The Proposal Overview
On September 25, 2021, the House Budget Committee approved legislative text for the Build Back Better Act. The Build Back Better Act is a massive proposal containing the majority of President Biden’s domestic policy agenda. The Act includes a massive expansion of the social safety net, including the extension of many popular tax benefits originally part of the American Rescue Plan Act, an expansion of Medicare, increased funding for health and education, investment in green infrastructure and much more. The cost of the bill, initially, is estimated to be $3.5 trillion, largely funded by increases in tax rates. These increases are generally limited to higher income taxpayers and corporations, but also include reforms to the taxation of foreign businesses and the overseas activity of domestic businesses, as well as increased funding for the IRS to ensure that all the taxes that should be collected are collected.
Business Provisions
Corporate Tax Rates: The proposal would actually lower the tax rate on smaller corporations, while raising it to 26.5% on larger corporations.
An additional 3% tax would be included on the taxable income of a corporation in excess of $10,000,000, with a maximum additional tax of $287,000.
Dividends-Received Deduction: The deduction claimed by corporations for dividends received is increased by the proposal. The deduction for dividends received from a 20 percent-owned corporation is increased to 72.5% from the current 65%.
Business Interest Expense: The bill proposes a limitation on the net interest expense that is allowed as a deduction by a specified domestic corporation. A specified domestic corporation is a domestic corporation that is part of a multinational group that prepares consolidated financial statements and has averaged interest expense of $12 million annually over the prior three years.
Additional Changes for Businesses: The proposed legislation makes several other changes to business-related provisions of the Code. The below changes are proposed to take effect for tax years beginning after 2021, unless otherwise noted:
• Modifications to the requirements of the orphan drug tax credit;
• Treatment of losses as capital losses in the case of worthless securities or partnership interests
• Modifications to the calculation of gain and basis in the case of a divisive corporate reorganization (effective upon enactment);
• Expansion of the expensing treatment for qualified film, television, and live theater productions to qualified sound recording productions;
• Many more
International Business Provisions
FDII and GILTI Deductions: Under current law, a domestic corporation receives a deduction of 37.5% of its foreign-derived intangible income (FDII) and a 50% deduction for its global intangible low-taxed income. These are scheduled to be reduced to 21.875% and 37.5%, respectively, for tax years beginning after 2025. Under the proposed legislation, these reductions would be accelerated to apply to tax years beginning after 2021.
Foreign Tax Credit: The proposed legislation seeks to apply the limitation on the foreign tax credit on a country-by-country basis, rather than on an aggregate basis. This would stop domestic corporations from using excess taxes paid to high-tax countries to reduce U.S. tax liability on income earned in lower tax countries. The change would apply not only to regular taxes, but also oil and gas taxes.
Deduction for Foreign-Source Dividends: The current rule under Code Sec. 245A allowing for a deduction equal to the amount of the foreign-sourced portion of a dividend received from a 10-percent owned foreign corporation is modified to only allow the dividend if the foreign corporation is a CFC. However, the shareholder and the foreign corporation can elect to treat the foreign corporation as a CFC if it is not in fact a CFC.
Our intent with this series is to present the most current facts available. Our next installment will discuss the Individual Part of this act and we will provide other comments as they become available.
