Federal Tax Update for Manufacturers
A multitude of budgets, bills, and COVID recovery plans have been put forth since President Biden took office – and many of these will be paid for, in part, by tax increases. What has actually been passed by Congress, what is still uncertain, and what should manufacturers specifically pay close attention to?
The Biden administration first released detailed tax proposals in May 2021 with release of the “Green Book,” consisting of the administration’s proposed fiscal year 2022 budget. The tax reform proposals in the Green Book were vast and would have significantly impacted business owners and other high-income taxpayers if enacted, but efforts to garner support of all 50 Senate Democrats, coupled with unanimous opposition from Congressional Republicans, resulted in a significant scaling back of both the spending provisions and the revenue-raising tax increases. The frequent proposal changes required taxpayers and their advisors to spend significant time monitoring these developments and analyzing potential planning opportunities in response to the various proposals. However, the prospects for passage of significant tax legislation are lower than they have ever been since President Biden’s election.
The various negotiations concluded with the House of Representatives passing the Build Back Better Act (BBBA) on Nov. 19, 2021. However, as of the time of this publication, BBBA is not supported by all 50 Democratic Senators, with Senator Joe Manchin, Democrat from West Virginia, being the most notable holdout against passing BBBA. The Biden administration is juggling competing agenda priorities heading into the new year, and BBBA’s passage in its current legislative form seems unlikely. President Biden has recently acknowledged that BBBA may need to be broken into chunks in an effort to pass limited parts of the full legislation.
BBBA’s uncertain future has left taxpayers confused with respect to pending tax law changes. Given the dramatic proposals that were in the Green Book and discussed in detail for months in 2021, the tax proposals that are not in the current BBBA legislation are noteworthy. The following provisions are not included in the current legislation and are extremely unlikely to reappear in future efforts to pass the legislation:
- There is no increase to ordinary income tax rates.
- There is no increase to the long-term capital gains tax rate or the qualified dividend tax rate.
- There are no changes to the estate tax exemption, grantor trust rules, ability to apply valuation discounts, or any other changes to the estate and gift tax rules.
The provisions that remain in BBBA might still be significant. A few key provisions that we continue to monitor for our manufacturing clients include:
- A 5% surtax on individuals with modified adjusted gross income in excess of $10 million, with an additional 3% surtax to the extent MAGI exceeds $25 million
- The 5% and additional 3% surtaxes apply to trusts with income in excess of $200,000 and $500,000 respectively
- Expanding application of the 3.8% net investment income tax and self-employment tax to ensure that most flow-through income is subject to one or the other
- Application of wash sale rules to cryptocurrency losses
- A host of significant international tax provisions that will impact taxpayers who own controlled foreign corporations or have operations in multiple foreign jurisdictions
- Provisions aimed at eliminating “backdoor Roth IRA” contributions and imposing distribution requirements on retirement plans that exceed $10 million
BBBA’s future is uncertain. It may never become law, but if it does, the final legislative text is still unknown. Thus, manufacturing owners and executives and their advisors should diligently monitor the ongoing negotiations in Washington, D.C., and be prepared to act quickly if BBBA negotiations pick back up.
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