Preparing for Passage: An Overview of the Build Back Better Act
The Build Back Better Act (BBBA), a reconciliation bill comprised of $1.75 trillion in domestic spending, is currently working its way through Congress. Though no aspects of the bill are written in stone until the legislation passes Congress and is enacted by the President, it is important to remain aware of the items that are potentially in store.
The BBBA Framework
Billed as ‚ÄúPresident Biden‚Äôs plan to rebuild the middle class,‚Äù the legislation covers a wide range of areas. Originally, the BBBA was slated to cost $3.5 trillion, but that number was trimmed down to $1.75 trillion over the course of negotiations. According to a framework published by the White House, the BBBA would ideally include the following:
- Investments in Children and Caregiving ‚Äì Universal and free preschool; tax provisions designed to make parenting and childcare more affordable; improvements to Medicaid coverage for seniors and those with disabilities; and an extension of the Child Tax Credit expansion established by the American Rescue Plan Act (ARPA)
- New Efforts to Combat Climate Change ‚Äì New consumer rebates and tax credits to incentivize families to switch to clean energy; corporate incentives for domestic production of clean energy technology; a new Clean Energy and Sustainability Accelerator to promote environmental justice; and historic investment in coastal restoration, forest management, and soil conservation
- Expansion of Affordable Health Care ‚Äì A reduction of prescription drug costs; new investment in the Affordable Care Act aimed at reducing insurance premiums; closure of the Medicaid coverage gap; and an expansion of Medicaid to cover hearing benefits
- Economic Measures Aimed at Bolstering the Middle Class ‚Äì Investment in affordable housing; extension of the expanded Earned Income Tax Credit (EITC); expansion of access to post-high school education; expansion of the free school meals program; a Rural Partnership Program to funnel funding into underserved rural areas; and investments in immigration reform
- New Tax Provisions to Cover the Costs of BBBA Initiatives ‚Äì A 15% minimum tax on corporate profits for corporations with more than $1 billion in profits; a 1% surcharge on corporate stock buybacks; a 15% minimum tax on foreign profits of U.S. corporations; a new surtax on the top 0.02% of Americans‚Äî5% on income greater than $10 million and an additional 3% on income above $25 million; investment in the IRS, including hiring enforcement agents to investigate wealthy taxpayers for evasion, updating old technology, and increasing funding to taxpayer services
The Current State of Key BBBA Provisions
As mentioned above, there have been many changes to BBBA provisions throughout the course of congressional negotiations over the legislation. For the rest of this post, we want to concentrate on the areas that we see as particularly critical for our clients.
Firstly, below are some provisions that were originally included but that have since been negotiated out of the BBBA. The following items are no longer included in the BBBA:
- Changes to the taxation of the promote/carried interest
- Limitations on section 1031 like-kind exchanges
- Restrictions on the section 199A 20% pass-through deduction
- Repeal of the stepped-up basis of assets at death
- Changes to grantor trusts
- Increase to tax rates on income or capital gains
More importantly, here is a look at key items that are still currently included in the BBBA:¬†
- A 3.8% Net Investment Income Tax (NIIT) ‚Äì The NIIT would be expanded to apply to all income derived from a trade or business, including rent. It would apply to taxpayers with taxable incomes over $400k (single) or $500k (joint filers) and to trusts and estates with taxable incomes over $200k.
- A Surcharge on High-income Individuals ‚Äì A 5% surtax applied on individual taxpayers with modified Adjusted Gross Income (AGI) over $10 million. An additional 3% surtax would be applied on modified AGI over $25 million. For the purposes of the surcharge, ‚Äúmodified AGI‚Äù refers to gross income reduced by any deduction for investment interest. This provision would be applicable for taxable years beginning after December 31, 2021.
- A Provision Making Active Pass-through Loss Limitation Permanent ‚Äì Currently, losses from a business exceeding $250k (single filers) or $500k (joint filers) cannot offset portfolio income or W-2 wages in the year incurred and are effectively suspended for one year. The BBBA would permanently disallow excess losses from being applied to portfolio or wage income. This provision is applicable for taxable years beginning after December 31, 2021.
- Modifications to Treatment of Certain Losses¬†‚Äì¬†This change would require a loss in a worthless partnership interest to be treated as a capital loss and deferred until the property is sold to a third party.
- State & Local Tax Deduction¬†‚Äì¬†The SALT deduction cap would be increased from $10,000 to $72,500 and extended through 2031.
- Deduction for Energy-Efficient Commercial Buildings (section 179D)¬†‚Äì¬†The deduction would be extended through 2031. The requirement for greater energy efficiency would be lowered from 50% to 25%, among other changes.
- Public EV Charging Station Credit¬†‚Äì¬†The alternative fuel vehicle refueling property credit would be extended through 2031. The credit would also be increased beginning in January 2022.