26 March 2024

'Same Old, Same Old' Revenue Raisers With A Few Twists

The Biden Administration's fiscal year 2025 budget submitted to Congress on March 11, 2024, is nearly the spitting image of last year's budget, with a few new twists...
United States Tax
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The Biden Administration's fiscal year 2025 budget submitted to Congress on March 11, 2024, is nearly the spitting image of last year's budget, with a few new twists, to eradicate numerous tax benefits usurped by large profitable corporations and wealthy individuals. With the proposed tax law changes, coupled with significant increases in IRS funding, the Administration estimates an additional $5 trillion in revenue over 10 years. However, with a divided government and impending election, Congress is unlikely to consider these proposals anytime soon. Nevertheless, the Biden Administration's vision and tactics set the stage for the upcoming election debate on tax policy, and beyond, as Congress will have to address the TCJA provisions set to expire at the end of 2025. Thus, we thought it important to recap several elements (recurring and new) of the Biden Administration's revenue-producing plans as detailed in Treasury's "General Explanations of the Administration's Fiscal Year 2025 Revenue Proposals" (the "Green Book") and share some perspectives.

Because the revenue raisers in the Green Book include many items from prior years, our previous alerts may also be helpful, such as those discussing the Biden Administration's fiscal year 2022 budget, 2023 budget, and 2024 budget, as well as the Build Back Better Act (BBBA) as passed by the House of Representatives.

In this alert, we highlight selected proposals in the following categories:

Corporate Taxation

  • Raise tax rates for corporations by:
    • Increasing the income tax rate from 21% to 28%; and
    • Increasing the corporate alternative minimum tax (CAMT) from 15% to 21% (NEW).
  • Modify the excise tax on share repurchases by:
    • Increasing the tax rate from 1% to 4%; and
    • Applying the tax to the purchase of stock of a public foreign parent corporation by certain affiliates that are controlled foreign corporations (CFCs) (NEW).
  • Modify the tax treatment for certain transactions that avoid dividend treatment or otherwise would qualify for tax benefits (e.g., spinoffs and certain liquidations).
  • Expand the limit on deductions for excess employee remuneration (generally compensation and certain benefits) to all publicly and privately held C corporations and to all compensation paid in excess of $1 million to any employee (NEW).

A&M Insight: The most important takeaway is how easy it is to propose increases in tax rates (as opposed to imposing a "new" tax), although, it is unlikely that any of these proposals will be passed in the near term. Of all the corporate tax proposals, it appears that the Republicans, if not in control, may be willing to support the changes to the excise tax on share repurchases as a negotiating tool to garner support for their priorities.

The two new twists, if ever adopted, could play further havoc on corporations. Expanding the scope of the excise tax to include purchases of a foreign corporation's stock by CFCs would require non-U.S. public corporations to closely monitor their dealings in their stock, including purchases by foreign members of their affiliated groups. Additionally, expanding the limitations on deductibility for renumeration paid to any employee that exceeds $1 million will increase payroll costs, thereby decreasing profit, as it is rare that corporations pay higher renumeration to obtain a deduction.

International Taxation

  • Better align the U.S. international tax regime with the global minimum tax under OECD Pillar 2 rules by:
    • Modifying the global intangible low-taxed income (GILTI) regime, by, for example, computing the tax on a jurisdiction-by-jurisdiction basis and reducing the section 250 deduction to 25% (generally increasing the effective tax rate from 10.5% to 21%);
    • Adopting the undertaxed profits rule (UTPR) that would primarily apply to foreign-parented multinationals; and
    • Implementing a domestic minimum top-up tax that would apply when other jurisdictions adopt the UTPR.
  • Repeal the section 250 deduction for foreign-derived intangible income (FDII) with an offset for "additional support" (undefined) for research and development expenditures.
  • Adopt other reforms to ensure foreign income is appropriately taxed and reduce incentives that encourage profit shifting and offshoring by:
    • Modifying pro rata share rules for allocating subpart F income and GILTI to U.S. shareholders;
    • Requiring a CFC's taxable year to match its majority U.S. shareholder's (NEW);
    • Limiting foreign tax credits from sales of hybrid entities;
    • Expanding the scope of the anti-inversion rules;
    • Limiting net interest expense deductions for highly leveraged U.S. members of multinational groups; and
    • Expanding the definition of 10-percent shareholder for portfolio interest purposes (NEW).

A&M Insight: Like last year's budget, the proposals to better align the U.S. international tax regime with Pillar 2 would generate substantial revenue. While a migration toward Pillar 2 might seem inevitable, with many jurisdictions' regimes effective this year, Republican Ways and Means Committee members (and certain Democrats) remain staunchly opposed to such rules. Additionally, it is noteworthy that this year's budget does not include the proposal from last year to modify how to determine a CFC's earnings and profits. However, it appears that proposal was replaced with a provision that would no longer allow CFCs to use a different taxable year from its majority U.S. shareholder, which would eliminate the ability to defer income inclusions currently available through an election.

Individual, Trust, and Estate Taxation

  • For taxpayers with income over $400,000:
    • Increase the marginal tax rate to 39.6%;
    • Increase the net investment income tax rate and additional Medicare tax rate to 5%;
    • Ensure that all passthrough business income is subject to either the net investment income tax or the self-employment tax;
    • Tax partners' carried interest as ordinary income; and
    • Impose special distribution rules for taxpayers with large retirement account balances.
  • Tax long-term capital gains and qualified dividends at ordinary rates for taxpayers' income over $1 million.
  • For taxpayers worth more than $100 million, impose a 25% minimum income tax on total income, generally including unrealized capital gains.
  • Tax the capital gain on a donor's or decedent's transfer of appreciated property at the time of transfer, subject to several exclusions and deferral elections.
  • Minimize estate tax planning opportunities by modifying rules regarding grantor retained annuity trusts and the generation skipping transfer tax.

A&M Insight: With several TCJA individual tax provisions expiring at the end of 2025, the longstanding debate on taxing unrealized income will likely resurface but possibly with the added benefit, one way or the other, of having the U.S. Supreme Court's decision in Moore v. United States (No. 22-800). The case involves a constitutional challenge to the TCJA transition tax, but all eyes will be on potential effects, if any, of the Court's opinion beyond its much-anticipated narrow ruling.

Other Targeted Provisions

  • Limit the annual deferral of gain on like-kind exchanges of real property.
  • Require 100% recapture of the cumulative depreciation deductions as ordinary income on certain depreciable real property.
  • Prevent basis shifting by related parties through partnerships.
  • Apply certain tax rules regarding securities (e.g., wash sale rules) to digital assets and expand reporting requirements, while allowing dealers and traders to elect mark-to-market treatment for certain actively traded digital assets.
  • Modify depreciation rules for purchases of general aviation passenger aircraft and increase excise taxes on kerosene used for private jet travel, including corporate jets (NEW).
  • Limit tax benefits for private placement life insurance and similar contracts (NEW).
  • Limit the deduction for the transfer of property for the performance of services to the amount the service provider includes in income, and deem the amount reported on an annual information return to be the income included for this purpose (NEW).

Tax Administration and Compliance

  • Extend the statute of limitations for assessment to five years for:
    • Erroneous employee retention tax credits and paid leave tax credits; and
    • Improper wage deductions if the taxpayer claimed these credits (NEW).
  • Impose penalties for inaccurate or fraudulent employment tax returns (NEW).
  • Amend the centralized partnership audit regime to allow a partnership to resolve audits earlier by pushing out adjustments sooner in the process (NEW).
  • Expand IRS authority to suspend the statute of limitations via the issuance of a designated summons to partnerships (subject to judicial enforcement) for the IRS's large partnership compliance program (NEW).

In addition, the budget includes new mandatory funding for the IRS of $104 billion to supplement annual appropriations for 2026 through 2034, which is estimated to yield $341 billion in additional revenue with half of the funding slated for enforcement initiatives.

A&M Tax Says

Like the current Administration's budget proposals, the impending tax reform debate will likely contain familiar tunes with perhaps some more dramatic proposals. All eyes remain on the 2024 election for possible signs of what the future may bring when Congress tackles the deficit and the expiring TCJA provisions.

Originally published 20 March 2024

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.

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