On July 27, 2022, Senator Joe Manchin (D-W.Va.) and Senate Majority Leader Chuck Schumer (D-N.Y.) released the Inflation Reduction Act of 2022 (the “IRA”). The IRA contains only two non-climate and non-energy tax proposals – a 15% corporate alternative minimum tax and a provision significantly narrowing the applicability of preferential
Summary of the Biden Administration’s Fiscal Year 2023 Green Book Tax Proposals
On March 28, 2022, the Biden Administration released the Fiscal Year 2023 Budget, and the “General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals,” which is commonly referred to as the “Green Book.” The Green Book summarizes the Administration’s tax proposals contained in the Budget. The Green Book is
The Biden Administration Proposes Changes to the Taxation of Partnerships
On March 28, 2022, the Biden Administration proposed certain limited changes to the taxation of partnerships. In short, the Administration’s proposals would (i) prevent related partners in a partnership that has made a section 754 election from basis shifting to reduce taxable income;[1] and (ii) make two helpful changes to the partnership audit rules.
I. Prevent Basis Shifting by Related Partners
Under current law, if a partnership with appreciated non-depreciable assets and depreciable or amortizable assets makes a “section 754 election” and distributes the appreciated non-depreciable assets on a tax-free basis to one partner, the other partners are entitled to “step-up”, or increase, their basis in the depreciable or amortizable assets. This allows them to claim increased depreciation or amortization deductions or generate losses from assets to be sold. These transactions are known as “basis bumps”.
The Biden Administration Re-Proposes to Tax Carried Interests as Ordinary Income
On March 28, 2022, the Biden Administration proposed to tax “profits” or “carried” interests as ordinary income and impose self-employment tax on income and gains from these interests for certain partners in investment partnerships. The proposal is identical to the proposal made by the Administration last year.
Under current law, a “carried” or “profits” interest in a partnership received in exchange for services is generally not taxable when received and the recipient is taxed on their share of partnership income based on the character of the income at the partnership level. Section 1061 requires certain carried interest holders to satisfy a three-year holding period – rather than the normal one-year holding period – to be eligible for the long-term capital gain rate.
The Biden Administration Proposes Changes to the Taxation of Real Property
On March 28, 2022, the Biden Administration proposed changes to the taxation of real property.
Restrict Deferral of Gain for Like-Kind Exchanges under Section 1031
The Biden Administration has proposed to limit the gain that can be deferred under a like-kind exchange of real estate under section 1031 to $500,000/year
The Biden Administration Proposes Changes to the Taxation of Cryptocurrency Transactions
On March 28, 2022, the Biden Administration proposed certain very limited changes to the taxation of cryptocurrency transactions. The proposals do not change the current treatment of cryptocurrency as property for federal income tax purposes, and do not address any of the fundamental tax issues that cryptocurrency raise.
I. Apply Securities Loan Rules to Digital Assets
Under current law, securities loans that satisfy certain requirements are tax-free under section 1058.[1] The Biden Administration’s proposal would expand section 1058 to apply to “actively traded digital assets” recorded on cryptographically secured distributed ledgers, so long as the loan agreement contains similar terms to those currently required for loans of securities. [2] The Secretary would also have the authority to define “actively traded” and extend section 1058 to “non-actively traded” digital assets. In addition, the proposal would require a lender to include in gross income amounts that would have been included had the lender not loaned the digital asset (i.e., “substitute payments”). The proposals would be effective for taxable years beginning after December 31, 2022.
The Biden Administration Proposes Changes to the U.S. International Tax Rules
Introduction and Summary
On March 28, 2022, the Biden Administration proposed changes to the U.S. international tax rules.
In short, the Biden Administration proposed to:
- Enact a 15% minimum “undertaxed profits rule” (a “UTPR”) to replace the “Base Erosion Anti-Abuse Tax” (“BEAT”), and a 15% “qualified domestic minimum top-up tax” (a “QDMTT”). These proposals are intended to comply with “Pillar Two” – the “Global Anti-Base Erosion” (“GloBE”) rules – of the “Inclusive Framework on Base Erosion and Profit Shifting” (“BEPS”), agreed to by the OECD/G20 member states on October 8, 2021.[1] Under the UTPR, U.S. corporations that are members of a foreign-parented multinational located in a jurisdiction that has not implemented an “income inclusion rule” (an “IIR”) would be denied deductions as are necessary to ensure that the non-U.S. group pays an effective tax rate based on book (and not taxable) income of at least 15% in each non-U.S. jurisdiction in which the group has profits. An IIR imposes a “top-up tax” on an “ultimate parent entity” (“UPE”) in its jurisdiction to produce a 15% minimum effective rate of book income in each taxing jurisdiction in which a member of the parent’s group does business. GILTI and Subpart F are IIRs.[2]
The QDMTT proposed by the Biden Administration would be a 15% domestic minimum top-up tax that would grant the United States taxing priority over other countries enacting a UTPR. The Biden Administration proposal also indicates that U.S. multinationals will benefit from U.S. tax credits and other tax incentives, despite the fact that the OECD/G20 agreement would treat nonrefundable tax credits (like most U.S. tax credits) as reducing a company’s effective rate of tax and would impose tax or deny deductions if those tax credits reduced the company’s effective rate of tax below 15%.
- Increase the “Global Intangible Low-Taxed Income” (“GILTI”) rate from 10.5% to 20% in conjunction with an increase in the corporate tax rate from 21% to 28% (which was proposed separately). Consistent with the Biden Administration’s previous proposal, GILTI and Subpart F would be applied on a jurisdiction-by-jurisdiction basis to prevent blending. Applying GILTI and Subpart F on a jurisdiction-by-jurisdiction basis conforms them to the OECD/G20 agreement.
- Provide a 10% tax credit for expenses incurred in “onshoring a U.S. trade or business,” which is reducing or eliminating a trade or business (or line of business) currently conducted outside the United States and starting up, expanding, or otherwise moving the same trade or business within the United States, but only to the extent that U.S. jobs result. The proposal would conversely deny deductions for “offshoring a U.S. trade or business,” which is reducing or eliminating a trade or business or line of business currently conducted inside the United States and starting up, expanding, or otherwise moving the same trade or business outside the United States, to the extent that this action results in a loss of U.S. jobs.
- Authorize the IRS to issue regulations to allow taxpayers to make retroactive “qualified electing fund” (“QEF”) elections for their “passive foreign investment companies” (“PFICs”) without requesting IRS consent, so long as the U.S. government would not be prejudiced.