On November 5, the House passed the Infrastructure Investment and Jobs Act (the Infrastructure Act), and President Biden is expected to sign it into law soon. The Senate previously passed the Infrastructure Act. Negotiations over the Build Back Better Act (BBBA) continue in the House, but new details about expected tax changes have emerged. Here are our initial reactions to what these developments mean and what’s expected to come next.
The Infrastructure Act: What happened and what’s included?
The Infrastructure Act had been awaiting a vote in the House since it was passed by the Senate on August 10. That vote was delayed in conjunction with negotiations over the BBBA. However, that vote finally occurred on November 5 as the House passed the Infrastructure Act on a bipartisan basis. President Biden will complete this legislation by signing it into law.
The Infrastructure Act provides funding for many forms of national infrastructure projects, such as roads, bridges, passenger and freight rail, broadband internet, water infrastructure, public transportation, and other similar programs. The bill includes only four tax changes: (1) the termination of the employee retention credit (ERC) is accelerated from Dec. 31, 2021, to Sept. 30, 2021 for most employers; (2) Form 1099-B-style tax information reporting is extended to include cryptocurrency; (3) the rules extending disaster-related tax deadlines are expanded; and (4) capital contributions to public utilities from the government for certain infrastructure projects can be received tax-free.
Of those tax changes, the early termination of the ERC will have the most immediate impact on businesses. Further detail of the tax provisions of the Infrastructure Act are included in the comprehensive summary below.
What’s the current status of the BBBA?
On November 5, the House passed a procedural rule that will bring the BBBA to the floor for a vote in the coming weeks. The House Ways and Means Committee previously approved an initial draft of the tax provisions of the BBBA on September 15, after which progress slowed considerably due to continued negotiations among Democratic members of Congress and the White House. On October 28, a high-level framework deal was released alongside an updated draft of the full legislation, including significantly slimmed-down tax proposals. The House Rules Committee released another revised version of the BBBA on November 3, which continued to be revised until November 5. The most recent action taken in the House is an incremental step, but significant actions remain to be completed.
The version of the BBBA that emerged from the House Rules Committee on November 3 is substantially similar to the version of the bill released on October 28, shortly after the framework agreement was announced. For example, the bill doesn’t increase individual or corporate tax rates, doesn’t change the 20% qualified business income deduction (QBID), and doesn’t include any estate or gift tax changes. The bill also continues to include key provisions like the maximum 8% surcharge on high-income individuals, estates, and trusts, and includes many of the same changes to GILTI, FIDI, BEAT, and the foreign tax credit.
However, the most recent version of the BBBA does have some key differences from the version released on October 28. Those key differences include an increase of the state and local tax deduction cap (SALT cap) to $80,000 from the current limit of $10,000, a 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. See the comprehensive summary below for details of these and many of the other tax provisions of the BBBA.
What’s next?
Completion of the Infrastructure Act clears a significant item from the congressional docket. All attention now shifts to the negotiations within the House and between the House and Senate over the content of the BBBA. The next step will be for the House to formally vote on its version of the bill before sending it to the Senate for consideration. While the Senate has been involved in the negotiation as the BBBA is making its way through the House, some Democratic senators have still expressed concerns with the House version of the BBBA and further negotiations are likely to continue in the Senate. To the extent that spending provisions are changed, that will likely have an impact on the tax provisions since President Biden and many members of Congress want the bill to be revenue neutral. One specific provision — the raising of the SALT cap — has generated pushback from some Senators. Senators Sanders and Menendez have proposed a SALT cap, whereby taxpayers with income below $400,000 would get an unlimited SALT deduction while those above that income limit would retain the current $10,000 cap.
Additionally, Democratic senators intend to pass the BBBA through the budget reconciliation process. This process has very specific requirements whereby only items that have a direct impact on the government budget can be included. Certain provisions included in the current House version of the BBBA may not fully comply with those rules and would have to be altered or removed entirely.
To the extent that any changes are made to a Senate-passed version of the BBBA, the bill would go back to the House for further consideration. The House could either vote on the identical version passed by the Senate or the House and Senate could hold a conference to negotiate a new bill that bridges all the differences. Both chambers would then vote on the same conference bill. Given the varying goals that many members of Congress have expressed throughout this process, it’s likely that any changes will require significant negotiations, which could continue to progress slowly.
Surrounding the continued negotiations on the BBBA are the debt ceiling and government funding deadlines, which are set to expire on or around December 3. While these deadlines could motivate the passage of the BBBA long before this date to provide sufficient runway to address the other matters, the pace of negotiations to date would suggest this will be challenging. Therefore, it’s possible that these matters may have to be managed alongside continued negotiations on the BBBA, which could draw some attention away from the BBBA and slow the process further. Most Democrats in Congress agree that the BBBA must be passed by year-end, but the precise timeline and process to get there is still very uncertain.
Continue to monitor our Outlook on tax rates and policy changes for updates as the BBBA works its way through Congress.
Comprehensive summary of the tax changes in the Infrastructure Act and version of the BBBA released by the House Rules Committee on November 3
Many of the tax changes included in the Infrastructure Act passed by the House and Senate and the version of the BBBA currently under consideration in the House are summarized below.
Infrastructure Act
- Early termination of the employee retention credit (ERC) — The expiration of the ERC is accelerated from Dec. 31, 2021, to Sept. 30, 2021, for most employers. This credit has been available since early 2020 to support businesses impacted by the COVID-19 pandemic. It has been continually modified and extended and was set to expire on Dec. 31, 2021. The only businesses that will continue to qualify for the ERC for the fourth quarter of 2021 are recovery startup businesses. Opportunities continue to exist for businesses to retroactively claim the ERC for prior calendar quarters. Please see our ERC resource page for additional details about this program.
- Tax information reporting for cryptocurrency — Tax information reporting is expanded by extending the definition of a broker to include persons that are paid to regularly provide services effectuating transfers of digital assets on behalf of others. The primary focus on this provision is cryptocurrencies, but other assets in the emerging digital marketplace may also fall under the digital asset definition. Those subject to this reporting would be required to supply Form 1099-Bs to their customers and the Internal Revenue Service (IRS) providing details on the value of digital assets sold, the acquisition date and sale date, and the basis of each digital asset sold. These requirements would apply beginning in 2023 (with Form 1099-Bs issued in early 2024). Overall, this change is expected to provide much more detail to the IRS about digital asset transactions.
- Modifications to disaster-related tax deadlines — Existing rules provide the IRS the ability to extend the due date for tax returns and payments for taxpayers affected by federally declared disasters. However, the IRS is not required to provide extensions for each disaster. The Infrastructure Act provides automatic extensions of these deadlines for all federally declared disasters while permitting the IRS to provide further extensions. It also expands the definition of qualifying disasters to include significant fires for which assistance is provided pursuant to the Stafford Act.
- Tax-free capital contributions to public utilities — Regulated public utilities are now permitted to receive tax-free contributions from the government as part of the infrastructure investments funded by the Infrastructure Act. Applicable contributions include those made to public utilities with respect to drinking water and sewage disposal enhancements. Without these changes, these contributions would have been included in taxable income and the assets acquired or constructed with those grants would be depreciable.
Individual income tax changes in the BBBA
- Increase to the state and local tax (SALT) deduction cap — Currently, taxpayers may only deduct state and local taxes up to $10,000 and beginning in 2026, there would be no cap on the deduction. Under the BBBA, the cap is increased to $80,000 ($40,000 for married taxpayer filing separate) for tax years beginning in 2021 through 2030, lowered to $10,000 ($5,000 for married taxpayer filing separate) for tax years beginning in 2031, and the cap would be eliminated for tax years beginning after 2031.
- Tax surcharge on individuals, estates, and trusts — Individual taxpayers would be subject to a 5% surcharge on modified adjusted gross income (MAGI) exceeding $10 million and an additional 3% surcharge on MAGI exceeding $25 million. Married taxpayers filing separately are subject to the surcharge on MAGI exceeding $5 million and $12.5 million, respectively, and trusts would be subject to the surcharge for MAGI exceeding much lower thresholds of $200,000 and $500,000. These changes apply to tax years beginning after Dec. 31, 2021.
- Impact of new high-income surcharge to other tax rules — Several existing tax rules are dependent on the highest individual income tax rate. The surcharge discussed above would be coordinated with those provisions so that the full 8% surcharge would be included in measuring the highest rate, regardless of whether the taxpayer actually exceeds the applicable income thresholds. These changes would apply to tax years beginning after Dec. 31, 2021.
- Installment sales — Taxpayers are required to pay interest on the deferred tax when installment obligations exceed $5 million in any single tax year. This deferred tax is measured based on the highest applicable capital gain tax rate. That rate would now include the full 8% surcharge.
- 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 deferred tax amount is generally measured at the highest individual tax rate plus 1%. That rate would now also include the full 8% surcharge.
- Partnership audit rules — Beginning in 2018, many partnerships are subject to new rules whereby the partnership is assessed any tax resulting from an IRS examination or an amended return. That tax is measured at the highest individual tax rate, which now would also include the full 8% 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, including the new 8% surcharge, to the foreign partner’s share of effectively connected income.
- Expansion of net investment income tax (NIIT) — Business income is currently subject to the NIIT only if the owner is passive in the business. Under the BBBA, net investment income (NII) includes the business income of active owners if their MAGI exceeds $500,000 for joint filers, $250,000 for married filing separate filers, and $400,000 for all other taxpayers. The inclusion of active business income in NII would be phased in over the next $100,000 of MAGI above the threshold ($50,000 for married filing separate filers). Any business income subject to self-employment tax wouldn’t be subject to this rule. With respect to trusts and estates, active business income would always be included in NII. These changes apply to tax years beginning after Dec. 31, 2021.
- Refund claims extended for married same-sex couples — 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 obtain refunds to the extent that a joint return resulted in a lower tax liability. For couples married prior to 2010, no refund claims were permitted. The BBBA provides that refund claims for this issue can be filed for any tax year up until the due date of a taxpayer’s 2021 tax return. This covers marriages that occurred prior to 2010, as well as couples who simply didn’t file refund claims at the time the law originally changed. The due date for the 2021 tax return includes an extension, so applicable taxpayers may have until Oct. 15, 2022, to complete these filings.
- Excess business loss limitation made permanent — The $250,000 limit for excess business losses ($500,000 in the case of joint returns), which is scheduled to expire at the end of 2026, is made permanent. The BBBA would also change the carryforward of excess losses. Under existing law, any excess loss converts to a net operating loss in the next tax year and is available to offset nonbusiness income in that year. Under the BBBA, the carryforward remains subject to the excess business loss limitation in succeeding years. These changes apply to tax years beginning after Dec. 31, 2020.
- Section 1202 small business stock — Under current law, the sale of qualified small business stock under Section 1202 can be excluded from income up to 100%. Under the BBBA, this exclusion would be capped at 50% for taxpayers with adjusted gross income (AGI) exceeding $400,000 and for all trusts and estates. These changes apply to sales and exchanges occurring on or after Sept. 13, 2021, except for sales and exchanges occurring after that date but pursuant to a written binding contract in place on Sept. 13, 2021.
- Extension of the child tax credit (CTC) — The increased CTC, including monthly advance payments as enacted by the American Rescue Plan Act (ARPA), is extended through 2022. The full refundability of the CTC, as first enacted by the ARPA for the 2021 and 2022 tax years, is made permanent.
- Earned income tax credit (EITC) expansion — The EITC for taxpayers without qualifying children is made permanent. The calculation is modified to allow taxpayers to use their prior year income for the credit calculation for the 2022 tax year when the taxpayer’s prior year income exceeds current-year income.
- Energy credits — The BBBA creates, expands, or increases credits 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 changes generally apply to expenditures made after Dec. 31, 2021 or Dec. 31, 2022.
- Income exclusion for conservation subsidies — Water conservation and storm water and wastewater management subsidies provided to taxpayers by state or local governments, public utilities, or storm water management providers are excluded from gross income. These changes apply to amounts received after Dec. 31, 2018.
- Above-the-line deduction for union dues and uniforms — The BBBA an above-the-line deduction of up to $250 for employee union dues and a separate $250 deduction for uniforms or work clothing required as a condition of employment and not suitable for everyday wear. These deductions are effective for tax years beginning after Dec. 31, 2021, and the union due deduction expires for years ending after Dec. 31, 2024, while the uniform deduction expires for years ending after Dec. 31, 2025.
- Wash sales — The wash-sale rules are expanded to include commodities, currencies, and digital assets such as cryptocurrency. The test for determining whether a taxpayer acquired substantially identical assets is expanded to consider acquisitions by related parties. These changes apply to tax years beginning after Dec. 31, 2021.
- Section 1259 constructive sales — When a taxpayer takes specified offsetting positions to previously owned positions, the constructive sale rules treat the transaction as a sale of the previously owned position. The definition of an “appreciated financial position” that’s subject to the constructive sale rule is also expanded to include digital assets. These changes generally apply to contracts entered into after the date of enactment of the BBBA.
Retirement plans changes in the BBBA
- Limits on IRA and other retirement accounts of high-income taxpayers — New restrictions would be imposed on the IRAs and other retirement accounts of taxpayers with income exceeding $400,000 for single or married taxpayers filing separately, $450,000 for married taxpayers filing jointly, and $425,000 for heads of household. Such taxpayers would be prohibited from making any further contributions to a traditional IRA, Roth IRA, or certain defined contribution plans in a year if the total value of the accounts at the end of the prior tax year exceeded $10 million. Taxpayers would also be required to take a distribution from these retirement accounts equal to 50% of the amount that the taxpayer’s aggregate account balance that exceeds $10 million. If these accounts exceeded $20 million, an additional distribution would be required equal to the lesser of (1) 100% of the excess over $20 million or (2) the entire balance of any Roth accounts. These changes apply to tax years beginning after Dec. 31, 2028.
- Limits on “backdoor Roth conversions” — Nondeductible contributions to traditional IRAs or specified retirement plans would be prohibited from being converted to a Roth IRA. This prohibits “backdoor Roth conversions,” which were permitted for high-income taxpayers starting in 2010. This prohibition would be effective for distributions, transfers, and contributions made after Dec. 31, 2021.
- Prohibition on Roth conversions for high-income taxpayers — Conversions of a traditional IRA or other retirement account into a Roth account is prohibited for taxpayers with taxable income exceeding $400,000 for single or married taxpayers filing separately, $450,000 for married taxpayers filing jointly, and $425,000 for heads of household. This change would apply to distributions, transfers, and contributions made in taxable years beginning after Dec. 31, 2031.
- Extended statute of limitation of IRA noncompliance — The statute of limitation for IRA noncompliance for valuation-related misreporting and prohibited transactions is extended from three years to six years. These changes apply to tax years to which the current three-year limitation period ends after Dec. 31, 2021.
- Holding a DISC or FSC in an IRA — Several courts have ruled that an IRA or Roth IRA is permitted to hold stock in a DISC or FSC. The BBBA makes this a prohibited transaction if the DISC or FSC receives any commission or other payment from an entity owned at least 10% by the individual for whose benefit the IRA maintained. Constructive ownership rules would apply in making this determination. These changes apply to stock held or acquired on or after Dec. 31, 2021.
General business changes in the BBBA
- Controlled group definition expansion — Businesses under common control are required to make a variety of tax determinations as if they were a single entity. Under current law, the common control definition can only include entities that operate trades or businesses which often prevents operating companies held by a holding company from being included in a controlled group. The BBBA would require entities conducting investment activities or activities involving research and experimentation to be included in a controlled group determination. The consequence of this change would be a dramatic increase in the number of entities considered to be under common control. These changes apply to tax years beginning after Dec. 31, 2021.
- Business interest expense modifications — The BBBA shifts the business interest expense limitation under Section 163(j) from being applied at the partnership and S corporation level and applies it instead to the owners of the partnership or S corporation. These changes apply to tax years beginning after Dec. 31, 2022.
- Research and experimentation expenses — The BBBA delays the effective date for a previously enacted provision requiring taxpayers to capitalize and amortize research and experimental expenditures over five years for domestic research and 15 years for research performed outside the United States. The BBBA would change the effective date of this requirement from Jan. 1, 2022 to Jan. 1, 2026.
- Research credit claimed on payroll tax returns — Under current law, certain small taxpayers are permitted to claim up to $250,000 of research credits on their payroll tax return. This permits that portion of the credit to be monetized to the extent the company doesn’t currently have any income taxes to claim the credit against. The BBBA doubles this limitation to $500,000, for tax years beginning after Dec. 31, 2021.
- Possessions economic activity credit — A new economic activity credit is established equal to 20% 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., maximum $10,000 credit per employee). Small employers are eligible for a larger credit. These changes apply to tax years beginning after the date of enactment.
- Tax treatment of assistance to certain farm loan borrowers — Certain payments to farm loan borrowers, as set out in the ARPA, are excludable from the payee’s gross income and the expenses incurred with respect to the loan proceeds will still be deductible. These changes take effect upon the date of enactment.
- Limitation on credit for clinical testing expenses — The application of the clinical testing expenses credit is narrowed to apply only to expenses related to clinical testing of certain drugs, which is conducted before the drugs are approved for any use. These changes apply to tax years beginning after Dec. 31, 2021.
- Reinstatement and expansion of employer-provided fringe benefits for bicycle commuting — The income exclusion for bicycle commuting employee benefits is reinstated, and the maximum benefit is increased from $20/month to $81/month. These changes apply to tax years beginning after Dec. 31, 2021.
- Employer-provided childcare credit — The business credit for employer-provided childcare expenses is increased from 25 to 50% of qualifying expenses, and the limit on the maximum allowable credit is increased from $150,000 to $500,000. These changes apply to tax years beginning after Dec. 31, 2021, and beginning before Jan. 1, 2026.
- Deduction for sound recordings — Under current law, a deduction of up to $150,000 is permitted for the cost of any qualified film production, television production, or live theatrical production. Costs in excess of this amount can be subject to capitalization. The BBBA extends this treatment to qualified sound recordings produced and recorded in the United States. The provision is effective for productions commencing in taxable years ending after the date of enactment and expires on Dec. 31, 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. The provision applies to amounts paid, incurred, or received in taxable years beginning after the date of enactment.
- Tax credit for compensation of local news journalists —The BBBA creates a refundable employment tax credit for wages paid to local new journalists. The credit is equal to 50% of the first $12,500 per quarter for the first four quarters and 30% for each quarter thereafter. The credit applies to quarters beginning after the date of enactment and expires after Dec. 31, 2025.
- Excise tax on nicotine — A new excise tax is applied to nicotine used in certain tobacco products other than certain FDA-approved products. The tax is the greater of the dollar amount specified for small cigarettes or $50.33 per 1,810 mg of nicotine. The excise tax applies to articles removed in calendar quarters beginning more than 180 days after the date of enactment.
- Termination of employer credit for paid family and medical leave — The termination date of the employer credit for paid family and medical leave would be accelerated to expire for wages paid after Dec. 31, 2023.
Corporate income tax changes in the BBBA
- Alternative minimum tax on large corporations — A new tax of 15% will be imposed on the financial statement profits of corporations with an average annual financial statement income exceeding $1 billion over a three-year period ending in the applicable tax year. Corporations that are members of an international financial reporting group which have a foreign corporate parent will be subject to the tax if the adjusted financial statement income of the corporation and all foreign members of such group exceed $1 billion, and the corporation’s own adjusted financial statement income exceeds $100 million, over a three-year period. These changes apply to tax years beginning after Dec. 31, 2022.
- Excise tax on publicly traded corporate stock redemptions — A new 1% excise tax is applied to the fair market value of any stock that a publicly traded corporation repurchases. Certain transactions are excluded from this tax, including repurchases occurring as part of a tax-free reorganization, repurchased stock 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 taxed as a dividend. These changes apply to repurchases occurring after Dec. 31, 2021.
- Limitation on deduction of excessive employee compensation — Certain public corporations are not permitted to deduct excessive employee compensation for certain employees. The BBBA requires aggregation of related corporations for purposes of this rule. Compensation covered by this rule is clarified to include performance-based compensation, post-termination compensation, commission, and compensation payments made by parties other than the corporation. These changes apply to tax years beginning after Dec. 31, 2021.
- Modifications to treatment of worthless stock and securities — This provision clarifies that losses relating to worthless securities are realized on the date the event establishing worthlessness occurs and that losses on abandoned securities are realized on the date of abandonment. Partnership abandonments would also be treated as capital losses and partnership debt would also be eligible to be treated as corporate debt for purposes of determining the treatment of a worthless security. The rule would also defer the deduction on the liquidation or dissolution of a worthless corporation until all property received from the corporation was sold to a third party. These changes apply to tax years beginning after Dec. 31, 2021, except for the liquidation/dissolution provision, which applies to transactions occurring after the date of enactment.
- Adjusted basis limitation for divisive reorganizations — A new rule is created requiring recognition of gain by the distributing corporation in certain divisive reorganizations. This applies when the sum of the liabilities assumed by the controlled corporation, the amount of money and property transferred to the creditors, and the qualified property transferred to the creditors exceeds the basis in the assets transferred between the distributing and the controlled corporations. These changes apply to reorganizations occurring after the date of enactment but would except certain transactions subject to a binding agreement as of that date.
- Income from detention facilities excluded from qualified income under REIT income tests — The REIT income test is modified to exclude income received with respect to property, which is primarily used as a prison or detention facility. These changes apply to tax years beginning after Dec. 31, 2021.
International tax provisions in the BBBA
- Business interest expense modifications — The BBBA creates a new interest deduction limitation on U.S. corporations in international financial reporting groups when the U.S. corporation’s allocable portion of the group’s worldwide interest expense is greater than 110% of the U.S. corporation’s reported interest expense. The U.S. corporation’s share would be determined based on the proportion of its EBITDA compared to that of the worldwide group. These changes apply to tax years beginning after Dec. 31, 2022.
- Modifications to the Base Erosion Anti-Abuse Tax (BEAT) – The BEAT tax rate would be set at 10% in 2022 and is increased in phases up to 18% in 2025. Modified taxable income would be computed without regard to base erosion tax benefits, without adjusting the basis of inventory property due to base erosion payments, by determining net operating losses without regard to any deduction that is a base erosion tax benefit, and according to other adjustments under rules similar to the rules applicable to the alternative minimum tax. Base erosion payments would be amended to 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. A safe harbor would be available to deem base erosion payments attributable to indirect costs of foreign related parties as 20% of the amount paid to the related party. The provision would provide an exception for payments subject to U.S. tax, and for payments to foreign parties if the taxpayer establishes that such amount was subject to an effective rate of foreign tax not less than the applicable BEAT rate. The provision would also limit the exception to the BEAT for taxpayers with a low base erosion percentage to taxable years beginning before Jan. 1, 2024. The provision would further provide that a taxpayer remains subject to BEAT for the next 10 years after it becomes subject to BEAT, even if it otherwise drops below the requirements that would otherwise subject it to BEAT. These changes apply to tax years beginning after Dec. 31, 2021.
- Reduced deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) — The deductions allowed under Section 250 for FDII and GILTI is decreased. The deduction for FDII is reduced to 24.8% and the deduction for GILTI is reduced to 28.5%. This results in a 15% GILTI rate and a 15.8% FDII rate. These changes apply to tax years beginning after Dec. 31, 2022.
- Modifications to GILTI inclusion and 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 is reduced from 10 to 5%, and the FTC haircut is reduced from 20 to 5%. These changes apply to tax years beginning after Dec. 31, 2022.
- Modifications to FTC — The FTC calculation will be modified to not consider any amount paid by a dual capacity taxpayer to a foreign country, to the extent it exceeds that country’s income tax, for taxes paid or accrued after Dec. 31, 2021. The FTC calculation will also be calculated on a country-by-country basis, carrybacks of excess FTC would be eliminated, and carryforwards would be allowed up to five years. These changes apply to taxable years beginning after Dec. 31, 2022, but beginning in 2030, FTCs can be carried forward for 10 years.
- Repeal of one-month deferral election for tax year of specified foreign corporations — Under current law, certain specified foreign corporations may elect a tax year beginning one month earlier than the majority U.S. shareholder’s tax year. The BBBA repeals this election. This change applies to tax years beginning after Nov. 30, 2022.
- Expansion of foreign oil-related income — The definition of foreign oil-related income for purposes of Section 970 is expanded beyond oil and gas wells to include oil shale or tar sands. These changes apply to tax years beginning after Dec. 31, 2021.
- Expanding deduction for foreign source portion of dividends — The 100% participation exemption for foreign portions of dividends received from specified 10% owned foreign corporations, is limited to only apply to foreign portions of dividends received from controlled foreign corporations. These changes apply to taxable years beginning after, and distributions made after, the date of enactment.
- Limitation on Foreign Base Company Sales and Services Income — The Foreign Base Company Sales and Services Income for purposes of determining Subpart F income is limited to U.S. residents and pass-throughs with a branch located in the United States. These changes apply to tax years beginning after Dec. 31, 2021.
- Expansion of extraordinary dividends — The category of extraordinary dividends is expanded to include any disqualified CFC dividend, regardless of the period of time the taxpayer held the related stock. However, domestic partnerships and trusts will be excluded from being treated as U.S. shareholders for purposes of extraordinary dividends. These changes apply to distributions made after the date of enactment.
- Treatment of gain from the sale, exchange, or distributions by a domestic international sales corporation (DISC) or foreign sales corporation (FSC) — The gain from a sale or exchange of DISC or FSC stock to certain foreign shareholders, or the distribution by a DISC or FSC to certain foreign shareholders, are treated as income effectively connected to a U.S. trade or business, which requires the gain to be taxable in the United States. These changes apply to distributions made on or after Dec. 31, 2021.
- Tax on nonresident alien individuals — The portfolio interest exception for tax on nonresident alien individuals is narrowed to exclude any person who owns 10% or more of the total vote or value of the stock of the corporation at issue, beginning after the date of enactment. The definition of a dividend equivalent payment, which is taxed like a U.S.-sourced dividend, is expanded for payments made on or after Dec. 31, 2022, to include certain principal contracts and similar payments from specified partnerships.
- Modification of passive foreign investment company (PFIC) rules for guaranty insurance companies — The test for determining whether a company qualifies as a PFIC is modified to allow financial guaranty insurance companies to include unearned premium reserves in its applicable insurance liability for purposes of the test. The BBBA also clarifies certain financial reporting requirements and expands regulatory authority to impose additional tax reporting requirements. The changes to financial and tax reporting take effect on the date of enactment, and all other changes apply to taxable years beginning after Dec. 31, 2017.
- Adjustments to earnings and profits (E&P) of controlled foreign corporations (CFC) — The rule for determining E&P of a CFC is modified to not take certain adjustments into account. These changes apply to the tax years of CFCs beginning after Dec. 31, 2021.
Energy-related provisions of the BBBA
- Energy production credits modifications and extensions — The BBBA creates or modifies several clean energy production credits, including 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. These changes have varying effective dates.
- Other energy credits modifications and extensions — The BBBA increases the investment tax credit for the cost of energy property and extends the credit for property for which construction begins before Jan. 1, 2027, extends and/or expands credits for use of biodiesel, renewable diesel, and alternative fuels used in certain production activities, costs of qualified fuel cell motor vehicles, costs of alternative fuel vehicle refueling property, costs of qualified advanced energy property, and clean energy investment. The BBBA also creates new credits for electric transmission property, qualified commercial electric vehicles, labor costs from installing mechanical insulation property, and investment in certain advanced manufacturing facilities. These changes have varying effective dates.
- Elective payment for renewable energy property and electricity — Taxpayers making elections with respect to certain renewable energy credits would be allowed to treat the credit as a payment against tax imposed in the same taxable year in which the credit was determined. These changes apply to tax years beginning after Dec. 31, 2021.
- Qualified environmental justice program credit — Higher education institutions are entitled to a competitive refundable credit for 20% of the costs associated with an environmental justice program. Credits would be permitted up to $1 billion in aggregate each year from 2022 through 2031.
- Energy-efficient commercial buildings deduction — The maximum deduction for energy-efficient commercial buildings under Section 179D is increased on a sliding scale-based level of efficiency achieved. This change applies to tax years beginning after Dec. 31, 2021. A parrel deduction would also be created for certain retrofit building property if the reduction in energy usage intensity is decreased by a sufficient amount. This change applies to property placed in service after Dec. 31, 2021. All provisions would expire after Dec. 31, 2031.
- Cost recovery for qualified property and facilities — Any facility described in the clean electricity production credit would be permitted to be treated as five-year property for purposes of the accelerated cost recovery system of depreciation. These changes apply to property produced after Dec. 31, 2026.
- Reinstatement of superfund tax — The Hazardous Superfund Financing Rate tax is reinstated at 16.4 cents per gallon on crude oil and imported petroleum products and reinstates the tax on taxable chemicals. These changes take effect on July 1, 2022.
- Extension of Black Lung Disability Trust Fund Tax — The tax on coal mined in the United States that funds the Black Lung Disability Trust Fund is extended through Dec. 31, 2025.
- Refunds for taxes paid on removal of taxable fuel — Taxpayers who remove taxable fuel from a terminal may claim a refund for the tax paid if it results in a double tax on the fuel, unless the fuel is dyed. The BBBA creates a new refund system for taxpayers to claim a refund for a second tax paid on eligible dyed fuels. These changes apply to fuel products removed on or after the date that is 180 days after the date of enactment.
Tax reporting and enforcement provisions of the BBBA
- Increased IRS funding for enforcement activities — 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 exceeding $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. These changes apply to calendar years beginning after Dec. 31, 2021.
- Modification of restrictions on assessing penalties — The rule requiring that an assessment of penalties must have IRS supervisor approval before it’s first presented to the taxpayer is eliminated retroactively to when this provision was first enacted in 1998. However, quarterly reporting would be required of each IRS supervisor to certify whether administrative policies intended to ensure voluntary compliance have been met with respect to notices of penalty issued by IRS employees. The quarterly reporting applies to notices of penalty issued after the date of enactment.
