By Melanie Waddell

What You Need to Know

• The effective date of the capital gains rate increase would be retroactive.
• Biden’s proposal to eliminate the step-up in basis at death went further than expected.
• Congress might substitute stepped-up basis provision with a reduction in the estate tax exemption, said Andy Friedman.

A more detailed look at President Joe Biden’s tax plans, laid out in the Treasury Department’s Greenbook that was released Friday with Biden’s FY 2022 budget, revealed two surprises, according to tax expert Andy Friedman, founder and principal of The Washington Update.

First, the effective date of the capital gains rate increase would be retroactive to April 28, Friedman explained. However, Friedman said that he doesn’t see a final budget resolution retaining the April 28 effective date. “I do expect Congress to adopt an early (pre-2022) effective date — likely without advance notice — perhaps either when the bill is introduced or signed into law,” he said.

The second surprise: “The repeal of stepped-up basis requires gain to be recognized at the time of gift or of death, rather than when the recipient later sells the asset,” Friedman said.

“This rule would require a recipient to incur tax before receiving sales proceeds from which to pay the tax due,” Friedman said. Congress, he added, “might retain this provision, or substitute a reduction in the estate tax exemption, perhaps combined with an increase in the estate tax rate.”

Tax and IRA specialist Ed Slott told ThinkAdvisor Tuesday in a separate email that the proposed change in the stepped-up basis “would add a layer of double taxation since these gains will be taxed for both income and estate tax. IRA and other tax-deferred retirement savings are already taxed that way. IRAs and 401(k)s never received step-up in basis. If eliminating the step up really does happen, it would put IRA taxation on a par with non-IRA investments.”

Slott explained that “even with the proposed $1 million exemption, this tax would still fall heavily on all the wrong targets — like homeowners and small business owners.”

Step-up in basis turns 100 years old this year, Slott said. “Hopefully, it will continue. If not, a fortune in unexpected taxation will occur at death, and not only to the billionaires. They will surely find ways around this, leaving homeowners and small business owners to pay the bill. Not fair.”

The stepped-up basis, Slott added, is “not only eliminated (other than for the $1 million and some other exemptions) but there is a recognized gain at death or transfer as if the property or stock were actually sold, when it wasn’t. If that is so, then that means a tax would have to be paid on property that was not yet sold. Money would be needed from other sources. This is an awful plan.”

Friedman noted some of the more “far-reaching” tax proposals in Biden’s plan include an increase in the top individual tax rate from 37% to 39.6%. “I believe that any final legislation will include this change,” he said.

However, Biden’s plan to increase the capital gains and dividend tax rate from 20% to 39.6% will likely result in passage of “a lesser increase in the capital gains and dividend rate, perhaps in the 25%-28% range.”

As to an increase in the corporate tax rate from 21% to 28%, “I believe any final legislation will include a lesser increase in the corporate rate, perhaps in the 25%-26% range,” Friedman said.

For a discussion on the current stepped up basis rules, see Q 694.

Melanie Waddell

Melanie is Washington Bureau Chief, Investment Advisory Group. She also covers regulatory and compliance issues. Her column, The Playing Field, appears in Investment Advisor and on ThinkAdvisor.com, and she also writes the briefing and produces the podcast, Human Capital. Earlier in her career, Melanie covered financial issues at American Banker/Thomson Media publications in Washington and New York. You can reach her at mwaddell@alm.com. On twitter: @Think_MelanieW

This story was originally published on our sister site, ThinkAdvisor. It is republished here with permission. 

Late in October, Democrats in Congress introduced a corporate profits minimum tax proposal as part of the Build Back Better Act legislation. The bill seeks to ensure that corporations with at least $1 billion in profits (as reported to shareholders) pay at least a 15 percent minimum tax on those profits. If enacted, the tax would be effective in tax years beginning after 2022. The tax would apply to corporate taxpayers (but not to S corporations, RICs, or REITs) that satisfy certain annual minimum income requirements over a three-year period. Income of controlled foreign corporations and non-consolidated entities would also be included—and any deductions for U.S. or foreign income taxes would be removed in calculating income.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about this tax proposal and its likelihood of passage.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: The bottom line is that we have to find some way to pay for these social spending bills in order to make even the pared-down versions of the next piece of legislation acceptable to moderate Democrats who oppose massive spending increases without funding. This tax would only apply to corporations that report over $1 billion in profits to shareholders—and those who meet certain average minimum income thresholds for a three-year period. Requiring big corporations to pay at least a minimum tax of 15 percent on those profits is only fair.

Byrnes: Raising taxes for American businesses is only going to do more harm than good. Another massive tax hike on American businesses will make those American businesses less competitive globally. That means those corporations are going to take steps to remove themselves from the U.S. tax system and, frankly, take their jobs with them.

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Bloink: In reality, this minimum tax rate would apply to only about 200 of the largest corporations in the U.S. This proposal is detailed and contains rules for determining adjusted financial net income-and it also addresses issues specific to multinational corporations. All in all, I think this proposal actually has a chance of passing and could go a long way toward raising the revenue we need to fund important social projects.

Byrnes: If businesses can’t compete in the global economy, that’s bad for everyone—at a time when American companies are already struggling to bring people back to work in the wake of the pandemic. Now is not the time for tax hikes on the businesses that are carrying this economy. I can’t imagine that this proposal would be included in the final reconciliation bill.

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Bloink: Both Manchin and Sinema appear to support this framework proposal. That makes it very likely that we’ll see some version of this corporate profits minimum tax in the final package. The most profitable American corporations are going to have to get used to the idea of paying their fair share.

Byrnes: Raising taxes on big business never has the impact that Democrats think it will. To foster a strong economy, we have to allow our businesses to compete in a global marketplace—and competitive tax rates are a big part of that. Corporate tax hikes will do more harm than good at a time when many businesses are already having trouble hiring and retaining the robust workforce they need. Yes, we need to find a way to fund the programs we pass—but corporate tax hikes aren’t the way to do it.

The employee retention tax credit provides a tax credit for employers that experience at least a 20 percent decline in gross receipts in the third or fourth quarter of 2021, when compared to the same quarter in 2019.  Originally, the credit was put into place by the 2020 CARES Act and extended through the end of 2021 by the year-end stimulus relief package.  While the credit has technically been extended for employers through 2021, the bipartisan infrastructure bill introduced last week would end the employee retention tax credit early, eliminating the credit for wages paid in the fourth quarter of 2021.  Startup recovery businesses that were established during the pandemic would remain entitled to the credit through the end of 2021.  While it remains far from certain that this bill will be passed, small business clients should continue to monitor its progress and watch for inclusion of this early termination provision to avoid surprises later in the year.  For more information on the IRC Section 3134 employee retention tax credit, Q 8555.

As negotiations over the framework spending legislation stalled last week, Congress took an unexpected turn and dropped all retirement proposals from the spending package. That includes proposals to require certain employers to enroll employees automatically in retirement savings programs and the increased credits for small businesses who adopt a retirement plan or auto-enrollment provision for the first time. All provisions that would close the “backdoor” to Roth IRAs for high earners were also dropped from the proposal, as were the changes that would impose contribution limits on high-income taxpayers with large IRA balances. The earlier proposal would have also changed the Saver’s Credit by turning it into a government-sponsored matching contribution. For more information on the current Roth conversion rules that allow higher income taxpayers to indirectly fund a Roth account, see Q 3663.

As Congress continues to work toward passing the Build Back Better Act, many originally proposed provisions have been dropped–including increases in the ordinary income tax rates and capital gains tax rates, as well as estate tax changes.  Many retirement provisions were originally dropped, but later added back into the package.  Currently, IRA contributions would generally be prohibited where a taxpayer’s total IRA and defined contribution plan account balances exceed $10 million (effective in 2029).  Owners of these larger accounts would be required to take a distribution of 50 percent of the excess of the amount that exceeds $10 million in the year following the year when the limit was exceeded.  Defined contribution plan administrators would also become subject to new reporting requirements so that they would be required to report account balances that exceed $2.5 million to the IRS and to the participant beginning in 2029.  Starting in 2022, Roth conversions and non-deductible IRA contributions would be prohibited.  For more information on Roth conversions, see Q 3663.