be efficient for taxable years starting after December 31, 2021.
Expanded Application of Anti-Inversion Rules    
To backstop the adjustments to the worldwide minimal tax regime and stop U.S. firms from shifting offshore to keep away from the worldwide minimal tax, the Greenbook proposes a dramatic growth of the anti-inversion regime beneath Code part 7874. Code part 7874 presently applies to the acquisition of a U.S. company by a international company if, after the transaction, the previous shareholders of the U.S. company personal greater than 80 p.c, by vote or worth, of the international company and sure different situations are glad. In this case, Code part 7874 applies to deal with the international buying company as a home company for U.S. federal revenue tax functions, assuming sure different situations are glad. If the portion of the international company held by former shareholders of the U.S. company (the so-called possession fraction) is between 60 and 80 p.c, present legislation topics the international company to the chance of elevated taxation, however doesn’t deal with it as a home taxpayer.
The Greenbook proposal would change the present 80-percent threshold with a 50-percent threshold and would remove the present 60-percent take a look at fully. In addition, the proposal would increase the universe of acquisitions handled as inversions (regardless of possession fraction) to embrace acquisitions the place (1) instantly prior to the acquisition, the truthful market worth of the home entity is bigger than the truthful market worth of the international buying company, (2) after the acquisition, the expanded affiliated group is primarily managed and managed within the United States, and (3) the expanded affiliated group doesn’t conduct substantial enterprise actions within the nation wherein the international buying company is created or organized. The proposal would additionally broaden Code part 7874 in a number of necessary methods, by together with sure asset acquisitions and inventory distributions, choosing up U.S. companies operated by international partnerships, and by contemplating the spinoff of a international subsidiary the equal of an inversion beneath sure circumstances.
Code part 7874 is already exceedingly advanced and broad in lots of respects and is thus a frequent entice for the unwary. These proposals, if enacted, would require cautious scrutiny by taxpayers and practitioners to keep away from harmful foot faults. Introduction of the administration and management and substantial enterprise actions assessments, particularly, would add a new degree of subjectivity and uncertainty to the edge query of whether or not the principles apply.
These guidelines could be efficient for transactions which can be accomplished after the date of enactment of such guidelines. The lack of an exception for transactions for which there’s a binding contract as of the efficient date may chill market exercise even earlier than passage.
Repeal of Deduction for Foreign-Derived Intangible Income     
The Greenbook proposes the repeal of the deduction presently obtainable to home firms with respect to 37.5 p.c of any foreign-derived intangible revenue for taxable years starting after December 31, 2021. This proposal was anticipated, and is framed by the Greenbook because the elimination of an inefficient subsidy to multinational firms. Additionally, many commentators seen the prevailing provision as violating World Trade Organization rules. The elevated tax income that’s estimated to come from repeal could be “used to encourage R&D” (presumably within the United States), though no particulars are offered on how the $123 billion could be deployed.
Replace BEAT with Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) Rule
The Greenbook would change the “base erosion and anti-abuse tax” (“BEAT”) in Code part 59A with a new rule—the Stopping Harmful Inversions and Ending Low-Tax Developments (“SHIELD”) rule—disallowing deductions by home firms with respect to members of their monetary reporting group whose revenue is topic to (or deemed to be topic to) an efficient tax price that’s beneath both the speed agreed to beneath OECD Pillar Two or the U.S. world minimal tax price of 21 p.c. Disallowance could also be full or partial, relying on whether or not the cost is made straight to such low-taxed entities.
The rule would apply to monetary reporting teams with better than $500 million in world annual revenues, though the proposal permits the Treasury Department to exempt from SHIELD (i) sure monetary reporting teams, in the event that they meet a minimal efficient degree of tax (on a jurisdiction-by-jurisdiction foundation) and (ii) funds to funding funds, pension funds, worldwide organizations, or non-profit entities. It is unclear whether or not the exemption would lengthen to traders that depend on the Code part 892 exemption. As mentioned above in reference to the proposed minimal tax on e book earnings, the hyperlink to monetary assertion reporting would mark one other notable shift to reliance on third-party requirements for figuring out U.S. revenue tax legal responsibility.
This proposal may adversely affect entities which have already “inverted,” or foreign-parented entities with home subsidiaries (and which conduct important enterprise within the United States). Foreign-parented entities which have substantial offshore mental property held in lower-tax jurisdictions could also be notably affected by this proposal.
The rule could be efficient for taxable years starting after December 31, 2022.
Limit Foreign Tax Credits from Sales of Hybrid Entities
The Greenbook would require that, for functions of making use of the international tax credit score guidelines, the supply and character of objects of sure hybrid entities ensuing from both a disposition of an curiosity in such a hybrid entity or a change within the U.S. tax classification of such entity that’s not acknowledged for international tax functions be decided as if the popularity occasion have been a sale or trade of inventory.
The rule could be efficient for transactions occurring after the date of enactment.
Restrict Interest Deductions for Disproportionate Borrowing within the United States
This proposal doubtlessly disallows deductions for curiosity paid by an entity that’s a member of a multinational group that prepares consolidated monetary statements. Such an entity’s curiosity deductions could be disallowed to the extent they exceed an quantity decided by reference to the entity’s proportionate share (based mostly on its proportion of group earnings) of the group’s web curiosity expense as reported on the group’s consolidated monetary assertion.
Alternatively, if an entity topic to the proposal fails to substantiate its proportionate share of the group’s web curiosity expense for monetary reporting functions, or an entity so elects, the entity’s curiosity deduction could be restricted to the entity’s curiosity revenue plus ten p.c of the entity’s adjusted taxable revenue (as outlined beneath Code part 163(j)).
The proposal wouldn’t apply to monetary companies entities. The proposal additionally wouldn’t apply to teams that may in any other case report lower than $5 million of web curiosity expense, within the mixture, on a number of U.S. revenue tax returns for a taxable yr.
The proposal could be efficient for taxable years starting after December 31, 2021.
Tax Incentive for Onshoring Jobs
This proposal would create a new basic enterprise credit score equal to 10 p.c of sure bills paid or incurred in reference to shifting a commerce or enterprise positioned outdoors the United States to the United States to the extent the motion ends in a rise in U.S. jobs.
The proposal would additionally scale back tax advantages related to U.S. firms shifting jobs outdoors of the United States by disallowing deductions for sure bills paid or incurred in reference to offshoring a U.S. commerce or enterprise to the extent the motion ends in a loss of U.S. jobs.
The proposal could be efficient for bills paid or incurred after the date of enactment.
Expand Taxation of Foreign Fossil Fuel Income
Under present legislation, sure non-U.S. oil-and-gas-related revenue successfully is taxed at a decrease price than comparable oil-and-gas-related revenue from actions inside the United States. For instance, “international oil and gasoline extraction revenue” is excluded from a managed international company’s “gross examined revenue” and could also be repatriated tax free. In addition, taxpayers could declare a credit score towards U.S. revenue tax legal responsibility for sure levies paid to non-U.S. governments.
The Greenbook proposes scaling again the helpful tax remedy afforded to non-U.S. oil-and-gas-related revenue. Specifically, the proposal would require international oil-and-gas-extraction revenue to be included in a CFC’s gross examined revenue for functions of GILTI and would restrict the conditions wherein taxpayers can declare a credit score for levies paid to non-U.S. governments.
The proposal could be efficient for taxable years starting after December 31, 2021.
PART IV: CHANGES TO PRIORITIZE CLEAN ENERGY
Extension of Tax Credits for Wind, Solar and Other Renewable Generation Facilities
The manufacturing tax credit score (“PTC”) and funding tax credit score (“ITC”) are long-standing renewable vitality incentives. The PTC is a production-based incentive, obtainable as energy produced from qualifying renewable sources (e.g., wind, photo voltaic) is offered to unrelated events. The ITC is a cost-based incentive, decided as a proportion of eligible foundation, that arises when a qualifying renewable vitality facility is positioned in service. The credit have traditionally been topic to a sophisticated patchwork of guidelines for various sources (e.g., when building of a facility wants to start, when the power have to be positioned in service, and so on.), the qualification guidelines have modified ceaselessly and typically unpredictably, and the credit have been non-refundable. Taken collectively, these options have introduced challenges within the growth and financing of renewable vitality tasks.
The Greenbook proposes a long-term extension of the principles, with the complete PTC and ITC each being obtainable for amenities whose building begins after December 31, 2021 and earlier than January 1, 2027, adopted by a predictable, stepped phase-down interval. Moreover, in contrast to the present PTC and ITC, taxpayers would have the choice to elect a money cost in lieu of the tax credit (the so-called “direct pay” choice).
If enacted, these proposals would deliver better predictability to undertaking builders and, by the direct pay choice, make it meaningfully simpler for taxpayers missing enough tax “urge for food” to effectively take part in renewables transactions, spurring further funding in renewable vitality era amenities. While not described intimately, this “direct pay” choice would seem to successfully make the credit refundable, that means that funding is accessible irrespective of whether or not the taxpayer has constructive revenue tax legal responsibility. Although this might scale back the inducement to use partnership buildings to make the most of the credit, it will additionally add a new degree of complexity to their administration and increase considerations from the IRS concerning the potential for abuse.
The proposal could be efficient for taxable years starting after December 31, 2021.
Expansion of Tax Credits to Stand-Alone Energy Storage and Energy Transmission Assets
Historically, vitality storage property (resembling battery storage tasks) have been eligible for the ITC solely when paired with sure renewable vitality sources, and the ITC has been unavailable with respect to vitality transmission property. The Greenbook proposes to make sure stand-alone vitality storage property and vitality transmission infrastructure property eligible for the ITC. Moreover, as with the era facility credit score, taxpayers could be eligible to elect a money cost in lieu of tax credit.
We anticipate that these proposals to improve the scope of ITC-eligible property will present sturdy incentives for funding in infrastructure designed to make the nation’s electrical grid extra dependable and resilient.
The proposal could be efficient for taxable years starting after December 31, 2021.
New Tax Credits for Qualifying Advanced Energy Manufacturing
Existing legislation authorizes a tax credit score for the institution of sure clear vitality manufacturing amenities (e.g., facility to manufacture wind or photo voltaic gear), however the quantity of the credit score is topic to a comparatively low cap, which makes the inducement unavailable to sure otherwise-qualifying credit score candidates. The Greenbook would increase the supply of the credit score to embrace numerous new manufacturing amenities (together with these targeted on vitality storage gear, electrical grid modernization gear, vitality conservation expertise, and carbon oxide sequestration gear) and considerably increase the cap, with a materials portion of the credit score being particularly allocable to tasks in coal communities. Again, taxpayers could be eligible to elect a money cost in lieu of tax credit. Taken collectively, the proposal intends to spur the manufacturing of home manufacturing of clear vitality property.
The proposal could be efficient for taxable years starting after December 31, 2021.
Eliminate Fossil Fuel Tax Preferences
Current legislation gives a quantity of tax incentives meant to encourage oil and gasoline manufacturing. These incentives have been focused for repeal beneath the Obama Administration’s Greenbook in annually starting with the 2011 fiscal yr. The Biden Administration’s fiscal yr 2022 Greenbook picks up the place the Obama Administration left off, proposing to repeal a almost similar set of fossil fuel-related tax incentives. Specifically, the Greenbook proposes repealing: (1) the improved oil restoration credit score for eligible prices attributable to a certified enhanced oil restoration undertaking; (2) the credit score for oil and gasoline produced from marginal wells; (3) the expensing of intangible drilling prices; (4) the deduction for prices paid or incurred for any tertiary injectant used as half of a tertiary restoration technique; (5) the exception to passive loss limitations offered to working pursuits in oil and pure gasoline properties; (6) the use of proportion depletion with respect to oil and gasoline wells; (7) two-year amortization of unbiased producers’ geological and geophysical expenditures, as a substitute permitting amortization over the seven-year interval utilized by built-in oil and gasoline producers; (8) expensing of exploration and growth prices; (9) proportion depletion for laborious mineral fossil fuels; (10) capital features remedy for royalties; (11) the exemption from the company revenue tax for publicly traded partnerships with qualifying revenue and features from actions relating to fossil fuels; (12) the Oil Spill Liability Trust Fund excise tax exemption for crude oil derived from bitumen and kerogen-rich rock; and (13) accelerated amortization for air air pollution management amenities.
If enacted, the repeal of these incentives would make the manufacturing of oil and gasoline costlier by rising producers’ efficient tax price. That mentioned, some of these incentives, just like the intangible drilling price deduction, predate the Internal Revenue Code itself and have survived quite a few political cycles. Efforts to repeal a almost similar set of incentives proved troublesome for the Obama Administration, even the place the income generated from repeal was projected to be greater in the course of the Obama Administration.
The proposal usually could be efficient for taxable years starting after December 31, 2021, though the repeal of merchandise 11 above (exception for sure publicly traded partnerships) will solely change into efficient for taxable years starting after December 31, 2026.
Expand and Enhance the Carbon Oxide Sequestration Credit
Current legislation gives a tax credit score for the seize and sequestration of sure varieties of carbon oxide captured with carbon-capture gear positioned in service at sure qualifying amenities, with the quantity of the credit score depending on when and how the carbon oxide is sequestered.
The Greenbook proposes rising the worth of the sequestration credit score by (i) $35 {dollars} per metric ton for carbon oxide that’s harder to seize, resembling carbon oxide from cement manufacturing, steelmaking, or hydrogen manufacturing, and (ii) $70 per metric ton for direct air carbon seize tasks. Further, the “start building” date for qualifying amenities eligible for the credit score could be prolonged 5 years to January 1, 2031. As is the case for the Greenbook’s different clear vitality proposals, taxpayers may elect to obtain a direct money cost in lieu of the credit. The enhanced credit, along with the start building date extension and the direct pay choice, ought to spur funding in carbon seize amenities and applied sciences.
The proposal could be efficient for taxable years starting after December 31, 2021.
Other Clean Energy Proposals

Establish Tax Credits for Heavy- and Medium-Duty Zero Emissions Vehicles
Provide Tax Incentives for Sustainable Aviation Fuel
Provide a Production Tax Credit for Low-Carbon Hydrogen
Extend and Enhance Energy Efficiency and Electrification Incentives
Provide Disaster Mitigation Tax Credit
Extend and Enhance the Electric Vehicle Charging Station Credit
Reinstate Superfund Excise Taxes and Modify Oil Spill Liability Trust Fund Financing

PART V: IMPROVE COMPLIANCE AND TAX ADMINISTRATION
The Administration has been vocal in latest months in calling for a rise in IRS funding to reverse greater than a decade of declining budgets and workers attrition, and to deal with data expertise infrastructure challenges, all of which have pushed traditionally low audit charges. On April 9, 2021, the Office of Management and Budget launched an overview of the President’s request for fiscal yr 2022 discretionary spending that would offer the IRS with $13.2 billion in funding for subsequent yr alone, a $1.2 billion or 10.4 p.c improve over enacted IRS funding for 2021.[3] This improve could be utilized in half to enhance taxpayer service however a main focus of the elevated funding could be on rising taxpayer compliance with present legislation, decreasing the “hole” between what’s paid over to Treasury in taxes annually and what is definitely owed. The most up-to-date official estimates, overlaying the 2011 – 2013 tax years, are that this “tax hole” is roughly $441 billion yearly (diminished by present enforcement efforts to roughly $ $281 billion), though IRS Commissioner Charles Rettig just lately advised that a extra correct quantity could also be nearer to $1 trillion.
While there are some estimates that the IRS can accumulate $4 in further tax for each $1 in elevated IRS funding, these estimates cowl a broad vary of enforcement exercise and are possible skewed towards low-cost/high-return features like automated matching of data returns, fairly than audits of advanced tax returns. And, within the context of these extra advanced returns, there may be significantly extra uncertainty round what tax is definitely owed, given ambiguities within the underlying legislation. Moreover, in accordance to the IRS’s personal estimates, over time the voluntary compliance price has remained remarkably fixed at slightly below 85 p.c, even during times of considerably declining budgets and enforcement exercise, elevating the query as to whether or not a materials improve in IRS funding will translate into the anticipated improve in compliance.
Introduce Comprehensive Financial Account Reporting to Improve Tax Compliance
Recognizing that elevated funding for the IRS alone is not going to be enough to make the required dent within the tax hole, the Greenbook contains a number of proposals that may equip the IRS with higher data to deal with noncompliance with present tax legal guidelines. The premise for these proposals is that third-party reporting can improve voluntary compliance charges from beneath 50 p.c to as excessive as 95 p.c. From that premise, the Administration proposes to create a “complete monetary account reporting regime,” that may require monetary establishments to report gross transfers into and out of accounts, together with accounts owned by the identical taxpayer. This proposal is estimated to increase $8.3 billion in FY 2022 alone and, as soon as absolutely applied, to increase over $462 billion over the subsequent 10 years. While elevated data reporting will undoubtedly enhance voluntary compliance, by how a lot is an open query. The proposed reporting regime falls a number of steps brief of the Form W-2 reporting that ties straight into taxable revenue and additionally falls brief of most present Form 1099 reporting, which ties straight into gross revenue. Rather, like service provider card reporting beneath Code part 6050W, the excellent reporting regime would offer the IRS with details about fund flows that would lead to uncovering unreported taxable revenue (or encourage taxpayers to extra precisely report taxable revenue to start with) however is not going to achieve this straight. Whether this helps transfer compliance from beneath 50 p.c to nearer to 95 p.c will depend upon a quantity of variables, together with the extent to which and how rapidly monetary establishments can implement a new reporting requirement and whether or not the IRS has the sources in place to successfully make the most of the brand new data by deployment of synthetic intelligence and complete audit comply with up. Successful implementation of this system will current further challenges to the extent that, as proposed, it covers crypto property, the place a longer interval of time for implementation may very well be wanted, and distinctive substantive points round transfers of “property,” because the IRS has characterised cryptocurrency, are possible to be raised. Even with established monetary establishments which have deep expertise with reporting data to the IRS, implementation of prior data reporting regimes together with dealer accounts and FATCA have confirmed much more sophisticated and burdensome than first anticipated.
Oversight of Paid Tax Return Preparers
The Greenbook proposes to present the Secretary with express authority to regulate paid tax return preparers. This proposal has been included in a number of items of launched laws and was proposed in a quantity of prior-year Budget requests. In the previous it was met with resistance from some within the tax skilled neighborhood in addition to members of Congress who oppose imposing new regulatory necessities on small companies.
The proposal could be efficient for taxable years starting after December 31, 2021.
Modifications to Partnership Audit Rules
Under the BBA Centralized Partnership Audit Regime signed into legislation in 2015 and usually efficient for tax years starting in 2018, companions within the “adjustment” yr of a partnership’s return are chargeable for any tax cost obligation arising from changes going again to the “reporting yr” return at difficulty. The BBA usually permits partnerships present process audit for sure tax years to make a “push out” election whereby the reporting yr companions, and not the adjustment yr partnership, change into chargeable for funds arising from an audit adjustment. If an adjustment reduces, as a substitute of will increase, a accomplice’s tax legal responsibility, the accomplice can use the lower to offset its tax legal responsibility within the present yr, however not beneath zero, with any discount in extra of its tax legal responsibility within the present yr being misplaced. The proposed change would deal with the surplus as a tax overpayment, doubtlessly permitting a refund. This proposal displays the Administration’s precedence on elevated enforcement for flow-through entities.
The proposal could be efficient upon enactment.
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   [1]   The time period “Bluebook” has additionally been utilized in prior administrations. Greenbook and Bluebook legislative proposals courting again to 1990 can be found on the Treasury Department’s web site, https://home.treasury.gov/policy-issues/tax-policy/revenue-proposals. The Joint Committee on Taxation (“JCT”) periodically publishes a basic clarification of just lately enacted tax laws in a publication that’s often known as a “Blue Book.” In December 2018, JCT launched a Blue Book that explains the TCJA, which may be discovered at https://www.jct.gov/publications/2019/jcs-2-19/.
   [2]   TCJA is formally titled “An act to present for reconciliation pursuant to titles II and V of the concurrent decision on the price range for fiscal yr 2018,” Pub. L. No. 115-97, 131 Stat. 2045.
   [3]   https://www.whitehouse.gov/wp-content/uploads/2021/04/FY2022-Discretionary-Request.pdf.

This alert was ready by Jennifer Sabin, John-Paul Vojtisek, Dora Arash, James Chenoweth, Michael J. Desmond, Pamela Lawrence Endreny, Kathryn Kelly, Brian W. Kniesly, David Sinak, Eric Sloan, Jeffrey M. Trinklein, Edward Wei, Lorna Wilson, Daniel A. Zygielbaum, Michael Cannon, Jennifer Fitzgerald, Evan M. Gusler, Brian Hamano, James Jennings, James Manzione and Collin Metcalf.
Gibson Dunn legal professionals can be found to help in addressing any questions you might have relating to these developments. Please contact the Gibson Dunn lawyer with whom you normally work, any member of the agency’s Tax Practice Group, or the next authors:
Jennifer Sabin – New York (+1 212-351-5208, [email protected])John-Paul Vojtisek – New York (+1 212-351-2320, [email protected]dunn.com)Dora Arash – Los Angeles (+1 213-229-7134, [email protected])James Chenoweth – Houston (+1 346-718-6718, [email protected])Michael J. Desmond – Los Angeles/Washington, D.C. (+1 213-229-7531, [email protected])Pamela Lawrence Endreny – New York (+1 212-351-2474, [email protected])Kathryn A. Kelly – New York (+1 212-351-3876, [email protected])Brian W. Kniesly – New York (+1 212-351-2379, [email protected])David Sinak – Dallas (+1 214-698-3107, [email protected])Eric B. Sloan – Co-Chair, New York (+1 212-351-2340, [email protected])Jeffrey M. Trinklein – London/New York (+44 (0) 20 7071 4224 /+1 212-351-2344), [email protected])Edward S. Wei – New York (+1 212-351-3925, [email protected])Lorna Wilson – Los Angeles (+1 213-229-7547, [email protected])Daniel A. Zygielbaum – Washington, D.C. (+1 202-887-3768, [email protected])
© 2021 Gibson, Dunn & Crutcher LLP
Attorney Advertising:  The enclosed supplies have been ready for basic informational functions solely and usually are not supposed as authorized recommendation.

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