After months of negotiations, on November 19, the U.S. House of Representatives passed a $1.85 trillion “Build Back Better” 10-year budget reconciliation package, by a near party-line vote of 220-213. However, the Senate is expected to modify the historic social spending and climate legislation in an effort to win over the razor-thin Democratic majority. Two Senate moderates, Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ), have yet to publicly endorse the House-passed measure. Before the bill can become law, they and other Senators may seek changes prior to another vote in the House, and then to the President for his signature.

The legislation overall includes:

  • Tax credits for companies and consumers that use clean energy and financial incentives for clean energy manufacturing and production ($550 billion).
  • Universal Pre-K for three- and four-year-olds ($400 billion).
  • Expansion of the child tax credit created during the pandemic to provide each parent with $300 per month for children under the age of six and $250 per month for children between the ages of six and 17 ($190 billion).
  • National paid leave program to provide employees with four weeks of paid family and medical leave ($200 billion).
  • Expansion of Medicare coverage to include hearing benefits ($165 billion).
  • Medicaid program to support long-term home healthcare for the elderly and disabled ($150 billion).
  • Investments in affordable and public housing ($150 billion).
  • An increase in the deduction allowed for state and local taxes from $10,000 to $80,000 ($275 billion).

The following is a brief summary of the key corporate tax items, green energy tax incentives, and social safety net provisions in the House-passed bill.

Corporate and International Tax Provisions

  • Corporate Alternative Minimum Tax
    • Imposes a 15% minimum tax on adjusted financial statement income for corporations with book income in excess of $1 billion for three consecutive years.
    • Determined by applying a 15% rate to the adjusted financial statement income of the corporation, after considering the AMT foreign tax credits and certain net operating losses (up to 80%).
    • A corporation would be liable for the greater of (i) its normal income tax computed under the regular tax system or (ii) its minimum tax computed under the alternative method.
  • Effective for taxable years beginning after Dec. 31, 2022.
  • Excise Tax on Repurchase of Corporate Stock
    • Imposes a 1% excise tax on the repurchase of stock by publicly traded US corporations.
    • Excludes certain repurchases of stock:
      • When the repurchase of stock is exchanged for stock of an acquiring corporation and no gain or loss is recognized by the shareholder
      • Where the repurchased stock is used to contribute to an employee's pension plan or employee stock option plan (ESOP)
      • When a repurchase is by a regulated investment company or REIT
    • Effective for taxable years after December 31, 2021.
  • Modifications to Deduction for Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII)
    • Increases the GILTI effective rate to 15% (by reducing the deduction to 28.5%) and allows for 15.8% deduction for a domestic corporation’s foreign-derived intangible income (FDII).
    • Accelerates the reduction of the FDII deduction that was scheduled to take effect in 2025.
    • Effective for taxable years beginning after December 31, 2022.
  • Modifications to inclusion of Global Intangible Low-Taxed Income
    • Changes the calculation of the tax to a country-by-country basis (instead of an aggregate basis).
    • Reduces the amount of allowable net deemed tangible income by reducing the QBAI threshold from 10% to 5%.
    • Effective for taxable years beginning after December 31, 2022.
  • Modifications to the Base Erosion and Anti-Abuse Tax (BEAT)
    • Amends the BEAT rate to 10% in taxable years beginning after December 31, 2021.
    • A 12.5% rate would apply in taxable years beginning after December 31, 2022.
    • A 15% rate would apply in taxable years beginning after December 31, 2023.
    • An 18% rate would apply in taxable years beginning after December 31, 2024.
  • Modifications to Foreign Tax Credit Limitations
    • Requires all foreign tax credits to be determined on a country-by-country basis and repeals the limitation on FTC carryforwards for GILTI category income for five succeeding taxable years.
    • The five-year carryforward limitation would not apply after December 31, 2030.
    • Effective for taxable years beginning after December 31, 2022.
  • Additional Limitation on Deduction of Interest Expense
    • Limits the interest deduction of certain domestic corporations which are members in an international financial reporting group to a maximum of 110% of net interest expense determined under financial accounting rules.
    • Disallowed interest can be carried forward for subsequent taxable years.
    • Effective for taxable years beginning after December 31, 2022.

High-Income Individual Tax Provisions

  • State and Local Tax (SALT) Deduction
    • Increases the deduction allowed for state and local taxes from $10,000 to $80,000 through 2031.
    • After 2031, the limitation would be eliminated.
  • Application of Net Investment Income Tax to Trade or Business Income of Certain High-Income Individuals
    • Expands the 3.8% Net Investment Income Tax (NIIT) base, which currently applies only to certain passive income.
    • Expands the tax base to include all investment income and trade or business income for individuals with AGI greater than $400,000 ($500,000 for joint filers)/Applies to estates and trusts (without any income thresholds).
    • Does not apply to income on which the FICA tax is already imposed.
    • Effective for taxable years beginning after December 31, 2021.
  • Surcharge on High Income Individuals, Estates, and Trusts
    • Imposes a 5% surcharge on modified adjusted gross income (MAGI) over $10 million and an additional 3% surcharge on MAGI over $25 million.
    • Applies to capital gains and qualified business income.
    • For estates and non-grantor trusts, the 5% surcharge applies to MAGI over $200,000, and the additional 3% surcharge applies to MAGI over $500,000.
    • Effective for years beginning after December 31, 2021.
  • Limitation on Excess Business Losses of Noncorporate Taxpayer
    • Permanently disallows excess business losses for non-corporate taxpayers.
    • The loss thresholds equal $262,000 for individuals and $524,000 for joint filers (indexed).
    • The provision includes a mechanism for disallowed losses to be carried forward to the following taxable year. The carried forward loss is retested and is allowed to the extent of a subsequent year’s aggregate trade or business income plus the threshold amount.
    • Effective for tax years beginning after December 21, 2020.
  • Modification to Rules Relating to Retirement Plans
    • For taxpayers whose income exceeds $450,000 (joint) or $400,000 (single):
      • Prohibits IRA contributions when the IRA balance reaches $10 million beginning in 2029.
      • Requires additional minimum distributions from those accounts beginning in 2029.
      • Bars any conversions from a traditional IRA (or a qualified plan) to a Roth IRA beginning in 2032.

Green Energy Incentives

  • Electric Vehicle Credits for Individuals
    • Creates a tax credit for new qualified electric vehicles for individual buyers through 2026. Provides a base credit of $4,000, a bonus credit of $3,500 for vehicles that meet certain battery capacity requirements, an additional credit of $4,500 for vehicles assembled at a unionized U.S. facility, and a final bonus credit of $500 for vehicles powered by battery cells and manufactured in the U.S.
      • Imposes limits on the retail prices for eligible vehicles.
      • Credit phases out for buyers earning more than $250,000 (single), $375,000 (head of household), or $500,000 (joint).
      • Beginning in 2027, only vehicles assembled in the U.S. will be eligible.
    • Creates a tax credit of up to $4,000 for used electric vehicles through 2031.
    • Creates a tax credit of 30% for up to $3,000 of the cost of qualified electric bikes through 2026. Limits the credit to $900.
  • Commercial Electric Vehicles and Refueling Property Credits
    • Creates a tax credit of up to 30% of the cost of qualified commercial electric vehicles (15% in the case of hybrid vehicles) used in a trade or business through 2031.
    • Modifies and expands the existing alternative fuel refueling property tax credit through 2031. Provides a base credit of 6% for expenses up to $100,000 for each business location and a bonus credit of 4% for certain expenses beyond $100,000 (with higher amounts available in certain circumstances).
  • Production Tax Credit (PTC)
    • Extends the production tax credit for energy facilities that produce electricity from renewable energy sources through 2026.
    • Provides a base credit of 0.5¢ per kWh and a bonus credit of 2.5¢ per kWh for taxpayers who pay prevailing wages and utilize registered apprenticeship programs.
    • Revives and extends PTC for solar energy through 2026.
    • Increases PTC for wind energy to the full appliable credit rate through 2026.
  • Investment Tax Credit (ITC)
    • Extends, by adding new property categories, the ITC for energy properties through 2026.
    • Provides a base credit of 6% and a bonus credit of 30% for taxpayers who pay prevailing wages and utilize registered apprenticeship programs.
  • Advanced Manufacturing Investment Credit
    • Creates a new investment tax credit for the construction of a facility whose primary purpose is the manufacture of semiconductors or semiconductor tooling equipment.
    • Provides a base credit of 5% for all taxpayers and a bonus credit of 20% for taxpayers who pay prevailing wages and utilize registered apprenticeship programs.
    • The construction of the facility must begin before January 1, 2025.
  • Advanced Manufacturing Production Credit
    • Creates a new production tax credit for taxpayers that produce eligible components (solar polysilicon, wafers, cells, and modules, and wind blades, nacelles, towers, and offshore foundations). Credits are provided on a mass or watt-capacity basis.
      • PV cells receive a 4¢ per watt credit
      • PV wafers receive a $12 per square meter credit
      • Solar-grade polysilicon receives a $3 per kilogram credit
      • Solar panels receive a 7¢ per watt credit
      • Wind turbine parts receive between 2-5¢ per watt credits.
    • Credit increases by 10% if the final assembly occurs at a unionized U.S. facility.
    • The credit phases out beginning in 2027 and is eliminated after calendar year 2029.

Social Safety Net Programs

  • Child Tax Credit (CTC)
    • Extends the expanded child tax credit from the American Rescue Plan Act for one year, through 2022 ($3,000 per qualifying child and $3,600 for children under age 6) with reduced qualifying eligible income levels.
    • Makes the credit fully refundable after 2022.
  • Earned Income Tax Credit (EITC)
    • Extends an expanded version of the earned income tax credit for childless workers for one year, through 2022.
  • Paid Family and Medical Leave
    • Provides four weeks of paid family and medical leave to care for a newborn, a loved one with a serious health condition, or a worker’s own serious health condition beginning in 2024.
    • Benefits are targeted to a worker’s typical wages.
    • A separate provision terminates the employer tax credit for paid family and medical leave on December 31, 2023.

Provisions Likely to Change or be Excluded in the Senate Version

  • Paid Family and Medical Leave
    • Senator Manchin opposes the inclusion of this provision and it is likely that this will be taken out in order to gain his support.
  • Medicare Expansion for Hearing
    • Senator Manchin has also voiced opposition to expanding Medicare programs.
    • However, he has approved of previous versions that included this provision.
  • Electric Vehicle Individual Tax Credit
    • Senator Manchin opposes the additional $4,500 credit for EVs made at unionized U.S. facilities.
    • This change would decrease the credit to $8,000 if the EV meets all other criteria.
  • State and Local Income Tax (SALT) Deduction Cap
    • Senators Menendez and Sanders support making changes to allow people earning under a yet-to-be-determined income threshold to take an unlimited SALT deduction, while leaving the current $10,000 cap in place for people who earn more than the income threshold.