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Tax Provisions in Build Back Better Act

On November 19th, the House passed the Build Back Better Act (the “BBB”) (HR. 5376) and in the tax area, many of the provisions which could have been very detrimental to small businesses and their owners were removed from the final House passed version of the BBB. More specifically, in the final House bill, this is what happened with the proposed tax provisions:

  • No change to income tax or capital gains rates. Only those with modified adjusted gross income (“MAGI”) of more than $10,000,000 will see an increase in income taxes through a new surtax;
  • No change to the estate and gift tax exemption amounts or rates for anyone;
  • No change to the step up in basis for assets going through an estate;
  • No change to the grantor trust rules;
  • No change to the valuation discounts used when transferring interests in most family-owned businesses from an older to a younger generation;
  • A new significant surtax for the super wealthy and non-grantor trusts;
  • Additional 5% surtax on MAGI in excess of $10,000,000 (single or married filing jointly) for individuals and in excess of $200,000 for non-grantor trusts;
  • Extra additional 3% surtax on MAGI in excess of $25,000,000 (single or married filing jointly) for individuals and in excess of $500,000 for non-grantor trusts;
  • No change to C corporation tax rates;
  • Expansion of the 3.8% net investment income tax (NIIT) to apply to active business income from pass-through entities (such as S corporations and partnerships) for those taxpayers earning more than $400,000 (if single) and $500,000 (if married filing jointly). Under current law the 3.8% net investment income tax only applies to passive income. The effective date for this provision in the House bill is January 1, 2022;
  • No change to the 20% qualified business income deduction under 199A for pass-through entities. Though the 199A deduction is still set to sunset at the end of 2025;
  • A change to the SALT (state and local taxes) deduction limit increasing it up to $80,000 until 2031 at which point the deduction would go back permanently to the $10,000 limitation brought in by the 2017 tax bill. This is a revenue raiser since under the current law, the $10,000 limitation is set to sunset at the end of 2025 and would revert to prior law with an unlimited SALT deduction as of 2026; and
  • No required reporting of banking transactions to IRS.

It’s too soon to judge what the Senate version will look like or even when it will be brought up, however it seems unlikely that any other negative tax provisions will come in, particularly with Senator Manchin having the deciding vote.