Infrastructure Act

The House of Representatives unanimously approved the Infrastructure Investment and Jobs Act on November 5. While discussions about the Build Back Better Act (BBBA) are still ongoing in the House, new information regarding anticipated changes to tax law has surfaced. Our tax experts discuss.

The Infrastructure Investment and Jobs Act (also known as the Infrastructure Act) was approved by the House on November 5 and it is anticipated that President Biden will sign it into law in the near future. The Infrastructure Act had already been approved by the Senate. While discussions about the Build Back Better Act (BBBA) are still ongoing in the House, new information regarding anticipated changes to tax law has surfaced. First impressions are important, so here are some of our thoughts on what these recent events signify and what we anticipate will happen next.

What has transpired and what provisions are incorporated in the Infrastructure Act?

Since it was approved by the Senate on August 10, the Infrastructure Act has been awaiting a vote in the House of Representatives ever since. The vote has to be postponed in order to make room for negotiations about the BBBA. On the other hand, that vote was ultimately held on November 5, and on that day, the House of Representatives unanimously approved the Infrastructure Act. The final step in the process will be for President Biden to complete this legislation into law.

The Infrastructure Act allocates funds for a wide variety of national infrastructure projects, including public transit, roads, and bridges, as well as passenger and freight rail, broadband internet, water infrastructure, and other comparable initiatives. There are just four different tax provisions included in the bill: (1) the expiration of the employee retention credit (ERC) is moved up to September 30, 2021 from December 31, 2021 for the majority of employers; (2) the reporting of tax information in the style of Form 1099-B is extended to include cryptocurrency; (3) the rules extending disaster-related tax deadlines are expanded; and (4) certain capital contributions to public utilities from the government for certain infrastructure projects can be received tax-free.

Businesses will feel the effects of these tax changes most acutely as a direct result of the earlier than expected repeal of the ERC. Additional detail regarding the tax provisions of the Infrastructure Act is given in the detailed overview that may be found below.

What exactly is the situation with the BBBA right now?

The BBBA will be brought to the floor for a vote in the coming weeks after the House of Representatives on November 5 approved a procedural procedure that would bring it there. Previously, on September 15, the House Ways and Means Committee had adopted a first draft of the tax provisions of the BBBA. After that, movement was significantly hindered owing to ongoing negotiations between Democratic members of Congress and the White House. On October 28, a high-level framework accord and an updated draft of the entire legislation were both made public. The amended text of the whole law included tax ideas that had been drastically scaled back. On November 3, the House Rules Committee issued yet another updated version of the BBBA, which remained under revision up until the following day, November 5. The most recent measure adopted in the House is a start in the right direction, but there are still many important steps that need to be finished.

The version of the BBBA that was approved by the House Rules Committee on November 3 is quite comparable to the version of the bill that was made public on October 28, just a few days after the announcement of the framework agreement. For instance, the bill does not increase individual or corporation tax rates, does not change the 20 percent qualified business income deduction (QBID), and does not include any changes to the estate or gift tax. The bill continues to include critical provisions like as the maximum 8 percent surcharge on high-income people, estates, and trusts. It also retains many of the same changes to GILTI, FIDI, BEAT, and the foreign tax credit.

In spite of this, the most recent version of the BBBA does, in fact, have a few significant departures from the version that was made public on October 28. These key differences include an increase in the limit of the state and local tax deduction cap (SALT cap) from its current level of $10,000 to a new level of $80,000, the reintroduction of various retirement plan contribution limits and distribution requirements for high-income individuals, coordination of the high-income tax surcharge with other income tax provisions, and a refund opportunity for same-sex couples to file joint tax returns for prior tax years. The details of these and many of the other tax provisions included in the BBBA may be found in the thorough overview that follows.

What should I do now?

The conclusion of the Infrastructure Act will remove a big issue from the legislative agenda once it is fully implemented. The negotiations taking place inside the House as well as between the House and Senate about the content of the BBBA are currently the focus of everyone’s attention. The next thing that will happen is that the House of Representatives will hold a formal vote on its version of the bill, and then they will submit it to the Senate for consideration. Some Democratic senators have still expressed concerns with the version of the BBBA that was passed through the House, and it is likely that the Senate will continue to engage in further negotiations despite the fact that the Senate has been involved in the negotiation process while the BBBA is proceeding through the House. Because President Biden and a large number of members of Congress want the bill to have no effect on the government’s ability to collect money, any modifications to the spending provisions are likely to have an effect on the tax provisions. Some senators have voiced opposition to a particular provision, which calls for increasing the limit on the amount that may be paid in SALT taxes. Senators Sanders and Menendez have proposed a SALT cap, according to which taxpayers whose income is less than $400,000 would be eligible for an unlimited SALT deduction, whereas taxpayers whose income is greater than the aforementioned limit would continue to be limited to the current cap of $10,000.

In addition, Democrats in the Senate want to push the BBBA legislation via the budget reconciliation process. Due to the fact that this procedure has extremely stringent requirements, the only things that may be included are those that have a direct influence on the budget of the government. It is possible that certain elements included in the present version of the BBBA that is being considered by the House do not completely comply with those rules. These sections would need to be changed or eliminated entirely.

A version of the BBBA that has been passed by the Senate would be sent back to the House for additional consideration if any changes are made to the bill after it has been passed by the Senate. Either the House of Representatives could vote on the identical version that was passed by the Senate, or the House and Senate could conduct a conference to draft a new bill that bridges all of the differences between the two versions. After then, a single conference bill would be put to a vote in both houses. It is quite probable that any changes will require considerable negotiations, which are likely to continue moving forward slowly. This is due to the fact that many members of Congress have declared different aims throughout the entirety of this process.

The debt ceiling and deadlines for government financing are both set to expire on or around December 3, and this is creating a lot of uncertainty surrounding the ongoing negotiations on the BBBA. Despite the fact that these deadlines might stimulate the adoption of the BBBA far before this date in order to allow ample runway to handle the other problems, the pace of negotiations to date would imply that this will be a challenge. As a result, it’s probable that these concerns may need to be addressed alongside further negotiations on the BBBA, which may divert some attention away from the BBBA and further slow down the process. The vast majority of Democrats in Congress are in agreement that the BBBA must be enacted before the end of the year; nevertheless, the specific timeframe and mechanism to get there remain fraught with a great deal of uncertainty.

As the BBBA makes its way through Congress, you should continue to check back here for any updates to our Outlook on changes to tax rates and policies.

The Infrastructure Act and the version of the BBBA that was issued on November 3 by the House Rules Committee include a comprehensive overview of the tax changes that were made.

The following is a summary of several of the tax changes that were contained in the Infrastructure Act, which was approved by both the House and the Senate, as well as the version of the BBBA that is presently being considered in the House.

Infrastructure Act

  • Early termination of the employee retention credit (ERC) — The expiration date of the ERC has been moved up to September 30, 2021 for the majority of businesses, from the previous date of December 31, 2021. This credit has been made available to help businesses who have been harmed by the COVID-19 epidemic since the beginning of 2020. It has undergone continuous revisions and extensions, and its original expiration date was originally set for December 31, 2021. Recovery starting businesses are the only businesses that will be eligible for the ERC during the fourth quarter of 2021. There is still the possibility for businesses to claim the ERC retrospectively for calendar quarters that have come and gone in the past. For further information on this initiative, please check the resource page that we have provided for the ERC.
  • Tax information reporting for cryptocurrency — The definition of a broker has been expanded to include individuals who are paid to regularly provide services effectuating transfers of digital assets on behalf of others. This change has resulted in an expansion of the tax information reporting system. Although cryptocurrencies are the major subject of this provision, the term of digital asset may also apply to other assets that are traded on the developing digital market. Those who are subject to this reporting would be required to supply Form 1099-Bs to their customers as well as the Internal Revenue Service (IRS), with details on the value of digital assets sold, the acquisition date and sale date, and the basis for each digital asset sold. These forms must be submitted annually. These prerequisites would become mandatory as of the year 2023. (with Form 1099-Bs issued in early 2024). Overall, it is anticipated that this change will give the IRS with a great deal more detail regarding transactions involving digital assets.
  • Adjustments to tax deadlines that are connected to natural disasters — Taxpayers whose filing and tax deadlines are affected by federally declared catastrophes may request an extension from the Internal Revenue Service (IRS), which is authorized to do so under the rules that are now in date. However, the Internal Revenue Service is not obligated to provide extensions for every natural catastrophe. The Infrastructure Act extends these deadlines in the event that the federal government declares a catastrophe, and it also gives the Internal Revenue Service the authority to grant additional extensions if necessary. In addition to this, it extends the definition of catastrophes that qualify for assistance under the Stafford Act to include severe fires that have occurred after the act was passed.
  • Tax-free capital contributions to public utilities — As part of the infrastructure expenditures supported by the Infrastructure Act, regulated public utilities are now permitted to accept tax-free contributions from the government. These contributions come in the form of capital contributions. Contributions that were given to public utilities for improvements to drinking water and sewage disposal systems are considered to be eligible for respect. If these changes weren’t altered, these donations would have been considered taxable income, and any assets that were purchased or built with the aid of these grants would have been subject to depreciation.

Changes to the individual income tax under the BBBA

  • An increase in the maximum amount that may be deducted for state and local taxes (SALT) Beginning in 2026, there will be no limit on the amount that can be deducted for state and local taxes. Currently, taxpayers are only allowed to deduct state and local taxes that are up to $10,000. In accordance with the BBBA, the ceiling is raised to $80,000 ($40,000 for married taxpayers filing separately) for tax years beginning in 2021 through 2030, then it is lowered to $10,000 ($5,000 for married taxpayers filing separately) for tax years beginning in 2031, and it is proposed that the ceiling be eliminated for tax years beginning after 2031.
  • Tax surcharge on people, estates, and trusts Individual taxpayers would be subject to a 5 percent surcharge on modified adjusted gross income (MAGI) that exceeds $10 million, and an additional 3 percent fee on MAGI that exceeds $25 million. Those taxpayers who are married but file their taxes separately are subject to the surcharge if their MAGI is more than $5 million or more than $12.5 million, whichever is greater. Trusts, on the other hand, would be subject to the surcharge if their MAGI was more than $200,000 or more than $500,000. These changes are applicable to tax years that apply after the 31st of December in 2021.
  • The influence that the new high-income surcharge will have on the other tax rules — Several of the tax rules that are now in place are based on the highest individual income tax rate. The surcharge that was just discussed would be coordinated with those provisions so that the full 8 percent surcharge would be included in measuring the highest rate, regardless of whether the taxpayer actually exceeds the applicable income thresholds. This would make it so that the highest rate would be calculated using the surcharge that was just discussed. These changes would apply effect for tax years beginning after the 31st of December in 2021.
  • Installment sales – When taxpayers have installment commitments that total more than $5 million in a single tax year, they are compelled to pay interest on the deferred tax. This tax is assessed based on the highest applicable rate for capital gains tax, which applies to deferred taxes. This price would now be inclusive of the supplementary fee in its whole of 8%.
  • Fiscal-year pass-through entities — Certain pass-through entities with fiscal years are required to make a deposit with respect to any tax that is deferred as a result of the owners having a different tax year than the pass-through entity. This is because the fiscal year of the pass-through entity is different from the tax year of the owners. This amount of tax that has been delayed is typically calculated using the individual’s highest marginal tax rate plus one percent. This pricing would now also be included of the complete 8% fee moving forward.
  • Regulations governing tax of partnerships: Beginning in 2018, many partnerships will be subject to new rules, according to which the partnership will be responsible for paying any additional rules that arise as a consequence of an IRS review or an updated return. This tax is computed based on the highest individual tax rate, which would now also take into account the total 8 percent surcharge.
  • Partnership withholding on foreign partners — The withholding tax on foreign partners’ share of income effectively connected of a U.S. trade or business will be required to be calculated by applying both the highest applicable tax rate as well as the new 8 percent surcharge to the foreign partner’s share of effectively connected income. This will be required to be done.
  • An increase in the net investment income tax (NIIT) — At the present time, a firm’s income is only subject to the NIIT if the owner is not actively involved in running the business. According to the BBBA, if a taxpayer’s MAGI is more than $500,000 for joint filers, $250,000 for married filing separately filers, and $400,000 for all other taxpayers, then their net investment income (NII) must include their share of the income from their business. The inclusion of income from active businesses in NII would be implemented gradually over the business of the following $100,000 of MAGI that is earned more than the threshold ($50,000 for filers who are married but filing separately). This regulation does not apply to business income that is subject to taxation under the self-employment tax system. In the respect of trusts and estates, NII would consist entirely of active business income in every instance. These changes are applicable to tax years that apply after the 31st of December in 2021.

Following the federal recognition of same-sex marriage in 2012, couples who were lawfully married under state law were generally permitted to amend their returns dating back to 2010 in order to obtain refunds to the extent that a joint return resulted in a lower tax liability. This allowed for the extension of refund claims for married same-sex couples. No requests for refunds might be permitted by couples who had been married before 2010. According to the provisions of the BBBA, requests for a refund on this matter can be submitted for any tax year up until the date when the taxpayer’s tax return is due in 2021. This applies to weddings that took place prior to 2010, as well as those between couples who simply did not submit claims for tax refunds at the time the law was initially amended. The filing date for tax returns for the year 2021 has been extended, giving taxpayers who are eligible for this benefit an additional year, until October 15, 2022, to complete their returns.

  • The $250,000 limit for excess business losses (or $500,000 in the event of joint returns) that was originally set to expire at the end of 2026 has been made permanent. This replaces the original business of the end of 2026. Additionally, the BBBA would change the way in which excess losses are carried forward. According to the laws that are now in place, any excess loss is converted into a net operational loss at the beginning of the next tax year and can be used to offset income from sources other than a law in that year. According to the BBBA, the carryforward will continue to be subject to the excess business loss limits in the years that follow. These changes are applicable to tax years that apply after the 31st of December in 2020.
  • Section 1202 small business stock – The present law allows for an exclusion from income of up to one hundred percent in the case of the sale of eligible small business stock under Section 1202 of the Internal Revenue Code. This exclusion would be subject to a ceiling of fifty percent under the BBBA for all trusts and estates as well as taxpayers whose adjusted gross income (AGI) is greater than four hundred thousand dollars. These changes are applicable to sales and exchanges that apply place on or after September 13, 2021, with the exception of sales that take place after that date but in accordance with a legally enforceable written contract that was in existence on September 13, 2021.
  • The extension of the child tax credit (CTC) — The expanded CTC, which includes monthly advance payments as mandated by the American Recovery and Reinvestment Act (ARRA), is prolonged until the year 2022. The provision that allows for the complete refundability of the CTC, which was initially implemented by the ARPA for the tax years 2021 and 2022, has been made permanent.
  • The expansion of the earned income tax credit (EITC) – The EITC is made permanent for taxpayers who do not have qualifying children in this plan. When a taxpayer’s prior-year income is higher than their current-year income, the computation will now enable them to use their prior-year income for the credit calculation for the 2022 tax year. This change will take effect for tax years beginning in 2022.
  • Energy credits — The BBBA creates, expands, or increases credits available to taxpayers for energy property, such as windows and doors, residential energy-efficient property, new energy-efficient homes, qualified expenses from participating in a state-based wildfire mitigation program, new plug-in electric motor vehicles, qualified fuel cell motor vehicles, and specified new electric bicycles. These credits can be used to offset the cost of purchasing energy property. These modifications are applicable to any expenditures made after either the 31st of December 2021 or the 31st of December 2022.
  • Water conservation and storm water and wastewater management subsidies paid to taxpayers by state or local governments, public utilities, or storm water management providers are excluded from the taxpayer’s gross income under this income. These changes apply to sums received after the 31st of December in 2018.
  • Deduction above-the-line for union dues and uniforms — The BBBA allows for a deduction above-the-line of up to $250 for employee union dues and a separate deduction of up to $250 for uniforms or work apparel that is necessary as a condition of employment and is not appropriate for everyday use. The deduction for union dues will be eliminated for tax years that finish after December 31, 2024, and the deduction for uniforms will be eliminated for tax years that conclude after December 31, 2025. These deductions will become available for tax years that begin after December 31, 2021.
  • Wash sales — The rules governing wash sales are being broadened so that they now apply to a wider range of assets, including commodities, currencies, and digital assets such as cryptocurrencies. The criteria that is used to determine whether a taxpayer bought essentially identical assets has been broadened such that it also takes into consideration acquisitions made by related parties. These changes are applicable to tax years that apply after the 31st of December in 2021.

Why Constructive sales under Section 1259: If a taxpayer takes certain offsetting positions to previously owned positions, the transaction is regarded by the constructive sale rules as a sale of the previously owned position. This is because the taxpayer is effectively selling the position. The concept of a “appreciated financial position” that is subject to the constructive sale rule is also broadened to include digital assets. This expansion came about since digital assets were not previously included in the definition. These modifications are applicable, as a general rule, to contracts that were signed after the adoption date of the BBBA.

BBBA has made several changes to its retirement schemes.

  • Restrictions placed on high-income taxpayers’ ability to contribute to IRAs and other types of retirement accounts — The Individual Retirement Accounts (IRAs) and other retirement accounts of taxpayers whose yearly income is greater than $400,000 for single taxpayers or married taxpayers filing separately, $450,000 for married taxpayers filing jointly, or $425,000 for heads of household would be subject to new restrictions. If the combined value of the taxpayer’s traditional IRA, Roth IRA, and certain defined contribution plans at the end of the previous tax year was greater than $10 million, the taxpayer would not be permitted to make any additional contributions to their retirement accounts during that year under any circumstances. Taxpayers would also be compelled to take a distribution from these retirement accounts equivalent to 50 percent of the amount that the taxpayer’s aggregate account balance that surpasses $10 million. This distribution would be taken from the retirement funds. In the event that the value of these accounts was greater than $20 million, an additional distribution would need to be made equal to the lesser of either (1) one hundred percent of the amount that was greater than $20 million or (2) the total amount held in any Roth accounts. These modifications are applicable to tax years that begin after the 31st of December in 2028.
  • Restrictions on what are known as “backdoor Roth conversions” – It would no longer be possible for nondeductible contributions made to regular IRAs or other types of retirement plans to be converted into a Roth IRA. This eliminates the possibility of “backdoor Roth conversions,” which were legal for taxpayers with high incomes beginning in the year 2010. This ban would go into effect for any contributions, distributions, or transfers made after the 31st of December in the year 2021.
  • Taxpayers with high incomes will not be allowed to have their Roth accounts converted — The conversion of a traditional individual retirement account (IRA) or another type of retirement account into a Roth account is not permitted for taxpayers whose taxable income is greater than $400,000 for single taxpayers or $450,000 for married taxpayers filing jointly, or $425,000 for heads of household. This change would apply to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031.
  • The statue of limitation for IRA noncompliance has been extended from three years to six years, with the exception of misreporting of valuation-related information and prohibited transactions. These modifications are applicable to tax years for which the existing three-year limitation period will have ended after the 31st of December in 2021.
  • Holding stock in a DISC or FSC within an IRA or Roth IRA – A number of courts have held that it is permissible for an IRA or Roth IRA to hold stock within a DISC or FSC. If the DISC or FSC gets any commission or other payment from a business controlled at least 10 percent by the individual for whose benefit the IRA was kept, then this transaction is considered to be in violation of the BBBA and is thus forbidden. For the purpose of making this conclusion, the laws governing constructive ownership would apply. These changes apply to stock that is owned or purchased on or after the date of December 31, 2021.

Changes to the BBBA’s operations generally

  • Controlled group definition expanded: companies that are owned or operated by the same person or group of people are required to make a range of tax judgments as if they were a single business. Because the notion of “common control” in the existing legal system may only include firms that conduct trades or businesses, this frequently inhibits operational companies held by a holding company from being included in a controlled group. [Citation needed] Entities that engage in investment activities or activities that include research and experimentation would be required under the BBBA to be included in a controlled group decision. A considerable uptick in the variety of organizations that are regarded as being subject to shared control would result from the implementation of this change. These modifications are applicable to tax years that start after the 31st of December in 2021.
  • Modifications to the business interest expense The BBBA changes the business interest expense limitation that is outlined in Section 163(j) so that it is no longer applied at the level of the partnership or the S corporation, but rather it is applied to the owners of the partnership or the S corporation. These modifications are applicable to tax years that start after the 31st of December in 2022.
  • Expenses related to research and experimentation — The BBBA moves back the effective date of a provision that was previously enacted, which required taxpayers to capitalize and amortize expenses related to research and experimentation over a period of five years for research conducted within the United States and 15 years for research conducted outside of the United States. This provision would not go into effect until January 1, 2026 rather than the current date of January 1, 2022 if the BBBA were to change.
  • Claiming research credits on payroll tax returns — As of right now, the legislation allows certain small taxpayers to claim up to $250,000 worth of research credits on their payroll tax return. This number can be increased in the future. Because of this, the corporation is able to convert a portion of the credit into cash, even if it does not yet owe any income taxes against which it could claim the credit. For tax years beginning after the 31st of December 2021, the BBBA raises this threshold to a whopping $500,000.
  • Possessions economic activity credit — A new economic activity credit is established that is equal to 20 percent of wages and allocable employee fringe benefits paid to employees of active businesses in U.S. possessions or territories, up to $50,000 for each full-time employee (i.e., a maximum credit of $10,000 per employee). Small firms are entitled for a greater credit. These modifications are applicable to tax years that start after the date when the legislation was enacted.
  • The tax treatment of assistance provided to particular farm loan borrowers — Certain payments made to farm loan borrowers, as outlined in the ARPA, are excludable from the gross income of the payee, and the expenses incurred in relation to the loan proceeds will still be deductible. This is because the ARPA was signed into law by President Ronald Reagan. These changes become operational on the date when the legislation was signed into law.
  • Restriction on the application of the credit for clinical testing expenses — The application of the credit for clinical testing expenses has been narrowed so that it only applies to expenses related to clinical testing of certain drugs. Clinical testing of drugs is performed before the drugs are approved for any use. These modifications are applicable to tax years that start after the 31st of December in 2021.
  • The income exclusion for bicycle commuting employee benefits has been reinstated, and the maximum benefit has been increased from $20 per month to $81 per month. The expansion and reinstatement of employer-provided fringe benefits for bicycle commuting. The income exclusion has been reinstated for bicycle commuting employee benefits. These modifications are applicable to tax years that start after the 31st of December in 2021.
  • Credit for childcare expenses paid by employers This credit for childcare expenses paid by employers is increased from 25 percent to 50 percent of qualifying expenses, and the limit on the maximum amount of credit that can be claimed has been increased from one hundred fifty thousand dollars to five hundred thousand dollars. These modifications are applicable to tax years that begin after the 31st of December in 2021 and before the 1st of January in 2026.
  • Deduction for sound recordings — The legislation as it stands currently allows for a deduction of up to one hundred fifty thousand dollars to be taken for the cost of any eligible film production, television production, or live theatre production. Any expenses that are higher than this threshold may be eligible for capitalization. This treatment is extended by the BBBA to eligible sound recordings that have been created and recorded in the United States. The provision takes effect for productions that begin in taxable years that conclude after the date of legislation and remains in force until the 31st of December in the year 2025.
  • Deduction for lawyer expenses on continency fee cases — The BBBA modifies current law expensing rules to allow plaintiffs’ attorneys to deduct out of pocket litigation costs in the year they are incurred, rather than waiting until the conclusion of the litigation to do so. This is made possible by the BBBA’s modification of current law expensing rules. The provision applies to sums paid, incurred, or received in taxable years beginning after the date of passage.
  • Tax credit for the salary of local news journalists — The BBBA establishes a refundable employment tax credit for wages given to local new journalists. The credit is calculated as follows: for the first four quarters, it is equivalent to 50 percent of the first $12,500 every quarter; subsequently, it is calculated as 30 percent for each quarter. The credit is only valid for quarters that begin after the date of passage and will no longer be available after the 31st of December, 2025.
  • A new excise tax will be levied on nicotine that is used in tobacco products that are not FDA-approved. This tax will only apply to items that include nicotine that is not FDA-approved. The tax is equal to the greater of $50.33 per 1,810 mg of nicotine or the cash amount that is stated for small packages of cigarettes. Excise taxes are imposed on items that are removed from circulation in calendar quarters that begin more than 180 days after the date the legislation was passed.
  • The termination date of the employer credit for paid family and medical leave would be advanced to expire for wages earned after December 31, 2023. This would cause the credit to no longer be available to employers.

Changes to the BBBA’s corporate income tax structure

  • Alternative minimum tax on large corporations — A new tax of 15 percent will be imposed on the financial statement profits of corporations that have an average annual financial statement income that is greater than $1 billion over a period of three years ending in the applicable tax year. This tax will be applied to corporations that have been subject to the alternative minimum tax on large corporations since 2001. Corporations that are members of an international financial reporting group and have a foreign corporate parent will be subject to the tax if, over a period of three years, the combined adjusted financial statement income of the corporation and all foreign members of such group is greater than $1 billion and the corporation’s own combined adjusted financial statement income is greater than $100 million. These modifications are applicable to tax years that start after the 31st of December in 2022.
  • An excise tax will be applied to the fair market value of any stock that a publicly listed corporation repurchases, and this tax will be in the amount of one percent of the total value of the stock. Certain transactions are exempt from this tax, including repurchases that take place as part of a tax-free reorganization, repurchased stock that is contributed to employee pension or similar plans, transactions where the total value of the stock repurchased in a single year is less than $1 million, repurchases where the purchaser is a dealer in securities, the repurchase is by a real estate investment trust or a regulated investment company, and repurchases that are taxed as These changes apply to repurchases that take place on or after the 31st of December in 2021.
  • Specific public businesses are not authorized to deduct excessive employee remuneration for certain employees, which means that there is a limitation placed on the deduction of excessive employee compensation. When considering compliance with this guideline, the BBBA mandates the aggregation of connected firms. This regulation makes it clear that performance-based compensation, post-termination compensation, commission, and compensation payments made by parties other than the corporation are all included in the scope of the remuneration that is covered by this rule. These modifications are applicable to tax years that start after the 31st of December in 2021.
  • Changes to the way worthless stocks and securities are handled in the tax stock — This provision makes it clear that losses relating to worthless securities are recognized on the date that the event proving the worthlessness of the securities takes place, and that losses relating to abandoned securities are recognized on the date that the securities are abandoned. For the purposes of determining how to handle a worthless security, partnership abandonments would likewise be recognized as capital losses, and partnership debt would be eligible to be treated in the same way as corporate debt if certain conditions were met. The regulation would also postpone the deduction on the liquidation or dissolution of a worthless corporation until all property received from the corporation was sold to a third party. This would be done in order to avoid double taxation. These alterations will take effect for tax years that begin after the 31st of December in 2021, with the exception of the liquidation/dissolution provision, which will take effect for transactions that take place after the legislative date.
  • Adjusted basis restriction for contentious reorganizations – A new regulation that requires the distributing corporation to recognize a gain in certain divisive reorganizations is developed. This is the case when the total amount of liabilities assumed by the controlled corporation, the amount of money and property transferred to the creditors, and the qualified property transferred to the creditors is greater than the basis in the assets that were transferred between the distributing corporation and the controlled corporation. These changes are applicable to reorganizations that apply place after the date of passage; however, some transactions that were subject to a legally binding agreement as of that date are exempt from their application.
  • REIT income tests are modified to exclude income received with respect to property that is primarily used as a prison or detention facility. • Income from detention facilities is excluded from qualified income. • The REIT income test is modified to exclude income received with respect to property that is primarily used as a prison or detention facility. These modifications are applicable to tax years that start after the 31st of December in 2021.

The BBBA includes laws pertaining to international taxes.

  • Modifications to business interest expense The BBBA imposes a new limitation on the deduction of interest that can be deducted by U.S. corporations that are members of international financial reporting groups. This limitation comes into effect when the allocable portion of the group’s worldwide interest expense that is attributable to the U.S. corporation is greater than 110 percent of the U.S. corporation’s reported interest expense. The proportion of the U.S. company’s EBITDA in comparison to that of the global group will be used to calculate the U.S. company’s share of the overall profit. These modifications are applicable to tax years that start after the 31st of December in 2022.
  • Changes to the Base Erosion Anti-Abuse Tax (BEAT) — Specifically, The initial rate of the BEAT tax would be set at ten percent in 2022, and it would gradually climb to eighteen percent in 2025. The amount of modified taxable income would be computed without taking into account base erosion tax benefits, without adjusting the basis of inventory property due to base erosion payments, by determining net operating losses without taking into consideration any deduction that is a base erosion tax benefit, and according to other adjustments that are governed by rules that are comparable to the rules that apply to the alternative minimum tax. Base erosion payments would be changed so that they include amounts paid to a foreign related party that are required to be capitalized in inventory under Section 263A, as well as amounts paid to a foreign related party for inventory that exceed the costs of the property to the foreign related party. This would be done as part of a proposed amendment to the Internal Revenue Code. If a safe harbor were available, base erosion payments that were due to the indirect expenses of foreign related parties would be deemed to be equal to 20 percent of the amount that was paid to the related party. The provision would make an exemption available for payments that are subject to U.S. tax, as well as payments to foreign parties, provided that the taxpayer can demonstrate that the amount in question was subject to an effective rate of foreign tax that was not lower than the rate that is applicable for the BEAT. Additionally, the provision would limit the exemption to the BEAT for taxpayers who have a low base erosion percentage to taxable years beginning before to January 1, 2024. Additionally, the provision would establish that a taxpayer would continue to be subject to BEAT for the subsequent ten years after it became subject to BEAT, even if the taxpayer dropped below the standards that would normally subject it to BEAT. These modifications are applicable to tax years that start after the 31st of December in 2021.
  • A reduction in the deduction for income from intangible assets produced from overseas sources (known as FDII) and global intangible low-taxed income (GILTI) — The reduction applies to the deductions that can be taken for FDII and GILTI under Section 250. Both the deduction for FDII and the deduction for GILTI have been lowered, now standing at 24.8 percent and 28.5 percent respectively. As a consequence, this yields a GILTI rate of 15 percent and an FDII rate of 15.8 percent. These modifications are applicable to tax years that start after the 31st of December in 2022.
  • Changes to the GILTI inclusion and the related foreign tax credit (FTC) — The GILTI inclusion will be required to be calculated on a country-by-country basis, the qualified business asset investment percentage will be reduced from 10 to 5 percent, and the FTC haircut will be reduced from 20 to 5 percent. These modifications are applicable to tax years that start after the 31st of December in 2022.
  • Changes to the FTC: The FTC calculation will be changed so that it does not take into account any amount paid by a dual capacity taxpayer to a foreign country, to the extent that it exceeds the income tax of that country, for taxes paid or accrued after December 31, 2021. This change will take effect for taxes paid or accrued after that date. The FTC computation will also be calculated on a country-by-country basis. Additionally, carrybacks of excess FTC would be removed, but carryforwards would be permitted for up to five years. These alterations are applicable to taxable years beginning after the 31st of December in 2022; however, beginning in the year 2030, FTCs will be permitted to be carried forward for a period of 10 years.
  • Elimination of the option for specified foreign corporations to choose a tax year that begins one month earlier than the tax year of the U.S. shareholder who owns the majority of the company’s shares The current law allows certain specified foreign corporations to choose a tax year that begins one month earlier than the tax year of the U.S. shareholder who owns the majority of the company’s shares. This option will be eliminated. This election will be voided by the BBBA. This modification is applicable to tax years that start after November 30, 2022.

The definition of “foreign oil-related income” for the purposes of Section 970 has been enlarged to include oil shale or tar sands, in addition to oil and gas wells. This change was made so that the definition of “foreign oil-related income” would be more inclusive. These modifications are applicable to tax years that start after the 31st of December in 2021.

  • Increasing deduction for foreign source portion of dividends — The 100 percent participation exemption for foreign portions of dividends received from certain foreign corporations that are owned by foreign investors in proportions of 10 percent or more will now only apply to foreign portions of dividends received from foreign corporations that are controlled by the investor. These changes are applicable to taxable years that apply after the date of passage, as well as distributions made after that date.
  • Limitation on Foreign Base Company Sales and Services Income – For the purposes of determining income under Subpart F, the Foreign Base Company Sales and Services Income is restricted to U.S. residents and pass-throughs that have a branch situated in the United States. These modifications are applicable to tax years that start after the 31st of December in 2021.
  • Expansion of exceptional dividends — The category of extraordinary dividends has been broadened to cover any disqualifying CFC payout, regardless of how long the taxpayer owned the relevant stock. This change came about as a result of recent tax reform. On the other hand, for the purposes of exceptional dividends, domestic partnerships and trusts will not be counted as U.S. shareholders and will not be eligible for those payouts. After the date of passage, these modifications are applicable to distributions that have been made.
  • The treatment of gain derived from a domestic international sales corporation (DISC) or a foreign sales corporation (FSC) sale, exchange, or distribution of distributions — The gain that is realized from the sale or exchange of DISC or FSC stock to certain foreign shareholders, or the distribution by a DISC or FSC to certain foreign shareholders, is regarded as income that is effectively connected to a U.S. trade or business. Because of this, the gain is required to be subject to taxation in the United States. These modifications are applicable to distributions made on or after the 31st of December in 2021.
  • Tax on nonresident alien individuals — The portfolio interest exception for tax on nonresident alien individuals will be narrowed to exclude any person who owns 10 percent or more of the total vote or value of the stock of the corporation at issue, beginning after the date of the act’s enactment. This change will take effect immediately. For payments issued on or after December 31, 2022, the definition of a dividend equivalent payment, which is taxed in the same manner as a dividend sourced in the United States, will be expanded to include certain principle contracts and comparable payments from certain partnerships.
  • Adjustments to earnings and profits (E&P) of controlled foreign companies (CFC) — The rule for determining E&P of a CFC has been updated so that certain adjustments will no longer be taken into consideration. These changes are applicable to CFCs with tax years that apply after the beginning of December in 2021.

Elements of the BBBA that are related to energy

  • Energy production credits modifications and extensions — The BBBA creates or modifies several clean energy production credits, such as a credit for electricity produced from certain renewable resources, zero-emission nuclear power, clean electricity production and investment, solar and wind production facilities in low-income communities, clean hydrogen production, advanced manufacturing production, and clean fuel production. The dates on which these changes will take effect are variable.
  • Other modifications and extensions to energy credits — The BBBA raises the investment tax credit for the cost of energy property and extends the credit for properties for which construction begins before January 1, 2027. Additionally, the BBBA extends and/or expands credits for the use of biodiesel, renewable diesel, and alternative fuels in certain production activities, as well as credits for the costs of qualified fuel cell motor vehicles, costs of alternative fuel vehicle refueling property, and costs of qualified advance investment credits for energy properties Additionally, the BBBA establishes new investment credits for electric transmission property, qualifying commercial electric cars, labor costs incurred from the installation of mechanical insulation property, and investments made in certain innovative manufacturing plants. The dates on which these changes will take effect are variable.
  • Credit for Qualified Environmental Justice Programs – Educational institutions of higher learning are eligible to receive a credit that is refundable and competitive for up to twenty percent of the expenditures that are associated with an environmental justice program. From 2022 to 2031, an annual maximum of one billion credits in combined credit availability would be available.
  • Deduction for energy-efficient commercial buildings Under Section 179D of the Internal Revenue Code, the maximum deduction that may be taken for energy-efficient commercial buildings is increased according to a sliding scale that is depending on the amount of efficiency attained. This modification is applicable to tax years that start after the 31st of December in 2021. If the reduction in energy use intensity is lowered by a significant amount, then a parrel deduction will also be established for particular retrofit building property. This change applies to any property that is put into operation on or after the 31st of December, 2021. After the 31st of December in 2031, each provision would become null and void.
  • Cost recovery for qualified property and facilities — Any facility described in the clean electricity production credit would be allowed to be treated as a five-year property for the purposes of the accelerated cost recovery system of depreciation. This would be a benefit for taxpayers because it would speed up the depreciation process. These alterations are applicable to any property developed after the 31st of December, 2026.

The Hazardous Superfund Financing Rate tax is reinstated at 16.4 cents per gallon on crude oil and imported petroleum products, and the tax on taxable chemicals is also reinstated. Both of these measures are included in the reinstatement of the superfund tax. These changes will take effect on the first of July in 2022.

Provisions of the BBBA pertaining to tax reporting and enforcement

  • Increased funding for IRS enforcement activities This provision of the BBBA would appropriate approximately $80 billion through 2031 for IRS taxpayer services, enforcement, operations support, and business systems modernization.
  • Increased 1099 reporting — Payments made in settlement of third-party network transactions with a total value of more than $600 in a single calendar year would be added to the list of reportable payments, and the third-party settlement organization would be required to file a return with respect to the payments made. This change would take effect as of the beginning of the 2018 tax year. These modifications are applicable to calendar years that start after the 31st of December in the year 2021.
  • Modification of restrictions on the imposition of penalties—The rule requiring that an assessment of penalties must have IRS supervisor approval before it is first presented to the taxpayer has been eliminated, and this change will take effect retroactively to the year 1998, which is the year that this provision was initially enacted. However, each IRS supervisor would be required to certify, on a quarterly basis, whether administrative policies designed to ensure voluntary compliance have been met with regard to notices of penalty issued by IRS employees. This certification would be part of the reporting requirements that would be placed on the supervisor. The requirement to report violations on a quarterly basis applies to any notifications of penalty that have been issued after the legislative date.

Leave a Reply