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Publish Date

Apr 01, 2021

The Roller Coaster of Predicting Tax Law Changes is Just Beginning

A&M Tax Advisor Weekly

Over the past 48 hours, the White House and senior members of Congress have released high-level policy proposals spanning numerous areas of the Internal Revenue Code (Code). While many of the White House’s proposals mirror commitments or proposals the President made while on the campaign trail, the totality of the changes makes it clear that we are in store for many twists and turns before year’s end and that anticipating what changes to the Code will be made ain’t a merry-go-round.

While there is a great deal of uncertainty surrounding some of the proposals, as highlighted below, we thought it would be helpful to note some of the proposals that have been released as well as to mention what is, or maybe, yet to come.


White House Proposals

In advance of the President’s speech yesterday, the White House released a 27-page fact sheet that highlights several aspects of the Administration’s desired infrastructure package. Within that fact sheet are numerous proposed changes to the Code that are intended to help cover the cost of the Administration’s infrastructure bill.

Made in America Tax Plan
As discussed in a prior alert, the President campaigned on modifying the corporate tax provisions of the Code in order to make corporations pay a greater share of taxes. The proposed Made in America Tax Plan definitely follows through on the President’s campaign pledge. Specifically, the Plan would:

  • Raise the corporate income tax rate to 28 percent (from 21 percent) and, for “large” corporations, impose a 15-percent minimum tax on book income;
  • Alter the taxation of global intangible low-taxed income (GILTI) by subjecting it to a 21 percent tax rate, calculating it on a country-by-country basis, and eliminating the reduction of net tested income by the 10-percent deemed return on tangible property (QBAI);
  • Strengthen rules that prevent U.S. companies from benefiting from inverting and moving their headquarters to foreign countries;
  • Disallow deductions of U.S. corporations for payments to foreign corporations that are based in countries that do not adopt a strong minimum tax;
  • Disallow deductions for expenses incurred in connection with offshoring jobs and provide credits for onshoring jobs;
  • Eliminate the deduction for foreign-derived intangible income (FDII);
  • Eliminate tax preferences for fossil fuels; and
  • Strengthen IRS enforcement resources.

A&M Insight: The Made in America Tax Plan is the bombshell that many multinational corporations were fearing. While all corporations would be subject to the increased corporate income tax rate and potentially the minimum tax on book income, multinationals would also now be subject to a higher effective tax rate on GILTI. Even though the fact sheet seeks to make inversions harder and to discourage multinationals from changing their headquarters, it is possible that unless other countries respond by adopting the proposed “strong minimum tax,” corporations would be willing to pay the surcharge to redomicile or, alternatively, simply be acquired by foreign corporations.

In addition, although the Made in America Tax Plan mirrors many aspects of the President’s campaign proposals, there are a few “interesting” additions, including the elimination of the FDII deduction. In discussing this change, the fact sheet notes that the revenue raised from the repeal would be used “to expand more effective R&D investment incentives.” Some have speculated that this may signal an intention to repeal the TCJA’s mandatory capitalization and amortization of R&D expenses, which was discussed during a recent webinar and is set to go into effect in 2022. While that is a possibility, it is equally plausible that the R&D incentives would be more targeted.

Extra … Extra … Who Wants Credits?
If Joe DiMaggio, Dwight Eisenhower, or Mark Twain were still newsboys, we could only imagine how they would be screaming about the tax credits covering a wide array of areas specified on the Administration’s fact sheet. Specifically, the fact sheet includes a host of credits associated with green energy, including:

  • Tax incentives to buy American-made electric vehicles;
  • A ten-year extension and phase-down of an expanded investment tax credit (section 48 – ITC) and production tax credit (section 45 – PTC) for clean energy generation and storage;
  • A reformed and expanded credit for carbon oxide sequestration (section 45Q);
  • An extension of the tax credit for qualifying advanced energy projects (section 48C); and
  • An extension and expansion of tax credits for home and commercial energy efficiency.

A&M Insight: As activists and investors focus on environmental, social and governance (ESG) awareness, these incentives, if enacted, would enable companies to satisfy their ESG goals at a reduced cost. A&M’s ESG services offer tailored assistance to companies that are looking to create long-term stakeholder value and articulate their position on ESG topics. A&M ESG services team is prepared to help clients navigate the complexity around ESG reporting, emerging regulatory trends and meeting investor expectations. In addition, A&M Tax helps clients, especially those in the energy sector, navigate tax credit eligibility. It also assists private-equity and venture-capital clients with diligence and structuring to maximize the benefits of such credits. Finally, the inclusion of the section 48C credit is intended to encourage the modernization of supply chains. Due to the pandemic, many companies have been forced to reexamine their supply chains as their pre-pandemic models are no longer nimble enough to function well in the current environment. A&M Supply Chain Tax Strategies team is happy to discuss your particular supply chain concerns in order to help develop and implement significant improvements.

The fact sheet also includes tax credits:

  • To provide incentives to low- and middle-income families and to small businesses to invest in disaster resilience;
  • For the buildout of at least 20 gigawatts of high-voltage-capacity power lines;
  • To provide affordable rental housing in underserved communities;
  • For building or rehabilitating homes for low- and middle-income homebuyers; and
  • To encourage businesses to build childcare facilities at places of work.

Missing Tax Provisions and Challenges Ahead
While it is worth noting what is included on the fact sheet, it is equally important to note what is missing. The three big omissions are:

  • Increases in the individual income tax and capital gains tax rates;
  • Repeal of the $10,000 cap on state and local tax (SALT) deductions; and
  • Changes in the estate and gift tax regime.

The fact that a repeal of the SALT cap is not included could pose challenges to the infrastructure bill’s passage. Three House Democrats, including two Ways and Means Committee members, are threatening to derail consideration of any infrastructure bill that does not lift the SALT cap. In addition, in the Senate, the proposal, as it currently stands, is unlikely to garner support from Senator Manchin due to its elimination of tax preferences for the fossil fuel industry and its restoration of payments to the Superfund Trust Fund. This is because more than 90 percent of West Virginia’s energy is generated by fossil-fuel-powered plants, and coal makes up more than a third of West Virginia’s total exports.

Further, Senate Republicans have already started to balk at the proposal. If the Democrats are planning to move forward with the proposal outlined on the fact sheet, it is highly likely that they will need to use reconciliation to pass the measure in the Senate. However, that process may not be smooth sailing, as Senator Sanders prefers a corporate income tax rate of 35 percent, while Senator Manchin has previously supported a corporate income tax rate of not more than 25 percent.

Senate Estate Tax Proposal

Earlier this week, a group of five Senate Democrats, including Senators Warren and Sanders, released a discussion draft of the Sensible Taxation and Equity Promotion Act of 2021 (the STEP Act). The STEP Act is a series of estate tax reforms that would be retroactive to January 1, 2021 if enacted as drafted. For this reason, although the drafters are actively soliciting feedback and it is unclear whether the STEP Act will be introduced as legislation, receive full consideration, and eventually be passed, we believe it is beneficial to appreciate the potential changes.

What’s in the STEP Act
In general, the STEP Act would treat property as sold for its fair market value whenever it is transferred by gift or bequest, or to an intentionally defective grantor trust or a non-grantor trust. In addition, a non-grantor trust would be treated as selling its property every 21 years after the establishment of the trust (trusts established in 2005 or earlier would be treated as incurring their first sale in 2026). That said, the discussion draft would exclude up to $1 million of capital gains recognized as a result of the deemed sale. Of this amount, $100,000 could be used for gifts during the taxpayer’s lifetime. But carryover basis for gifts and “free” basis step-ups at the time of death would be eliminated for many estates and individuals.

A&M Insight: The timing of the circulation of the discussion draft was not coincidental. Although the STEP Act provisions were not included in the White House’s fact sheet revenue proposals, many Democrats have suggested that a similar provision may be used to help pay for the infrastructure bill. In addition, as the STEP Act is a discussion draft, as opposed to an introduced bill, it is hard to say what provisions an introduced bill would actually include. Furthermore, given the White House’s interest in estate tax reform, the STEP Act, while informative, may not be definitive.

What’s not in the STEP Act
Interestingly, the STEP Act is a narrow proposal that focuses nearly entirely on taxing unrealized gains at death. This was a policy the President advocated on the campaign trail and one which was also called for by President Obama. However, the STEP Act does not include other relevant estate tax provisions, such as revisiting the lifetime exemption for gift and estate tax purposes or imposing an alternative annual wealth tax.

A&M Insight: If the STEP Act is adopted, it would not preclude the Democrats from pursuing other tax changes in other packages. However, as noted above, it is unclear what legislative vehicle the Democrats would be able to rely upon to pass such increases if they have to use reconciliation to pass the infrastructure bill and these provisions are not included in the infrastructure bill. This may be why Senate Majority Leader Chuck Schumer is reportedly arguing to the Senate parliamentarian that under an arcane budget rule, a third reconciliation bill is actually available this calendar year.

A&M Tax Says

The discussion above covers only some of the tax-related provisions that are contained in the White House’s fact sheet and the STEP Act discussion draft. As neither proposal is an actual bill that is being negotiated, the provisions should be viewed as a first draft of potential changes to the Code. However, because of who was involved in the “drafts,” we felt it was important to highlight some of the more significant provisions to help our clients keep pace with the potential new legislation and plan accordingly.

Much like Bon Jovi’s classic track “Roller Coaster,” taxpayers should not look down or look back. Instead, they should look forward to the release of Treasury’s upcoming General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, more commonly known as the “Green Book.” Once that is issued, taxpayers will have a much clearer picture of the full scope of the Administration’s tax goals. A&M will continue to monitor the evolving tax landscape and provide timely updates on new developments. If you have a question regarding your particular situation, please do not hesitate to reach out.