Biden Administration's Tax Plans

OVERVIEW

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Biden Administration’s Tax Plans

AMERICAN FAMILIES PLAN

On April 28, 2021, the Biden White House released

a fact sheet describing the “American Families

Plan,” which seeks to raise $1.5 trillion in revenue

from wealthy taxpayers to cover new subsidies

for families and workers. The tax proposals in the

American Families Plan are laid out below.

RAISE THE TOP PERSONAL

INCOME-TAX RATE

Current Law The highest personal income tax rate

is 37%, which was enacted as part of 2017’s Tax

Cuts and Jobs Act (TCJA). Pre-TCJA, the highest

personal income tax was 39.6%.

Taxpayers falling within the current top rate of 37%

in 2021:

• Single ﬁlers with taxable income over $523,600

• Joint ﬁlers with taxable income over $628,300

• Married couples ﬁling separate (MFS) returns with

taxable income over $314,150

• Head-of-household ﬁlers with taxable income

over $523,600

Biden Administration Proposal The American

Families Plan would reverse the TCJA’s rate change

and bring the top rate back up to 39.6%.

President Biden has said he will not raise taxes on

anyone making less than $400,000 per year, so it

is not clear (given the MFS current top-rate gate

above) whether the proposal will raise rates for

taxpayers who are married and ﬁling separately

earning between $314,150 and $400,000.

INCREASE CAPITAL-GAINS RATE

FOR TAXPAYERS EARNING

$1,000,000 OR MORE

Current Law Rates applicable to long-term capital

gains, i.e., gains from the sale of stocks, mutual

funds, and other capital assets held for at least

one year, are taxed at a 0%, 15%, or 20% rate,

depending on the amount of the taxpayer’s taxable

income. The 20% rate applies to single ﬁlers with

taxable income over $445,850, head-of-household

ﬁlers with taxable income over $473,750, and

married couples ﬁling a joint return with taxable

income over $501,600. Short-term capital gains are

taxed at the same rate as ordinary taxable income.

Biden Administration Proposal Taxpayers with

taxable income over $1,000,000 would pay tax at

the ordinary income rate of 39.6% on their long-

term capital gains, thus eliminating the reduction

in tax for capital gains. This rate increase is almost

double the current top rate on long-term capital

gains.

Those taxpayers with over $1,000,000 in taxable

income would also see an application of the

3.8% Medicare tax on net investment income

(NII) in Section 1411, bringing the top rate for such

taxpayers’ long-term capital gains to 43.4%.

With the addition of state and local capital-gains

taxes, taxpayers with over $1,000,000 in taxable

income could be paying long-term capital-gains

taxes at a combined rate of over 58%, depending

on where they live.

ELIMINATE THE BASIS STEP-UP

FOR INHERITED PROPERTY

Current Law Taxpayers receive a basis step-up to

fair market value on stock, real estate, and other

capital assets inherited from an estate. In essence,

this basis step-up allows the imbedded increase in

fair market value to avoid capital-gains tax.

Biden Administration Proposal Calls for the

nulliﬁcation of the basis step-up eects for gains

of $1,000,000 or more ($2,000,000 or more for

married couples ﬁling a joint return).

The speciﬁcs for how this would be accomplished

are not entirely clear, but it appears the property

would carry a tax obligation in the amount of

embedded gain at time of death, with the tax

liability falling on the estate. A previous proposal

to limit the stepped-up basis, the Sensible Taxation

and Equity Promotion (STEP) Act of 2021, gave

families up to 15 years to pay the taxes owed on

certain assets.

Exceptions would be carved out for property

donated to charity and certain family-owned

businesses and farms that heirs continue to

operate.

ELIMINATE CARRIED-INTEREST

ELIGIBILITY FOR LONG-TERM

CAPITAL-GAINS RATES

Current Law Under certain circumstances, an

investment fund manager can treat “carried

interest,” which is essentially earned income from

fund management, as long-term capital gain.

This treatment allows the income to be taxed at

long-term capital-gains rates, which are currently

considerably lower than ordinary income rates.

Biden Administration Proposal Eliminate the

carried-interest rules. If the fund manager’s taxable

income is over the threshold for the top income tax

rate, the tax on the fund manager’s carried-interest

income could go from a rate of 23.8% (20% capital

gain rate + 3.8% surtax on NII) to 43.4% (39.6%

ordinary tax rate + 3.8% surtax on NII).

LIMIT AVAILABILITY OF

LIKE-KIND (SECTION 1031)

EXCHANGE TREATMENT

Current Law Tax gain or loss can be deferred

on exchanges of real property used for business

or held as an investment for “like-kind” property.

Properties are of like kind if they are of the same

character. This is the case regardless of whether

the properties dier in size or value.

Biden Administration Proposal Eliminate like-

kind exchange treatment for gains greater than

$500,000. This change would apply regardless of a

taxpayer’s taxable income.

MAKE BUSINESS LOSS-

LIMITATION RULE PERMANENT

Current Law Under the TCJA (Section 461(l)),

individuals operating a trade or business and ﬁling

a Schedule C cannot deduct losses in excess of

$250,000 ($500,000 for joint ﬁlers). Excess losses

may be carried forward to future tax years. This

loss-limitation rule is currently set to expire in 2027.

Biden Administration Proposal Make permanent

the business loss-limitation rule.

INCREASE IRS’S ENFORCEMENT

BUDGET BY $80 BILLION

OVER THE NEXT 10 YEARS

Biden Administration Proposal “[I]ncrease

investment in the IRS, while ensuring that the

additional resources go toward enforcement

against those with the highest incomes, rather than

Americans with actual income less than $400,000.”

The IRS would also focus resources on large

corporations, other businesses, and estates.

To assist in these enforcement eorts, the plan calls

for ﬁnancial institutions to “report information on

account ﬂows so that earnings from investments

and business activity are subject to reporting

more like wages already are.” The speciﬁcs of

the reporting requirements are apparently not

yet developed, but presumably the purpose is to

identify unreported taxable income. The American

Families Plan suggests that these increased tax-

enforcement eorts would raise $700 billion in tax

revenue over a 10-year period.

AMERICAN JOBS PLAN

On March 31, 2021, the Biden White House

released a fact sheet describing the “American

Jobs Plan,” which contains a $2.3 trillion proposal

for infrastructure spending that also contains certain

tax credits outlined below.

TAX CREDIT PROPOSALS

• Point of sale rebates and tax incentives to buy

American-made electric vehicles.

• Tax credits for low- and middle-income

families and small businesses to invest in

disaster resilience.

• Targeted investment tax credit for construction

of at least 20 gigawatts of high-voltage capacity

power lines.

• Extension and expansion of direct-pay investment

tax credit and production tax credit for clean

energy generation and clean energy storage.

• Reform and expansion of section 45Q tax credit,

which provides a tax credit on a per-ton basis

for CO2 that is sequestered by new equipment

placed into service. Proposal to make the credit

direct-pay and easier to use for certain industrial

applications, air recapture, and retroﬁts of existing

power plants.

• Targeted tax credits to expand aordable housing

rental opportunities in underserved communities.

• Passage of the Neighborhood Homes Investment

Act, which includes tax credits (proposed to be

$20 billion over ﬁve years) to build or rehabilitate

500,000 homes.

• Expansion of home and commercial eciency

tax credits under the Weatherization

Assistance Program.

• Expansion of tax credits (50% of the ﬁrst $1 million

in construction costs per facility) to encourage the

building of childcare facilities at places of work.

• Extension of the section 48C tax-credit

program, which would be aimed to build-out

U.S. manufacturing capacity to supply clean

energy projects with American-made parts

and equipment.

MADE IN AMERICA TAX PLAN

On March 31, 2021, the Biden White House

released a fact sheet describing the “Made in

America Tax Plan,” which is a tax proposal that

would generate revenue for the American Jobs

Plan spending. It is estimated that the Made in

America Tax Plan will raise $2 trillion in tax revenue

over the next 15 years. The Made in American Tax

Plan proposals are laid out below.

RAISE CORPORATE INCOME TAX RATE

Current Law The TCJA lowered the corporate

income tax rate to 21% for tax years beginning on

or after January 1, 2018. From 1994–2017, the top

eective corporate income tax rate was 35%.

Biden Administration Proposal Increase the

corporate income tax rate to 28%.

RAISE TAX RATE ON GILTI

Current Law Background: The TCJA identiﬁed

a new type of income, Global Intangible Low-

Taxed Income (GILTI), which is an approximation

of a taxpayer’s (a U.S. shareholder) allocable

share of amounts earned by a controlled foreign

corporations (CFC) outside the U.S. in excess of

routine returns on tangible property.

A deduction equal to 50% of its GILTI inclusions is

aorded taxpayers to achieve an eective tax rate

on GILTI of 10.5% (13.125% in tax years after 2025,

achieved by reducing the deduction to 37.5% of

GILTI inclusions).

The tax on GILTI inclusions may be reduced by

80% of any foreign tax credits (FTCs) for foreign

income taxes imposed on the foreign earnings. A

CFC’s U.S. shareholder (the taxpayer) with GILTI

subject to 13.125% foreign income tax would be

allowed 80% of those foreign income taxes as

FTCs. The 13.125% of FTCs would entirely oset the

10.5% federal income tax on GILTI inclusions.

Biden Administration Proposal Raise the eective

GILTI federal tax rate to 21%. The rate increase is

achieved by reducing the GILTI deduction to 25%

of a U.S. shareholder’s GILTI inclusions.

For a taxpayer to have a full oset of the 21%

federal income tax on its GILTI inclusions from

FTCs, its CFC(s) would need to have GILTI subject

to 26.25% foreign income tax.

ELIMINATE THE QBAI

EXEMPTION FOR GILTI

Current Law In calculating its GILTI, a taxpayer

is allowed a reduction in GILTI inclusions by an

imputed return of 10% on its foreign subsidiaries’

depreciable tangible assets (qualiﬁed business

asset investment or QBAI).

Biden Administration Proposal Repeal the QBAI

exemption. The repeal of the QBAI exemption

would have the result of increasing a taxpayer’s

GILTI inclusions.

REQUIRE COUNTRY-BY-

COUNTRY GILTI CALCULATION

Current Law GILTI is determined on a blended-

country basis. This method has been criticized by

the Biden administration, as well as academics,

as allowing a taxpayer to avoid the GILTI tax

with respect to its CFCs operating in low tax-rate

countries by “blending” the low rate with income

from CFCs operating in high tax-rate countries.

Biden Administration Proposal Require GILTI

be determined on a country-by-country basis.

Eectively, eliminating the tax rate blending

concern/approach.

REPEALING THE FDII DEDUCTION

Current Law Background: As a “carrot” to the

“stick” that is the tax on GILTI, the TCJA enacted a

deduction to reduce the eective federal income

tax rate for a domestic corporate taxpayer’s

Foreign-Derived Intangible Income (FDII). Examples

of FDII include income from export sales and

licensing royalties paid by foreign entities.

Taxpayers are permitted a deduction of 37.5% of

their FDII to achieve an eective tax rate of 13.125%

(16.406% for tax years beginning in 2026, achieved

by reducing the deduction to 21.875% of FDII).

Biden Administration Proposal Repeal the FDII

deduction. The Biden administration has labeled

the FDII deduction as giving “corporations a tax

break for shifting assets abroad and is ineective at

encouraging corporations to invest in R&D.”

REPEAL AND REPLACEMENT OF BEAT

Current Law The TCJA enacted the Base

Erosion Anti-Abuse Tax (BEAT), which generally

imposes a 10% minimum tax (5% in 2018) on a

taxpayer’s income determined without regard to

tax deductions arising from base erosion payments

(including the portions of a taxpayer’s net operating

loss (NOL) deduction treated as related to base

erosion payments), which generally cannot be

reduced by credits other than, through 2025, the

research credit under section 41(a) and 80% of

other credits.

Biden Administration Proposal Replacing BEAT

with the Stopping Harmful Inversions and Ending

Low-tax Developments (SHIELD), which would deny

tax deductions by reference to payments made

by taxpayers to related parties that are subject to

a “low eective rate of tax.” The low eective rate

of tax is yet to be determined, but Treasury has

announced that until such announcement, “the

default rate trigger would be the tax rate on the

GILTI income [sic], as modiﬁed by the [Made in

America Tax] plan.”

MINIMUM CORPORATE TAX

ON “BOOK INCOME”

Biden Administration Proposal Impose a 15%

minimum tax on “large, proﬁtable corporations”

based on “book income.” For this purpose, book

income appears to refer to GAAP income.

STRENGTHENING ANTI-

INVERSION RULES

Biden Administration Proposal Initiative to

prevent U.S. corporations from merging with foreign

corporations and reducing their federal income tax

(by replacing the U.S. parent with a foreign parent,

with the U.S. parent becoming a subsidiary of the

foreign parent, thereby moving its tax residence to

such foreign country) while retaining management

and operations in the U.S.

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AMERICAN RESCUE PLAN

On March 11, 2021, President Biden signed into

law the “American Rescue Plan Act,” a $1.9 trillion

legislation containing, among other provisions,

$1,400 Economic Impact Payments to qualifying US

taxpayers. The tax aspects of the American Rescue

Plan Act are laid out below.

• For 2021, the child tax credit is $3,600 per child

under the age of 6 and $3,000 per child that is

6 through 17 years old, which is fully refundable

and payable in advance. The credit revers to

$2,000 per child under the age of 17 for 2022.

• For 2021, the maximum child and independent

care tax credit for one individual is $4,000 and

$8,000 for two or more qualifying individuals. The

credit is refundable for some taxpayers.

• Extension of the earned income credit (EITC)

to workers under age 25. Individuals as young

as age 19 are eligible for 2021, as well as being

entitled to apply the credit to more earned

income with the added beneﬁt of a higher phase-

out level. There is no longer a maximum age

for eligibility.

• Premium reductions for Aordable Care Act

(ACA) health insurance coverage through the

application of premium tax credits eective for

two years.

Contributors

TODD BETOR

OF COUNSEL

Washington, D.C.

+1 (202) 282-5783

[email protected]

JIM MASTRACCHIO

PARTNER

Washington, D.C.

+1 (202) 282-5849

[email protected]

SUSAN SEABROOK

PARTNER

Washington, D.C.

+1 (202) 282-5220