House Passes Build Back Better Act; its Future is Uncertain in the Senate

November 22, 2021

Democrats in the House of Representatives succeeded in passing their version of the Build Back Better Act on Friday, 220 to 213. Republicans were unanimous in opposition. But the $2.1 trillion tax and spending bill still faces some uncertainty in the Senate, where key Democrats Kyrsten Sinema (Arizona) and Joe Manchin (West Virginia) have expressed misgivings over the bill’s cost.

With the Senate nearly evenly divided, Democrats will need Sinema’s and Manchin’s votes to get it through. And even then, the bill will need to go through the Byzantine process of reconciliation before Congress can send a final bill to the President for signature.

The current version of the Build Back Better Act is significantly slimmed down compared to the $3.5 trillion original version originally advocated by the Biden Administration. The latest estimate from the Congressional Budget Office pegs the total cost of the bill at $2.1 trillion – significantly more than the $1.85 trillion proposal pushed forth from the President and his staff.

The CBO Office projects that as written, this bill would add $160 billion to the federal budget deficit over the next decade.

Among the Build Back Better Act’s key provisions that may affect AbitOs clients:

Individual Tax Increases

SALT Deduction Increase. High-end homeowners in high-income tax states got a Halloween treat in the second iteration of the Build Back Better Act:  The new version of the bill change would raise the state and local tax exemption (SALT) cap to $80,000 from 2021-2030, reverting to $10,000 for 2031.

High-income surtax. A surtax of 5% of modified adjusted gross income over $10 million per year, and an additional tax of 3% of MAGI in excess of $25 million. So incomes over $25 million per year would face an additional 8% tax, over and above existing income taxes. Trusts and estates would face the same tax at income thresholds of $200,000 and $500,000, respectively.

Restrictions on Contributions to ‘jumbo’ IRAs. The bill would stop individuals with more than $10 million in combined IRA and workplace retirement plan balances from making new contributions, effective tax year 2029.

New type of RMD for ‘jumbo IRAs’ and other retirement accounts. The bill introduces a new type of required minimum distribution for retirement accounts over $10 million. Owners of IRAs and other retirement accounts over that threshold must begin taking distributions – and paying taxes on the income. The rules will apply to those with incomes over $400,000 for individuals and $425,000 for couples, beginning in tax year 2029. The effective date was moved back from 2022 in an earlier version of the bill.

“Backdoor Roth” conversions restricted. The law will prohibit any conversions of after-tax 401(k) and other workplace plan contributions and non-deductible IRA contributions to Roth accounts. Those with incomes above $400,000 (singles) and $450,000 (married filers) would not be allowed to convert pre-tax to Roth IRAs, effective 2032.

3.8 % net investment income tax on active business income. Under current law, there’s a 3.8% net investment income tax on net investment income, or all MAGI over $125,000 per year for single filers, $250,000 for married filers, and $200,000 for everybody else. The Build Back Better bill expands this tax to include active business income for single taxpayers with taxable income greater than $400,000 single filers, or $500,000 for married filers, as well as for trusts and estates.

Higher Taxes on Sales of Small Businesses. Currently, Section 1202 allows sellers of qualified small business stock (QSBS) exclude up to 100% of gains from tax, up to a limit of $10 million, or 10 times the original investment annually. The Build Back Better act would increase taxes on sales these qualified C-corporation shares substantially by reducing the maximum exclusion to 75% or 50%. If the bill passes, this tax would be backdated to September 13th, 2021, except for those sales under binding contracts prior to that date.

Expanded ‘Wash Sale’ Rules. The Build Back Better Act expands Section 1091 30-day wash sale rules to include currencies, cryptocurrencies and other digital assets, and commodities.  This means that these assets will be subject to the same wash sale rules that have long applied to securities: If you want to claim a capital loss on these assets, you must wait at least 30 days before buying a substantially identical asset.

Child Tax Credit Extended. The American Rescue Plan Act (ARPA) Child Tax Credit is extended through 2022, if the bill passes. It’s also made fully and permanently refundable.

Four weeks paid family and medical leave. Democrats had originally drafted a bill mandating 12 weeks of paid leave. But took it out over cost concerns. However, the provision had enough support among the Women’s Caucus that Democrats worked a slimmed down four-week requirement back into the bill. This section was a sticking point for Senator Manchin (D-WV), a key vote for Democrats. Sen Manchin has stated he would prefer passing this provision as a separate law with bipartisan support, rather than inside the larger Build Back Better Act.

Universal Pre-K. The bill authorizes $100 million to fund universal pre-K education initiatives over the next three years.
Corporate Tax Increases

New 15% Corporate Alternative Minimum Tax. The current version of the Build Back Better Act imposes a new alternative minimum tax of 15% on book income for corporations reporting adjusted financial state income (AFSI) of $1 billion or more over three consecutive years.

1% tax on stock buybacks. The BBB creates a new 1% tax on share repurchases on publicly-traded U.S. corporations. This could influence corporations to use excess cash issue a (taxable) dividend to shareholders, rather than buy in stock from existing shareholders.

GILTI Tax Increase. The bill would reduce the tax on Global Intangible Low-Taxed Income to 5%, resulting in an effective tax rate of 15% on this income. GILTI would also be exempt from expense allocation rules.

Qualified Business Asset Investment (QBAI) tax increase. The Build Back Better Act would reduce the QBAI exemption to 5%.

Reduced Foreign Income Tax credit. The Foreign Income Tax Credit would be slashed to 5%. They can be carried forward for five to ten years. Carrybacks are disallowed under the bill.

FDII Tax Increase. The BBB Act reduces the deduction for foreign-derived intangible income (FDII) to 21.875 percent, resulting in a tax rate of 15.8 percent, effective with the 2023 tax year.

Outlook
While the bill will almost certainly go through some changes in the reconciliation process, the passage of some version of it seems almost certain at this point. We may see some of the more expensive spending provisions, such as the 4-week family and medical leave stripped out and voted on in a separate bill, as Senator Manchin has advocated.

But most of the tax increases in the bill fall on higher income earners and corporations that don’t have much of a lobby. So it’s unlikely that there will be major changes in these provisions when the reconciliation process is complete.

When the bill passes the reconciliation process, the President will almost certainly sign it into law.

About Abit0s
AbitOs specializes in the unique accounting needs of high net-worth individuals, entrepreneurs, and business owners with international lifestyles as well as for entities doing business in LATAM and across the globe. Our full-service tax, accounting, and legal team has particular expertise in international taxation. We work every day with foreign business owners and corporations to lower their tax bills, maximize after-tax cash flows, or both.

If you would like to benefit from our expertise in these areas, or if you have further questions on this Alert, we encourage you to contact us.