President Biden recently released his fiscal year (FY) 2022 budget, proposing significant changes to the current U.S. tax code with a goal of modernizing the nation’s tax system. The Treasury Department also issued its “Green Book” to provide a general explanation of these tax and revenue proposals, primarily focused on corporation taxation, housing and infrastructure, and clean energy, and its related effective dates.

With a majority of these proposals applying toward taxable years beginning after Dec. 31, 2021, Doeren Mayhew’s dedicated tax advisors highlight key takeaways U.S. businesses and individuals should be aware of for tax planning considerations.

Business Tax Impact

Biden’s revenue proposal introduces a significant amount of changes to the U.S. tax code for corporations. Below is an overview:

  • Increase the corporate tax rate from 21% to 28%, effective for taxable years beginning after Dec. 31, 2021. Fiscal year taxpayers would have a 21% tax rate, plus 7% times the portion of the taxable year that occurs in 2022.
  • Provide an expanded general business credit (equal to 10% of expenses paid or incurred) for locating jobs and business activity in the United States and removing deductions for expenses paid or incurred in connection with offshoring a U.S. trade or business.
  • Reform the global tax regime with respect to controlled foreign corporation (CFC) earnings by eliminating the exemption for qualified business asset income (QBAI) and reducing a corporate U.S. shareholder’s Section 250 deduction for the global minimum tax inclusion to 25%. The proposal also replaces the “global averaging” calculation with a “jurisdiction-by-jurisdiction” calculation to determine a U.S. shareholder’s global minimum tax inclusion, plus repeals the high-tax exemption to subpart F income (including the cross-reference to that provision).
  • Expand the application of Section 265 to disallow deductions attributed to a class of foreign gross income exempt from tax or have it taxed at a preferential rate through a deduction.
  • Reform the taxation of foreign fossil fuel income by repealing the exemption from global intangible low-taxed income (GILTI) for foreign oil and gas extraction income (FOGEI).
  • Repeal the deduction for foreign-derived intangible income (FDII) to encourage more research and development in the United States.
  • Replace the base erosion anti-abuse tax (BEAT) with the stopping harmful inversions and ending low-tax developments (SHIELD) rule, disallowing a deduction to a domestic corporation by reference to low-taxed income of entities that are members of the same financial reporting group. This rule would apply to financial reporting groups exceeding $500 million in global annual revenues and would be effective for taxable years beginning after Dec. 31, 2022.
  • Limit foreign tax credits from sales of hybrid entities by applying 336(h)(16) to determine the source and character of any item recognized in connection with a direct or indirect disposition of an interest in a specified hybrid entity.
  • Restrict deductions of excessive interest of members of financial reporting groups for disproportionate borrowing in the United States.
  • Impose a 15% minimum tax on worldwide book income of large corporations with such income in excess of $2 million.

Housing and Infrastructure

The Biden proposal includes several changes to encourage more affordable homebuilding as well as improve the nation’s infrastructure. These proposals include:

  • Creating an additional type of housing credit dollar amount (HCDA), called the opportunity HCDAs for projects in difficult to develop areas. This proposal would be effective for calendar years beginning with 2022.
  • Creating a Neighborhood Homes Investment Credit to support new construction for sale, substantial rehabilitation for sale and substantial rehabilitation for exiting homeowners.
  • Making the new markets tax credit permanent with allocations indexed for inflation after 2026.
  • Providing federally subsidized state and local bonds to support regional infrastructure.

Clean Energy

In an effort to prioritize clean energy in the United States, Biden’s budget repeals several fossil fuel tax preferences as well as introduces renewable and alternative energy incentives.

Most of the tax credits, deductions or other provisions being repealed are targeted toward the production of oil, gas and coal, including the:

  • Enhanced oil recovery costs tax credit.
  • Credit for oil and gas produced from marginal wells.
  • Expensing of intangible drilling costs, as well as exploration and developmental costs.
  • Deduction for costs paid or incurred for any tertiary injectant used.
  • Exception to passive loss limitations provided to working interests in oil and natural gas properties.
  • Use of percentage depletion with respect to oil and gas wells and hard mineral fossil fuels.
  • Two-year amortization of independent producers’ geological and geophysical expenditures.
  • Capital gains treatment for royalties.
  • Oil Spill Liability Trust Fund excise tax exemption.
  • Accelerated amortization for air pollution control facilities.

New tax credits encouraging clean energy include:

  • Extending the full production tax credit for qualified facilitations beginning construction after Dec. 31, 2021, with the credit being phased out by 20% over five years.
  • Providing a tax credit equal to 30% for electricity transmission investments.
  • Creating an allocated production credit for electricity generation from eligible existing nuclear power facilities.
  • Establishing a new tax credit for qualifying advanced energy manufacturing.
  • Establishing tax credits for medium- and heavy-duty zero emission vehicles (for example, electric and fuel cell vehicles).
  • Providing tax incentives for the production of sustainable aviation fuel.
  • Implementing a tax credit for low-carbon hydrogen production using zero-carbon emissions electricity (renewables or nuclear).
  • Extending and enhancing energy efficiency and electrification incentives. Enhancements include extending the Section 25C nonbusiness energy credit by five years, increasing the Section 45L tax credit amount for building energy-efficient homes and buildings, creating a new business tax credit for qualifying mechanical insulation labor costs, extending the carbon oxide sequestration credit and expanding the tax credit for electric vehicle charging stations.
  • Providing a nonrefundable tax credit for homeowners and businesses equal to 25% of qualified disaster mitigation expenditures.
  • Reinstating the superfund excise taxes and modifying the oil spill liability trust fund financing.

High-Income Individuals Impact

The FY 2022 budget proposes to strengthen taxation of high-income individuals by increasing the individual tax rate as well as eliminating other current tax incentives. Below is an overview of these proposals:

  • Increase the top marginal income tax rate to 39.6%.
  • Reform on long-term capital gains and qualified dividends, which would be taxed at ordinary income rates rather than capital gains rates to the extent the taxpayer’s income exceeds $1 million. The threshold amount would be indexed for inflation after 2022. Additionally, the proposal would be effective for gains required to be recognized after the date of announcement.
  • Eliminate the step-up in basis by a taxpayer and treating transfers of appreciated property by gift or on death as realization events. Gain on unrealized appreciation also would be recognized by a trust, partnership or other noncorporate entity that is the owner of property in certain circumstances.
  • Ensure that net investment income and self-employment taxes apply toward all pass-through business income of high-income individuals.

Families and Workers

To continue supporting families and workers impacted during the COVID-19 pandemic, the FY 2022 budget proposes extending or making permanent several provisions provided in the American Rescue Plan. This includes:

  • Making permanent the premium assistance tax credit for health insurance.
  • Making permanent the expansion of the earned income tax credit for workers without qualifying children as well as the changes to the child and dependent care credit.
  • Extending the child tax credit increase through 2025, plus allowing 50% of the credit to be paid in advance.
  • Increasing the employer-provided childcare tax credit for businesses.

Eliminate Loopholes

To offer additional revenue raisers within Biden’s budget, the following is also being proposed:

  • Tax carried interests in partnerships as ordinary income rather than capital gains if the partner’s taxable income from all sources exceeds $400,000. Additionally, it will require partners in such investment partnerships to pay self-employment taxes on such income.
  • Allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing jointly) each year for real property exchanges that are like kind.
  • Make permanent excess business loss limitation of noncorporate taxpayers. This proposal would be effective for taxable years beginning after Dec. 31, 2026.

Tax Compliance and Administration

The FY2020 also includes changes to improve tax compliance and tax administration. These include:

  • Introducing a comprehensive financial account reporting to improve tax compliance. Financial institutions will report data on financial account in an information return, while the annual return will report gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, crypto asset exchanges and custodians, and transfers between accounts with the same owner. This new financial reporting regime would go into effect for tax years beginning after Dec. 31, 2022.
  • Providing the Treasury Department with explicit authority to regulate all paid preparers of federal tax returns, including by establishing mandatory minimum competency standards.
  • Requiring electronic filing for taxpayers reporting larger amounts or businesses with complex entities.
  • Increase the limitations period under Section 6501 for returns reporting benefits from listed transactions from three years to six years. This would also increase the limitations period for listed transactions under Section 6501 from one year to two years.
  • Amending Sections 6226 and 6401 to provide that the amount of the net negative change in tax that exceeds the income tax liability of a partner in the reporting year is considered an overpayment under Section 6401 and may be refunded.
  • Authorize limited sharing of business tax return information to just officers and employees (not contractors) of the Bureau of Economic Analysis (BEA). The BEA would have access to federal tax information of those sole proprietorships with receipts greater than $250,000, and of all partnerships.

Doeren Mayhew continues to follow news related to these budget proposals and its impact on U.S. businesses and individuals. To learn more about how these changes may impact you or to obtain tax planning assistance, please contact us today.