On May 28, 2021, the Treasury Department launched the Biden Administration’s Fiscal Year 2022 Revenue Proposals (the Greenbook). In brief, the proposals in the Greenbook would, if enacted:
Raise tax charges on home firms from 21% to twenty-eight% and impose a 15% minimal tax on firms which have worldwide e book earnings in extra of $2 billion; Significantly reform the worldwide tax regime; Raise the particular person unusual earnings tax fee from 37% to 39.6% and tax long-term capital positive aspects and certified dividends as unusual earnings for people with adjusted gross earnings of greater than $1 million; Eliminate or severely curtail different important tax advantages, resembling like-kind exchanges and acquire nonrecognition at demise; Incentivize investments in clear power; and Expand tax reporting and compliance.
This memorandum summarizes the tax proposals which can be of most curiosity to U.S. company taxpayers, monetary establishments, insurance coverage firms, hedge funds, non-public fairness funds, and high-income people.
II. Corporate Tax Measures
Raise the company earnings tax fee. The present federal company tax fee is 21%. Before the Tax Cuts and Jobs Act of 2017 (the TCJA), the highest marginal tax fee that utilized to firms was 35%. The Greenbook proposes to boost the company tax fee to twenty-eight%. The proposal can be efficient for tax years starting after 2021. For non-calendar-year firms, the 2021-2022 tax fee can be 21% plus 7% occasions the portion of the tax 12 months that happens in 2022. Impose 15% minimal tax on e book earnings. The Greenbook would impose a 15% minimal tax on the worldwide e book earnings of home firms which have worldwide e book earnings in extra of $2 billion. The proposal can be efficient for tax years starting after 2021. Expand the anti-inversion guidelines. The anti-inversion guidelines of part 7874 are meant to remove the incentive for home firms to expatriate to lower-tax jurisdictions. The Greenbook proposes to broaden the circumstances beneath which part 7874 applies, and would deal with any expatriated company as a home company for all U.S. tax functions if, instantly after the expatriation, the pre-transaction shareholders personal at least 50% of the expatriated entity. By distinction, present legislation applies an 80% possession take a look at for treating an expatriated company as a home company, and topics expatriated firms to U.S. tax on solely sure transactions if a 60% possession take a look at is glad. Increase the GILTI tax. Under the TCJA, U.S. firms usually are taxed yearly at a ten.5% fee (rising to 13.125% in 2026) on the extra of sure “international intangible low-tax earnings” earned by their managed international firms (CFCs) over a ten% imputed return on depreciable tangible property held by the CFCs. The Greenbook proposes to remove the 10% imputed return for tax years starting after 2021, rising the quantity of a CFC’s earnings that’s topic to present GILTI taxation in the fingers of its U.S. mother or father company. The Greenbook additionally would improve the GILTI tax fee to 21%, and would apply a separate international tax credit score limitation to every international jurisdiction as an alternative of permitting a U.S. mother or father company to make use of an averaging method (which usually permits international taxes paid to high-tax jurisdictions to scale back the residual U.S. tax paid on earnings earned in low-tax jurisdictions). These adjustments can be reconciled with any multilateral settlement reached beneath “Pillar Two” of the OECD/G20 Inclusive Framework on BEPS, which requires a worldwide minimal tax. Repeal the excessive tax exemption to GILTI and subpart F earnings. Under the GILTI and subpart F regimes (each of which tax U.S. mother or father firms yearly on sure of their CFCs’ earnings), U.S. firms aren’t taxed on any earnings earned by a CFC if the CFC’s international efficient tax fee exceeds 90% of the U.S. company earnings tax fee. The Greenbook proposes to remove this excessive tax exemption for tax years starting after 2021. Repeal the FDII deduction. The TCJA grants U.S. firms a 37.5% deduction (reducing to 21.875% in 2026) for sure “intangible earnings” that they derive from exports. The Greenbook proposes to repeal the deduction efficient for tax years starting after 2021. Replace BEAT with SHIELD. Under the TCJA’s “base erosion and anti-abuse tax,” firms with common gross receipts exceeding $500 million are topic to a minimal tax add-on usually equal to 10% (rising to 12.5% in 2026) multiplied by the extra by which their “BEAT legal responsibility” (calculated by including again sure deductible funds made to international associates) exceeds their common tax legal responsibility. The Greenbook proposes to exchange BEAT with a “stopping dangerous inversions and ending low-tax developments” rule. The SHIELD rule would deny sure deductions to U.S. company members and branches of monetary reporting teams with greater than $500 million in international annual revenues (decided based mostly on their consolidated monetary statements) for funds made to monetary reporting group members whose earnings is topic to an efficient tax fee that’s under a delegated minimal tax fee. The designated minimal tax fee can be 21%, except and till a unique fee is required by “Pillar Two” of the OECD/G20 Inclusive Framework on BEPS. The proposal can be efficient for tax years starting after 2022. Limit deductions for disproportionate U.S. borrowing. Under part 163(j) (enacted by the TCJA), U.S. firms usually are allowed a deduction for enterprise curiosity expense solely to the extent that it exceeds their enterprise curiosity earnings plus 30% of EBITDA (or EBIT, starting after 2021). The Greenbook would additional restrict curiosity deductions of sure U.S. members of multinational teams that put together consolidated monetary statements if their internet curiosity expense for monetary reporting functions exceeds their proportionate share of the internet curiosity expense reported on the group’s consolidated monetary statements. The quantity of curiosity expense denied for U.S. tax functions can be proportionate to the extra curiosity expense for monetary reporting functions. The proposal can be efficient for tax years starting after 2021.
III. Individual Tax Measures
Increase the particular person tax fee. Under the TCJA, the highest marginal federal earnings tax fee relevant to people is 37%, rising to 39.6% after 2025. The Greenbook would improve the fee to 39.6% for tax years starting after 2021. In 2022, the fee usually would apply to taxable earnings over $509,300 for married people submitting a joint return and $452,700 for single people. Tax long-term capital positive aspects and certified dividends at unusual charges for prime earners. Currently, people are topic to a 20% most fee on long-term capital positive aspects and certified dividends. The Greenbook proposes to topic long-term capital positive aspects and certified dividends to unusual earnings tax charges for people with adjusted gross earnings of greater than $1 million. The proposal would apply to gadgets acknowledged after April 28, 2021. Force earnings recognition to donors, decedents, and non-corporate entities. Currently, presents and transfers at demise aren’t taxable occasions, despite the fact that heirs usually take a “stepped-up” foundation on property they obtain from a decedent. The Greenbook proposes to usually require donors and decedents to acknowledge capital positive aspects on transfers to donees or heirs. Certain exclusions would apply, together with a $1 million per-person lifetime exclusion (listed for inflation). Beginning in 2030, the proposal additionally would require non-corporate entities to acknowledge unrealized appreciation in any belongings that haven’t been topic to a taxable occasion in the earlier 90 years. The proposal usually can be efficient after 2021. Expand the 3.8% Medicare tax. Currently, restricted companions who materially take part in a partnership’s enterprise aren’t topic to the self-employment tax, and S company members who materially take part in an S company’s enterprise are topic to self-employment tax solely on “affordable compensation” that they obtain of their worker capability. These people are also exempt from “internet funding earnings tax,” which at present applies solely to sure passive earnings and positive aspects. The Greenbook proposes to topic all commerce or enterprise earnings of people incomes over $400,000 to both self-employment tax or internet funding earnings tax for tax years starting after 2021. Tax carried pursuits at unusual charges. The Greenbook proposes to tax funding professionals at unusual charges on earnings from, and positive aspects from the disposition of, their carried pursuits if their taxable earnings from all sources exceeds $400,000. Investment professionals whose taxable earnings is under $400,000 would proceed to be topic to Section 1061 (enacted by the TCJA), which imposes a three-year holding interval as a precondition to recognizing long-term capital positive aspects on carried pursuits issued to funding professionals, and in any other case treats the capital positive aspects as short-term capital positive aspects. If the Greenbook’s separate proposal to tax long-term capital positive aspects at unusual charges for people with earnings in extra of $1 million is enacted, then the carried curiosity proposal is more likely to materially have an effect on solely carried curiosity holders with taxable earnings between $400,000 and $1 million. The proposal can be efficient for tax years starting after 2021. Limit acquire deferral on like-kind exchanges. Under part 1031, house owners of appreciated actual property utilized in a commerce or enterprise or held for funding can defer acquire on the trade of the property for actual property of a “like sort.” The Greenbook would restrict a taxpayer’s potential to defer acquire recognition in extra of $500,000 on any putative part 1031 trade.