On May 28, 2021, the Treasury Department released the Biden Administration's Fiscal Year 2022 Revenue Proposals (the Greenbook). In short, the proposals in the Greenbook would, if enacted:
- Raise tax rates on domestic corporations from 21% to 28% and impose a 15% minimum tax on corporations that have worldwide book income in excess of $2 billion;
- Significantly reform the international tax regime;
- Raise the individual ordinary income tax rate from 37% to 39.6% and tax long-term capital gains and qualified dividends as ordinary income for individuals with adjusted gross income of more than $1 million;
- Eliminate or severely curtail other significant tax benefits, such as like-kind exchanges and gain nonrecognition at death;
- Incentivize investments in clean energy; and
- Expand tax reporting and compliance.
This memorandum summarizes the tax proposals that are of most interest to U.S. corporate taxpayers, financial institutions, insurance companies, hedge funds, private equity funds, and high-income individuals.
II. Corporate Tax Measures
- Raise the corporate income tax rate. The current federal corporate tax rate is 21%. Before the Tax Cuts and Jobs Act of 2017 (the TCJA), the highest marginal tax rate that applied to corporations was 35%. The Greenbook proposes to raise the corporate tax rate to 28%. The proposal would be effective for tax years beginning after 2021. For non-calendar-year corporations, the 2021-2022 tax rate would be 21% plus 7% times the portion of the tax year that occurs in 2022.
- Impose 15% minimum tax on book earnings. The Greenbook would impose a 15% minimum tax on the worldwide book income of domestic corporations that have worldwide book income in excess of $2 billion. The proposal would be effective for tax years beginning after 2021.
- Expand the anti-inversion rules. The anti-inversion rules of section 7874 are intended to eliminate the incentive for domestic corporations to expatriate to lower-tax jurisdictions. The Greenbook proposes to expand the circumstances under which section 7874 applies, and would treat any expatriated corporation as a domestic corporation for all U.S. tax purposes if, immediately after the expatriation, the pre-transaction shareholders own at least 50% of the expatriated entity. By contrast, current law applies an 80% ownership test for treating an expatriated corporation as a domestic corporation, and subjects expatriated corporations to U.S. tax on only certain transactions if a 60% ownership test is satisfied.
- Increase the GILTI tax. Under the TCJA, U.S. corporations generally are taxed annually at a 10.5% rate (increasing to 13.125% in 2026) on the excess of certain "global intangible low-tax income" earned by their controlled foreign corporations (CFCs) over a 10% imputed return on depreciable tangible property held by the CFCs. The Greenbook proposes to eliminate the 10% imputed return for tax years beginning after 2021, increasing the amount of a CFC's income that is subject to current GILTI taxation in the hands of its U.S. parent corporation. The Greenbook also would increase the GILTI tax rate to 21%, and would apply a separate foreign tax credit limitation to each foreign jurisdiction instead of allowing a U.S. parent corporation to use an averaging approach (which generally allows foreign taxes paid to high-tax jurisdictions to reduce the residual U.S. tax paid on income earned in low-tax jurisdictions). These changes would be reconciled with any multilateral agreement reached under "Pillar Two" of the OECD/G20 Inclusive Framework on BEPS, which calls for a global minimum tax.
- Repeal the high tax exemption to GILTI and subpart F income. Under the GILTI and subpart F regimes (both of which tax U.S. parent corporations annually on certain of their CFCs' income), U.S. corporations are not taxed on any income earned by a CFC if the CFC's foreign effective tax rate exceeds 90% of the U.S. corporate income tax rate. The Greenbook proposes to eliminate this high tax exemption for tax years beginning after 2021.
- Repeal the FDII deduction. The TCJA grants U.S. corporations a 37.5% deduction (decreasing to 21.875% in 2026) for certain "intangible income" that they derive from exports. The Greenbook proposes to repeal the deduction effective for tax years beginning after 2021.
- Replace BEAT with SHIELD. Under the TCJA's "base erosion and anti-abuse tax," corporations with average gross receipts exceeding $500 million are subject to a minimum tax add-on generally equal to 10% (increasing to 12.5% in 2026) multiplied by the excess by which their "BEAT liability" (calculated by adding back certain deductible payments made to foreign affiliates) exceeds their regular tax liability. The Greenbook proposes to replace BEAT with a "stopping harmful inversions and ending low-tax developments" rule. The SHIELD rule would deny certain deductions to U.S. corporate members and branches of financial reporting groups with more than $500 million in global annual revenues (determined based on their consolidated financial statements) for payments made to financial reporting group members whose income is subject to an effective tax rate that is below a designated minimum tax rate. The designated minimum tax rate would be 21%, unless and until a different rate is required by "Pillar Two" of the OECD/G20 Inclusive Framework on BEPS. The proposal would be effective for tax years beginning after 2022.
- Limit deductions for disproportionate U.S. borrowing. Under section 163(j) (enacted by the TCJA), U.S. corporations generally are allowed a deduction for business interest expense only to the extent that it exceeds their business interest income plus 30% of EBITDA (or EBIT, beginning after 2021). The Greenbook would further limit interest deductions of certain U.S. members of multinational groups that prepare consolidated financial statements if their net interest expense for financial reporting purposes exceeds their proportionate share of the net interest expense reported on the group's consolidated financial statements. The amount of interest expense denied for U.S. tax purposes would be proportionate to the excess interest expense for financial reporting purposes. The proposal would be effective for tax years beginning after 2021.
III. Individual Tax Measures
- Increase the individual tax rate. Under the TCJA, the highest marginal federal income tax rate applicable to individuals is 37%, increasing to 39.6% after 2025. The Greenbook would increase the rate to 39.6% for tax years beginning after 2021. In 2022, the rate generally would apply to taxable income over $509,300 for married individuals filing a joint return and $452,700 for unmarried individuals.
- Tax long-term capital gains and qualified dividends at ordinary rates for high earners. Currently, individuals are subject to a 20% maximum rate on long-term capital gains and qualified dividends. The Greenbook proposes to subject long-term capital gains and qualified dividends to ordinary income tax rates for individuals with adjusted gross income of more than $1 million. The proposal would apply to items recognized after April 28, 2021.
- Force income recognition to donors, decedents, and non-corporate entities. Currently, gifts and transfers at death are not taxable events, even though heirs generally take a "stepped-up" basis on property they receive from a decedent. The Greenbook proposes to generally require donors and decedents to recognize capital gains on transfers to donees or heirs. Certain exclusions would apply, including a $1 million per-person lifetime exclusion (indexed for inflation). Beginning in 2030, the proposal also would require non-corporate entities to recognize unrealized appreciation in any assets that have not been subject to a taxable event in the previous 90 years. The proposal generally would be effective after 2021.
- Expand the 3.8% Medicare tax. Currently, limited partners who materially participate in a partnership's business are not subject to the self-employment tax, and S corporation members who materially participate in an S corporation's business are subject to self-employment tax only on "reasonable compensation" that they receive in their employee capacity. These individuals also are exempt from "net investment income tax," which currently applies only to certain passive income and gains. The Greenbook proposes to subject all trade or business income of individuals earning over $400,000 to either self-employment tax or net investment income tax for tax years beginning after 2021.
- Tax carried interests at ordinary rates. The Greenbook proposes to tax investment professionals at ordinary rates on income from, and gains from the disposition of, their carried interests if their taxable income from all sources exceeds $400,000. Investment professionals whose taxable income is below $400,000 would continue to be subject to Section 1061 (enacted by the TCJA), which imposes a three-year holding period as a precondition to recognizing long-term capital gains on carried interests issued to investment professionals, and otherwise treats the capital gains as short-term capital gains. If the Greenbook's separate proposal to tax long-term capital gains at ordinary rates for individuals with income in excess of $1 million is enacted, then the carried interest proposal is likely to materially affect only carried interest holders with taxable income between $400,000 and $1 million. The proposal would be effective for tax years beginning after 2021.
- Limit gain deferral on like-kind exchanges. Under section 1031, owners of appreciated real property used in a trade or business or held for investment can defer gain on the exchange of the property for real property of a "like kind." The Greenbook would limit a taxpayer's ability to defer gain recognition in excess of $500,000 on any putative section 1031 exchange.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.