Proposed Tax Changes in the Build Back Better Act

The Biden Administration has undertaken several new legislative initiatives since the start of the year. This included several economic revitalization programs introduced as part of the American Rescue Plan Act (ARPA). As the effects of the pandemic continue to dwindle, the White House is focusing on passing comprehensive legislation that creates jobs, cuts taxes, and reduces expenses for working families. Specific investments in healthcare, childcare, higher education, and workforce training will also be made. Formally known as the Build Back Better Act, it will be paid for by increasing taxes on corporations and individuals while modifying federal tax incentive programs. Although currently under review, it is expected to be taken up for a formal vote before the end of September. If passed, there will be significant changes to the amount and type of federal taxes which Atlanta individuals and businesses may be required to pay. To help clients, prospects, and others, Wilson Lewis has provided a summary of the proposed tax changes outlined by the House Ways and Means Committee below.   

Proposed Business Tax Changes

• Corporate Tax Rate – The flat tax rate which was implemented during the Trump Administration would be replaced with a graduated rate starting at 18% with a maximum of 26.5%. Specifically, the 18% rate would apply to the first $400,000 in income, 21% on income up to $5M and then 26.5% on income greater than $5M.
• GILTI & FDII Deductions – There would also be a reduction in the savings available through the Foreign Derived Intangible Income (FDII) and Global Intangible Low-Tax Income (GILTI). As proposed the FDII deduction would be 21.875% and the GILTI deduction would be 37.5%. The above-mentioned change to the corporate rate means businesses would receive a 16.56% GILTI and 20.7% FDII deduction.
• Section 199a Deduction Changes – Also known as the Qualified Business Income Deduction, it permits pass through entity owners (S-corporations, partnerships, etc.) to deduct a percentage of business income on the individual tax return. The proposed changes will limit the value of the deduction to $500,000 for joint filers, $400,000 for individual filers, and $250,000 for married filing jointly.
• Small Business Stock Capital Gains Exclusion – There is also a proposal to eliminate the special 75% and 100% exclusion for gains realized from small business stock for taxpayers with an adjusted gross income (AGI) of $400,000 or more. It is important to note the baseline exclusion of 50% will remain available to all taxpayers regardless of income.
• Research & Development (R&D) Tax Credit – The proposal also calls for a delay in the requirement to amortize qualifying R&D expenses over five years, rather than taking the immediate deduction. The change means the requirement will be delay to after 2025, rather than after 2021, as is the case under current regulations.

Proposed Individual Tax Changes

• Individual Tax Rate – There is also a proposed increase in the top individual tax rate to 39.6%. The higher rate would apply to married filing jointly taxpayers with income over $450,000, heads of households with income over $425,000, and married filing jointly with income over $225,000.
• Capital Gains Tax Rate – There would also be an increase in the capital gains tax to 25%. It is important to note the 20% rate would continue to apply to gains and losses for the period prior to September 13, 2021.
• Net Investment Income Tax (NIIT) – This provision calls for the expansion of NIIT to cover net investment income derived from ordinary business for individual taxpayers earning more than $400,000, and $500,000 for joint filers.
• New Income Surcharge – There is also a provision that calls for a tax surcharge on income over $5M. A 3% surcharge would be levied on individual taxpayers that have income more than $5M, or more than $2.5M for married filing jointly.
• Excess Business Losses – There would be a permanent disallowance of excess business losses for noncorporate taxpayers.

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It appears there are significant tax changes proposed that will have a substantial impact on many Atlanta businesses and high net worth individuals. While the details could still change before the legislation is passed into law, it does provide important insights to consider for future tax planning. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.