The Infrastructure Investment and Jobs Act (Infrastructure Bill) is part of the larger efforts contained in the Build America Back Better Act (BABBA), the legislation that is currently inside of the budget reconciliation process. The House Ways and Means committee has released text (the proposal) that would be incorporated into the budget reconciliation process. The legislation is by no means finalized and is likely to see additional changes; however, the provisions introduced by the House of Ways & Means committee do propose changes to a number of tax rates and other legislation affecting businesses and individuals. With the exception of the capital gains tax, the proposed provisions would be applicable for tax years after December 31, 2021.
Business Provisions
Corporate tax rate – Under the proposal, the current flat 21% corporate tax rate would be replaced with a graduated rate, which phases out for corporations making more than $10 million. Corporate income would be taxed as follows:
- 18% on the first $400,000 of income
- 21% on income up to $5 million
- 26.5% on income above $5 million
Personal Service Corporations would not be eligible for the graduated rates and would pay a flat tax of 26.5% on taxable income.
Carried interests and capital gains – The proposal would extend the holding period required for gain attributable to an applicable partnership interest to qualify for long-term capital gain treatment from a period of three years to five years. However, for real property trades or businesses and taxpayers with an adjusted gross income (AGI) less than $400,000, the holding period would remain three years. The proposal also extends §1061 to all assets eligible for long-term capital gain rates.
Section 1202 stock: Under the proposal, all eligible taxpayers would still have the baseline 50% exclusion in §1202(a)(1). However, the special 75% and 100% exclusion rates for gains realized from certain qualified small business stock would only apply to taxpayers other than a corporation, trust, or estate with AGI under $400,000.
S corporation reorganization: The proposal would allow eligible S corporations to reorganize as partnerships without triggering tax. An eligible S corporation would be any corporation that was an S corporation on May 13, 1996, and at all times through the date on which the qualified liquidation is completed.
Business interest expense: The proposal would revise §163(j) so that it applies at the partner or shareholder level for business interest expenses incurred by a partnership or S corporation and create a 5-year expiration on disallowed business interest expenses incurred after December 31, 2021. Disallowed business interest expense would be used on a first-in, first-out basis.
Other business provisions – In addition, rather than expiring in 2025, the employer credit for wages paid to employees during family and medical leave would end for tax years beginning after 2023. For all Work Opportunity Tax Credit-targeted groups (except for summer youth employees), the WOTC would increase to 50% for the first $10,000 in wages through December 31, 2023. The current deductibility of §174(a) research or experimental expenditures would be extended through December 31, 2025.
Individual Provisions
Tax rates – Under the proposal, the top combined rate on ordinary income would be 43.4% [39.6% marginal, plus 3.8% Net Investment Income Tax (NIIT)].
This top marginal rate (39.6%) would apply to:
- single filers with taxable income over $400,000
- married individuals filing separately with taxable income over $225,000
- married individuals filing jointly with taxable income over $450,000
- heads of household with taxable income over $425,000
- estates and trusts with taxable income over $12,500
Net investment income tax – The §1411 NIIT would cover net investment income derived in the ordinary course of a trade or business for:
- single filers with taxable income over $400,000
- married individuals filing jointly with taxable income over $500,000
- trusts and estates
High-income surtax – High income earners would be subject to a tax equal to 3% of their modified AGI (MAGI) in excess of $5 million (or in excess of $2.5 million for a married individual filing separately and $100,000 for an estate or trust). To calculate MAGI for this purpose, you would reduce your AGI by any deduction allowed for investment interest, as defined in §163(d)).
Capital gains – Under the proposal, the tax rate on capital gains would increase by 5% (20% to 25%). However, the proposal includes a transition rule, allowing qualifying gains and losses recognized prior to September 13, 2021, (or those recognized after that date if they arose from a contractually documented transaction entered into before September 13th) to be taxed at the 20% rate.
Qualified business income deduction – The maximum allowable deduction under §199A would be:
- $400,000 for an individual return
- $500,000 in the case of a joint return
- $250,000 for a married individual filing a separate return
- $10,000 for a trust or estate
Limitation on excess business losses: §461(l) would be amended to disallow excess business losses for noncorporate taxpayers permanently.
Gift & estate taxes – Estate planning will be in high gear between now and the end of the year, as the proposal would rollback the unified credit against estate and gift taxes after December 31, 2021. The current $11.7 million lifetime exemption would revert to $5 million per taxpayer, adjusted for inflation, on January 1, 2022.
Retirement accounts – Under the proposal, if the total value of a taxpayer’s IRA and defined contribution retirement accounts exceeds $10 million at the end of the prior tax year, further contributions to a Roth or traditional IRA for a tax year would be limited as follows:
- single taxpayers with taxable income over $400,000
- married taxpayers filing separately with taxable income over $400,000
- married taxpayers filing jointly with taxable income over $450,000
- heads of household with taxable income over $425,000
Roth conversions for both IRAs and employer-sponsored plans would be eliminated based on the same taxable income thresholds listed directly above. And the proposal would change the requirements for required minimum distributions (RMDs).
Contact ARB
There is still a lot of room for these provisions to change as the legislation continues to make its way through the budget reconciliation process. We are keeping a close watch on these developments. If you have questions, contact me today. Visit our COVID-19 Financial Resource and Tax Center for information on related matters.
John Hadwen joined ARB in 2021 as a tax director. He specializes in providing individuals and businesses with comprehensive tax compliance and consulting services related to manufacturing, construction, real estate, closely-held business, and professional services firm taxation. Prior to joining ARB, John was a Tax Principal at a large, regional CPA firm.
