Nicholas L. Shires, CPA, Dannible & McKee LLP
At the writing of this article, the Build Back Better Act (BBBA) was passed by the House of Representatives and sent to the Senate for deliberation. This bill, if passed by Senate, could drastically change the mindset of your tax planning in 2022 and beyond. It contains numerous provisions related to areas ranging from health care, climate change and immigration to education, social programs and, of course, taxes. While it is expected to undergo some changes before it is passed in the Senate, the legislation will likely undergo several more changes to get all of the Senate Democratics on board.
Funding for the sweeping package largely comes from tax increases on high-income individuals and businesses, but the law also includes tax breaks for eligible taxpayers. Here are some of the significant tax changes included in the bill:
Corporate Taxes
The bill imposes a 15% minimum corporate tax on corporations’ financial statement net income. This reduces the benefit of numerous credits and deductions for high-income corporate taxpayers. It also includes a 1% excise tax on companies when they buy back their own stock.
SALT Deduction
After negotiating numerous times, the BBBA plans a cap on the Federal deduction for state and local taxes, or SALT, at $80,000, up from the $10,000 imposed beginning in 2018. The higher cap would be in place through 2030 and then revert to $10,000 in 2031.
Child Tax Credit
The bill would extend through 2022 the extra monthly payments per child that parents earning up to $150,000 are now getting. The legislation also makes the tax credit permanently refundable.
High Income Surtax
The BBBA would create a 5% surtax on individuals with a modified adjusted gross income (MAGI) that exceeds $10 million ($5 million for married taxpayers filing separately). It adds another 3% surtax on MAGI exceeding $25 million ($12.5 million for married taxpayers filing separately). The surtax would take effect for 2022.
Net investment income tax (NIIT)
The Act would expand the 3.8% NIIT to apply to the trade or business income of high-income individuals, regardless of whether they’re actively involved in the business. The income thresholds are over $500,000 for joint filers, over $400,000 for single filers and over $250,000 for married couples filing separately. The NIIT currently applies to business income only if the income is passive.
Renewable Energy Benefits
Some $300 billion is by far the largest component of the climate spending in the package, which would include expanding a number of tax credits for renewable power, electric vehicles, biofuels and energy efficiency. The credits apply to businesses and individuals.
EV Tax Credit
Under the bill, a $7,500 consumer tax credit would be made refundable and expanded by up to $4,500 for electric passenger vehicles. An additional $500 bonus would be added for vehicles that use batteries made in the U.S for a total of $12,500. The legislation also creates a new $4,000 tax credit for the purchase of used electric vehicles.
IRS Enforcement
The bill would give the Internal Revenue Service (IRS) an additional $80 billion to hire more auditors, improve customer service and modernize technology. The Congressional Budget Office concluded IRS enforcement would raise $207.2 billion over a decade, or $127.2 billion after subtracting the $80 billion in additional funding for the agency.
At the point of writing this article, it’s impossible to say which of the proposed tax law changes will survive and be enacted into law. Additional tax provisions could be added, too. However, smart taxpayers will get up-to-speed on the Build Back Better Act’s tax proposal, so they’re prepared if/when they make it through the legislative process. If you have any questions regarding any of the current tax provisions and how they may impact you and your business, feel free to contact Nick Shires at nshires@dmcpas.com or 315-472-9127.
Nicholas L. Shires, CPA is a tax partner at Dannible & McKee, LLP. Nick has over 16 years of experience providing tax and consulting services to a wide range of clients, including individuals and privately held companies.