On May 28, the Treasury Department released its explanation of the tax proposals included in President Biden's fiscal year 2022 budget submission, often referred to as the "Green Book." The sweeping proposals include raising taxes on higher-income individuals and corporations, capital gains tax rate increases, new estate and gift tax provisions, and other changes that could have far-reaching and substantial consequences for US taxpayers. Below, we provide an overview. Notably, no proposals specifically focused on tax-exempt organizations are included, but several proposals could affect nonprofit organizations, as noted below.
Raising Corporate Tax Rates
The Green Book proposes to raise the corporate income tax rate from 21% to 28% for tax years after December 31, 2021. President Biden has stated publicly that he wants to raise the corporate tax rate from 25% to 28%. This tax rate would apply to the unrelated business income tax ("UBIT") paid by nonprofit taxpayers on their unrelated business income as well as on the rate paid by taxable subsidiaries. In addition to the proposed increase in the corporate tax rate, a new 15% minimum tax on worldwide book income for corporations is proposed. The minimum tax would apply to corporations with more than $2 billion of book income on financial statements.
Increase Individual Tax Rates
The Green Book proposes to increase the top individual income tax rate to 39.6% for tax years after December 31, 2021 (43.4% after taking into account the 3.8% net investment income tax). For joint filers, the top rate would apply to taxable income above $509,300, as adjusted for inflation. Increases in tax rates increase the value of the charitable deduction and are thought to encourage charitable giving, although many other factors, both within and outside the tax code, are also relevant. The proposal would also repeal the deferral of gain from "like-kind" exchanges of real property to the extent such gains exceed $500,000 for each taxpayer ($1 million for joint filers). The proposal would also make permanent the limitations on deducting losses from noncorporate businesses, which are scheduled to expire for tax years after December 31, 2026.
Phaseout of Capital Gains Treatment
For taxpayers with incomes above $1 million, the Green Book proposes to tax long‑term capital gains and qualified dividends at the top ordinary income rate (currently 37%, with a proposed increase to 39.6% for tax years after December 31, 2021) plus the 3.8% net investment income tax, rather than the existing capital gains rate of 20%. The effective date of this change would be April 28, 2021, which would eliminate any opportunities to plan for a potential future increase in capital gains rates by selling appreciated property in 2021.
Revamping International Provisions
The Green Book proposes a series of changes applicable to taxpayers with international operations. These proposed changes include overhauling and tightening the Global Intangible Low-Taxed Income (GILTI) regime, de facto increasing the rate to 21%, and repealing the Foreign-Derived Intangible Income regime, which was an export regime for U.S. companies servicing international clients, each of which would be effective for tax years after December 31, 2021. For tax years after December 31, 2022, the Green Book also proposes to replace the Base Erosion Anti‑Abuse tax with a new tax designed to prevent multinational corporations from shifting profits to low-tax jurisdictions, called Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD). The SHIELD proposal would disallow deductions for certain payments made by a domestic corporation or branch to a group member in a low-tax jurisdiction. The proposal's international tax provisions would effectively establish a minimum effective tax rate, consistent with the Treasury Department's position in international negotiations for a global minimum tax rate on multinational corporations.
Carried Interest Changes
The Green Book proposes to tax income or gain derived from certain "carried interests" in a partnership as ordinary income for taxpayers with more than $400,000 in income, effective for tax years after December 31, 2021. Consistent with treating income or gain derived from carried interests as ordinary income, the proposal would also repeal the three-year holding period for carried interests under section 1061 for taxpayers with more than $400,000 in income.
Expansion of Employment Tax/Elimination of Loan-Out Structures
In addition to the proposal to tax income from carried interests as ordinary income, the Green Book proposes to subject pass-through income of taxpayers with more than $400,000 in income to either the 3.8% net investment income tax or the 3.8% Medicare tax on self-employment earnings.
Estate and Gift Provisions
The Green Book's proposed changes to the estate and gift provisions are much less comprehensive than anticipated. Importantly, the Green Book does not increase the 40% federal estate tax rate or propose to lower the current $11.7 million estate and gift tax exemption amounts to pre-TCJA levels. Thus, there should not be a major new incentive for individuals to create charitable bequests. The proposal does provide that transfers of property by gift or death, including transfers of property to, and distributions of property from, a trust, partnership, or other non-corporate entity, are subject to income tax, effective for transfers after December 31, 2021. This provision excludes charitable donations, meaning such donations would not generate taxable capital gain to the donor and charities would take a carryover basis in the contributed assets. Taxpayers still retain a step-up in tax basis but may recognize taxable gain for property transferred at death. In addition, the proposal provides that if, in the last 90 years, property has not been sold or otherwise subject to income tax, then gain on the unrealized appreciation is taxed, with the first possible tax event under this proposal to be on December 31, 2030. The proposal also provides several exclusions, including for transfers of certain small business stock (referred to as founder's stock under section 1202 of the Internal Revenue Code) and transfers for tangible personal property other than artwork and other collectibles. In addition, the proposal would allow a $1 million per person exclusion to the gain recognition requirement, which would be indexed for inflation.
Infrastructure Provisions
The Green Book includes several tax incentives for construction of housing and public infrastructure, and generation of clean energy. The proposal would expand the Low-Income Housing Tax Credit, which is utilized by many nonprofits providing affordable housing, establish a new Neighborhood Homes Investment Tax Credit, make the New Markets Tax Credit permanent, and provide federally subsidized state and local bonds for infrastructure, such as school construction, public transit, passenger rail, and charging stations for zero-emissions vehicles. The proposal would repeal existing tax incentives for fossil fuels and extend and enhance incentives for renewable and alternative energy generation and zero-emissions vehicles.
What's Next?
The Green Book provides details on the Biden administration's desired tax reform. With a narrow Democratic majority in the House of Representatives and an evenly divided Senate, it is uncertain which, if any, of these proposals will be enacted. But with some tax increases for high earners and corporations likely, Venable will continue to monitor the legislative landscape and provide insight on developments as they arise. Visit our website or subscribe to our Tax Team and Nonprofit Organizations mailing lists for timely updates.