Build Back Better Bill Passes by Slim Margin in House; Faces Hurdle in Senate

(Parker Tax Publishing November 2021)

On November 19, the House of Representatives passed the Build Back Better (BBB) Act, the centerpiece of President Biden's legislative agenda. The legislation contains extensive tax provisions, including (1) the extension of benefits for families and lower-income taxpayers that were originally enacted in the American Rescue Plan (ARP) Act; (2) increasing the cap on the deduction for state and local income and property taxes (SALT) to $80,000; (3) broadening the 3.8 percent Net Investment Income Tax (NIIT) to apply to active trade or business income from pass-through entities of high-income taxpayers; (4) an income tax surcharge on incomes in excess of $10 million; (5) an alternative minimum tax on corporations with over $1 billion in income; (6) a 1 percent tax on corporate stock buybacks; and (7) a large increase in the IRS's enforcement budget. H.R. 5376.

On November 19, the Build Back Better (BBB) Act, H.R. 5376, passed the House of Representative by a vote of 220 - 213. Numerous last-minute changes were made to the bill which now heads to the Senate where its passage is far from assured.

Executive Summary

Highlights of the tax provisions included in the bill passed by the House include the following:

(1) an extension and expansion of the child tax credit;

(2) the extension of recent improvements to the earned income tax credit through 2022;

(3) expanded access to the premium tax credit to assist with purchasing health insurance;

(4) an increase in the $10,000 cap on the deduction for state and local income and property taxes to $80,000;

(5) the application of the net investment income tax to trade or business income of certain high-income individuals;

(6) an income tax surcharge on high-income individuals, estates, and trusts;

(7) a large increase in the IRS's enforcement budget;

(8) the imposition of a contribution limit for individual retirement plans of high-income taxpayers with large account balances:

(9) an alternative minimum tax on corporations with over $1 billion in income;

(10) a 1 percent excise tax on publicly traded U.S. corporations for the value of any of its stock that is repurchased by the corporation during the tax year; and

(11) numerous new tax credits designed to incentivize businesses and individuals to help in the fight against climate change.

Additionally, the legislation passed by the House provides a broad array of non-tax related provisions. It provides funding, establishes programs, and otherwise modifies provisions relating to a myriad of different areas, including education, labor, childcare, health care, taxes, immigration, and the environment. For example, the bill establishes programs that:

(1) provide free childcare for children under the age of six;

(2) provide free universal preschool services;

(3) provide up to 4 weeks of paid family and medical leave;

(4) provide health benefits for eligible individuals who reside in states that have not expanded Medicaid;

(5) expand Medicare to cover hearing; and

(6) provide certain aliens with a path to permanent resident status (e.g., those who entered the United States as minors).

A discussion of the BBB's key tax provisions follows.

Individual Tax Provisions

Child Tax Credit

Exception to Safe Harbor Where Credit Exceeds Amount for Which Taxpayer Is Eligible: An exception is provided to the safe harbor rule which provides that certain taxpayers who receive a larger advanced child tax credit (CTC) payment amount than they are eligible to claim are not subject to repayment. Under the exception, the safe harbor does not apply if the Treasury Secretary determines that a child was taken into account for the advance payment due to fraud or intentional disregard of rules and regulations by the taxpayer.

Extension of Child Tax Credit Changes Enacted for 2021: The special CTC rules in Code Sec. 24(i) that were enacted for 2021 by the American Rescue Plan Act of 2021 (ARP) are extended through 2022. Thus, the credit is generally fully refundable, children 17 years old and younger qualify for the credit, the maximum credit amount is $3,000 per child ($3,600 for children under age 6), and the modified adjusted gross income threshold at which the credit phases out is generally the same as in 2021.

Repeal of Social Security Number Requirement: The social security number requirement for receiving the CTC for qualifying children, which was added by the Tax Cuts and Jobs Act of 2017 (TCJA), is repealed.

Taxpayers Can Use Look-Back Rule in Calculating Child Tax Credit Phaseout: New Code Sec. 24(i)(5) allows taxpayers to use prior-year income for purposes of determining the phaseout of the CTC. This will allow taxpayers who may have received an excess advance credit to keep the full value of the credit even when their income rises above the phaseout range in the following year.

Child Tax Credit Is Fully Refundable after 2022: A provision is added under which the CTC is fully refundable after 2022 and thus is no longer subject to either the $1,400 limitation on refundability, nor the earned income phase-in.

Earned Income Tax Credit

Certain Improvements to Earned Income Tax Credit Extended Through 2022: The ARP made improvements to the earned income tax credit through 2021 which this provision would extend through 2022. Specifically, the provision extends the expansion of the eligibility and the amount of the earned income tax credit for taxpayers with no qualifying children (the "childless EITC") enacted in the ARP permanent. In particular, the minimum age to claim the childless EITC is reduced from 25 to 19 (except for certain full-time students) and the upper age limit for the childless EITC is eliminated. This provision also increases the childless EITC amount by increasing the credit percentage and phaseout percentage from 7.65 to 15.3 percent, increasing the income at which the maximum credit amount is reached to $9,820, and increasing the income at which phaseout begins to $11,610 for non-joint filers. The provision contains special rules regarding the application of the credit for former foster youth and homeless youth. As with all other parameters of the EITC, these amounts are indexed for inflation, and will be indexed for 2022.

This provision also includes for 2022 the provision included in the ARP allowing a taxpayer to use the taxpayer's prior-year earned income for purposes of computing the EITC, in the event that a taxpayer's earned income in the current taxable year has fallen. This provision allows consistency in the value of the EITC for taxpayers who may have lost a job, or whose income has fallen temporarily.

State and Local Tax Deduction

Increase in SALT Deduction Cap: A last minute amendment to the bill increased the cap on the deduction for state and local income and property tax deductions from $10,000 to $80,000 through 2031.

Premium Tax Credit

Improve Affordability and Reduce Premium Costs of Health Insurance for Consumers: This provision extends the ARP Section 9661 affordability percentages used for Code Sec. 36B premium tax credits through 2025 to increase generosity for individuals eligible for assistance with household incomes below 400 percent of the federal poverty level (FPL) and provides Code Sec. 36B credits for taxpayers with household incomes above 400 percent of the FPL. The provision also specifies that the applicable percentages are not indexed until 2027.

Modification of Employer-Sponsored Coverage Affordability Test in Health Insurance Premium Tax Credit: This provision revises the household income thresholds through 2025 that are used to determine whether a taxpayer has access to affordable insurance through an employer-sponsored plan or through a qualified small employer health reimbursement arrangement. Taxpayers are eligible for the Code Sec. 36B premium tax credit where insurance premiums exceed 8.5 percent of household income. The provision also specifies that the thresholds are not indexed until 2027.

Treatment of Lump-Sum Social Security Benefits in Determining Household Income: This provision excludes social security benefit lump-sum payments for Americans with disabilities, widows, new retirees, and others from the calculation of household income for purposes of Code Sec. 36B premium tax credits.

Temporary Expansion of Health Insurance Premium Tax Credits for Certain Low-Income Populations: This provision modifies certain eligibility rules and requirements for Code Sec. 36B premium tax credits through 2025, expands eligibility to taxpayers with household incomes below 100 percent of the FPL, specifies that taxpayers with household incomes below 138 percent of the FPL with access to employer-sponsored coverage or a qualified small employer health reimbursement arrangement can still receive Code Sec. 36B premium tax credits, reduces the recapture limitation for taxpayers with household incomes below 200 percent of the FPL, exempts certain taxpayers from having to file a return, reconcile, or repay advance payments of Code Sec. 36B premium tax credits, and modifies when applicable large employers make an employer shared responsibility payment with respect to certain low-income taxpayers.

Special Rule for Individuals Receiving Unemployment Compensation: This provision, which extends Section 9663 of the ARP through 2022, provides that a taxpayer can receive Code Sec. 36B premium tax credits as if the taxpayer's household income was no higher than 150 percent of the FPL for individuals receiving unemployment compensation as defined in Code Sec. 85(b).

Permanent Credit for Health Insurance Costs: This provision makes the health coverage tax credit permanent, removing the uncertainty of annual extensions, and increases the amount of the qualified health insurance premium covered by the credit from 72.5 percent to 80 percent.

Exclusion of Certain Dependent Income for Purposes of Premium Tax Credit: This provision excludes certain dependent income through 2026 from the calculation of household income for purposes of determining the 36B premium tax credit amounts.

Disaster-Related Tax Provisions

Exclusion of Disaster Grants from Income: Code Sec. 139 is amended to provide an exclusion from gross income for state-based grants, made to homeowners, that support mitigation efforts for earthquakes, fires, windstorms, and other disasters.

Education-Related Provisions

Incentives to Study Medicine and Practice in Rural and Underserved Communities: A Rural and Underserved Pathway to Practice Training Program for Post-Baccalaureate and Medical Students is established under Section 1899C of the Social Security Act. This program incentivizes those from rural and underserved communities to become physicians and to practice in those communities through a scholarship and stipend for qualifying medical students to attend medical school or post-baccalaureate and medical school. It establishes a new refundable Pathway to Practice medical scholarship voucher credit under new Code Sec. 36G for qualified educational institutions. The credit amount for a tax year is equal to the aggregate amount paid or incurred by a qualified educational institution during the tax year pursuant to an annual award of a Pathway to Practice medical scholarship voucher to a qualifying student.

Credit for Donations to Educational Institutions with Research Infrastructure Program: A 40 percent general business credit for qualified cash contributions made by a taxpayer to a certified educational institution in connection with a qualifying research infrastructure program is established. Under the provision, taxpayers may elect to claim this credit with respect to a qualifying cash contribution in lieu of treating such contribution as a charitable deduction. Institutions of higher education may designate such contributions made by a taxpayer as qualified cash contributions only if the institution is certified as having been allocated a credit amount with respect a project to purchase, construct, or improve property that is used for research. For purposes of this provision, an eligible educational institution is a public college or university, or a non-profit organization to which authority has been delegated by a public college or university to apply for administering credit amounts on behalf of such institution.

Education Tax Credit Improvements: Code Sec. 117(b) is amended to provide an exclusion from gross income through 2025 for federal Pell grants and scholarships or fellowship grants used for qualified tuition and related expenses. The provision also provides that, for purposes of the American opportunity tax credit (AOTC) in Code Sec. 25A(a)(1) and the lifetime learning credit in Code Sec. 25A(a)(2), the amount of qualified tuition and related expenses used in calculating the credit will not be reduced by any amount paid with a federal Pell grant. Additionally, the rule in Code Sec. 25A(b)(2)(D), which excludes students convicted of a state or felony drug offence from claiming the AOTC, is repealed.

Net Investment Income Tax Expansion

Application of Net Investment Income Tax to Trade or Business Income of Certain High-Income Individuals: This provision amends Code Sec. 1411 to expand the net investment income tax (NIIT) to cover net investment income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income (single filer), $500,000 (joint filer), or $250,000 (married filing separately) as well as for trusts and estates. The provision also amends Code Sec. 1411(c)(6) to clarify that the NIIT is not assessed on wages on which FICA tax is already imposed.

Other Tax Increases on High-Income Individuals

Limitations on Excess Business Losses of Noncorporate Taxpayers: This provision amends Code Sec. 461(l)(1) to provide that in the case of any taxpayer other than a corporation, an excess business loss of the taxpayer for the tax year is not allowed. Code Sec. 461(l)(2) is amended to provide that any such loss disallowed is treated as an excess business deduction under Code Sec. 461(l)(3).

Surcharge on High Income Individuals, Estates, and Trusts: This provision adds new Code Sec. 1A to impose a tax equal to 5 percent of a taxpayer's modified adjusted gross income in excess of $10,000,000 (or in excess of $5,000,000 for a married individual filing separately), and an additional tax of 3 percent of a taxpayer's modified adjusted gross income in excess of $25,000,000. For this purpose, modified adjusted gross income means adjusted gross income reduced by any deduction allowed for investment interest (as defined in Code Sec. 163(d)).

Other Individual Tax Provisions

Allowance of Above-the-Line Deduction for Union Dues Paid: This provision allows for up to $250 in dues to a labor organization be claimed as an above-the-line deduction. The provision is effective for tax years beginning after December 31, 2021.

Above-the-line Deduction for Employee Uniforms: This provision allows an above-the-line deduction for up to $250 paid for employee uniforms or work clothing. The uniforms or work clothing must be required as a condition of employment and not suitable for everyday wear. The provision applies to tax years beginning after December 31, 2021.

Extension of Period of Limitation for Legally Married Same-Sex Couples: Following the Supreme Court's decision in U.S. v. Windsor, 2013 PTC 167 (S. Ct. 2013), the IRS released guidance in Rev. Rul. 2013-17 that allowed taxpayers to amend their returns with respect to their marital status, but only generally back to 2010. Thus, taxpayers lawfully married under state law before 2010 could not claim the benefits of federal recognition of same-sex marriage for pre-2010 years. Under this provision, lawfully married same-sex couples can file claims for credits and refunds related to a change in marital status back to their year of marriage, which in some cases is as early as 2004.

Business Tax Provisions

Alternative Minimum Tax on Large Corporations: This provision imposes a 15 percent minimum tax on adjusted financial statement income for corporations with such income in excess of $1 billion. Under the proposal, an applicable corporation's minimum tax would be equal to the amount by which the tentative minimum tax exceeds the corporation's regular tax for the year. Tentative minimum tax is determined by applying a 15 percent tax rate to the adjusted financial statement income of the corporation for the tax year (after taking into account the AMT foreign tax credit and the financial statement net operating losses).

Excise Tax on Repurchase of Corporate Stock: This provision adds new Code Sec. 4501 which imposes a 1 percent excise tax on publicly traded U.S. corporations for the value of any of its stock that is repurchased by the corporation during the tax year. The term "repurchase" means a redemption within the meaning of Code Sec. 317(b) with regard to the stock of such corporation, and any other economically similar transaction as determined by the Secretary of Treasury. The amount of repurchases subject to the tax is reduced by the value of any new issuance to the public and stock issued to the employees of the corporation.

Limitation on Interest Expense Deduction: This provision adds new Code Sec. 163(n), which limits the amount of net interest expense (interest expense in excess of interest income) of certain domestic corporations (or foreign corporations engaged in a U.S. trade or business) that are members in an international financial reporting group. The provision limits the interest expense deduction to an "allowable percentage" of 110 percent of the domestic corporation's net interest expense. A domestic corporation's allowable percentage is the ratio of such corporation's allocable share of the group's net interest expense over such corporation's reported net interest expense. A domestic corporation's allocable share of the group's net interest expense is the portion of such expense which bears the same ratio to the total group expense as the corporation's earnings before interest, taxes, depreciation, and amortization (EBITDA) bears to the group's total EBITDA. This interest limitation applies only to domestic corporations whose average excess interest expense over interest includible over a three-year period exceeds $12,000,000. The limitation does not apply to any small business exempted under Code Sec. 163(j)(3).

Limitation on Certain Special Rules for Section 1202 Gains: This provision amends Code Sec. 1202(a) to provide that the special 75 percent and 100 percent exclusion rates for gains realized from certain qualified small business stock will not apply to taxpayers with adjusted gross income that equals or exceeds $400,000.

Constructive Sales: This provision includes digital assets in the constructive sale anti-abuse rules previously applicable to other financial assets. The constructive sale rules in Code Sec. 1259 treat the adoption of certain offsetting positions to previously owned positions as sales of the previously owned position. These rules prevent taxpayers from locking in investment gains without realizing taxable gain. The amendments made by this provision apply to constructive sales after the date of enactment and contracts entered into after the date of enactment.

Modification of Application of Business Interest Limitation to Partnerships and S Corporations: This provision amends Code Sec. 163(j)(4) to clarify that in the case of any partnership or S corporation, Code Sec. 163(j) applies at the partner or shareholder level, respectively.

Carryforward of Disallowed Interest: This provision amends Code Sec. 163 by providing new Code Sec. 163(o) which allows the carryforward of interest expense disallowed by reason of both Code Sec. 163(j)(1) and Code Sec. 163(n)(1). A taxpayer subject to both Code Sec. 163(j)(1) and Code Sec. 163(n)(1) is eligible to deduct only the lesser of the two limitations in a tax year. Interest not allowed will be carried forward and treated as business interest in subsequent tax years.

Credit for Clinical Testing of Orphan Drugs Limited to First Use or Indication: This provision amends Code Sec. 45C to limit the credit for clinical testing of orphan drugs to expenses related to the first use or indication for an orphan drug as designated under Section 526 of the Federal Food, Drug, and Cosmetic Act. Additionally, the provision provides that clinical testing expenses for any drug that has received a marketing approval for any use or indication (either for use in rare disease or condition or non-rare disease or condition) do not qualify for the credit.

Modifications to Treatment of Certain Losses: This provision amends Code Sec. 165(g) to provide that losses with respect to securities are treated as realized on the day that the event establishing worthlessness occurs. In addition, the provision provides that partnership indebtedness is treated in the same manner as corporate indebtedness under this provision. The provision also clarifies that abandoned securities are treated as worthless at the time of abandonment. In addition, Code Sec. 165 is amended to provide that a loss on a worthless partnership interest is subject to the same rules as a loss on a sale of a partnership interest. The rule also changes the treatment of taxable liquidations of corporate subsidiaries. Under the provision, a loss in a taxable liquidation, dissolution of a corporation with worthless stock, or issuance of debt in connection with which corporate stock becomes worthless is deferred until the property received in the liquidation is sold to a third party.

Adjusted Basis Limitation for Divisive Reorganization: This provision amends Code Sec. 361 to provide that a distributing corporation in a divisive reorganization recognizes gain to the extent of controlled corporation debt securities transferred to the creditors of the distributing corporation in excess of the basis in assets (reduced by amounts paid by the controlled corporation to the distributing corporation) transferred from the distributing corporation to the controlled corporation in the transaction.

Rents From Prison Facilities Not Treated as Qualified Income for Purposes of REIT Income Tests: This provision amends Code Sec. 856 to provide that income received with respect to property primarily used as a prison or other detention facility does not qualify for the purpose of REIT income tests.

Modification of Rules Relating to Common Control: Under the Code, certain business entities are aggregated in order to apply various limitations (e.g., the gross receipts limitation in the use of the cash method of accounting under Code Sec. 448(c), the exemption from interest deductibility limitations under Code Sec. 163(j)). Code Sec. 52(a) addresses corporate entities and Code Sec. 52(b) provides similar rules for corporate and non-corporate entities. Code Sec. 52(b) refers to "trades or business (whether or not incorporated)" and the treatment of certain for-profit activity is unclear. Under this provision, a taxpayer engaged in any activity in connection with a trade or business or any for-profit activity is subject to the aggregation rules under Code Sec. 52(b).

Expansion of Wash Sale Rules: This provision amends Code Sec. 1091 to include commodities, currencies, and digital assets in the wash sale rule, an anti-abuse rule previously applicable to stock and other securities. The wash sale rule in Code Sec. 1091 prevents taxpayers from claiming tax losses while retaining an interest in the loss asset.

Improvements to Low-Income Housing Credit: There are several changes to the low-income housing tax credit including a provision which provides a 50 percent basis boost for low-income housing tax credit buildings that designate at least 20 percent of their occupied units for extremely low-income tenants and limit rent to no more than 30 percent of the greater of: 30 percent of area median income or the federal poverty line.

Deductibility of Research and Experimental Expenditures: This provision delays the effective date of Section 13206 of the TCJA. That section provides for amortization of the research and experimental expenditures under Code Sec. 174 starting in tax years beginning after December 31, 2021. Under this provision, the amortization of research and experimental expenditures will begin for amounts paid or incurred in tax years beginning after December 31, 2025.

Treatment of Certain Qualified Sound Recording Productions: This provision amends Code Sec. 181 to permit taxpayers to treat as currently deductible expenses the cost of certain qualified sound recording productions not exceeding $150,000 in a tax year. The bill defines qualified sound recording production as certain sound recordings produced and recorded in the United States. The provision expires on December 31, 2025 (the current Code Sec. 181 termination date).

Exclusion from Income of Certain Payments Made to Farmers: This provision addresses the tax treatment of certain payments made to farmers and others under Sections 1005(b) and 1006(e) of the ARP. Such payments will not be included in the gross income of the payee, and any otherwise-allowable deductions continue to be deductible notwithstanding the tax-free treatment of the payment.

Termination of Employer Credit for Paid Family and Medical Leave. This provision accelerates the termination of the employer credit for paid family and medical leave under Code Sec. 45S to December 31, 2023. The credit does not terminate until December 31, 2025 under current law.

Expenses in Contingency Fee Cases: This provision modifies current law expensing rules in Code Sec. 162 to allow plaintiffs' attorneys to deduct out of pocket litigation costs in the year they are incurred, rather than waiting until the conclusion of the litigation. The provision applies to amounts paid, incurred, or received in tax years beginning after the date of enactment.

Other Business Tax Provisions: The BBB includes numerous additional business tax provisions. The more significant provisions include:

(1) modifications to the limitation on deduction of excessive employee remuneration;

(2) a new federal tax credit to encourage the rehabilitation of deteriorated homes in distressed neighborhoods;

(3) a new markets tax credit allocation for calendar years 2022-2025 for low-income communities in tribal areas;

(4) a temporary increase in the percentage of qualified childcare expenditures that qualify for the employer-provided childcare credit in Code Sec. 45F as well as an increase the total amount of expenditures by the employer that are taken into consideration for the credit;

(5) a payroll credit for compensation of local news journalists; and

(6) an increase in the research credit against payroll tax for small businesses.

Increased IRS Funding and Other Compliance-Related Changes

Increased IRS Funding: The BBB increases funding for the IRS over the next decade as follows: $1.9 billion for taxpayer services; $44.9 billion for enforcement; $27.4 billion for operations support; and $4.8 billion for business systems modernization.

Observation: The proposed additional funding works out to nearly $8 billion per year on top of the IRS's current funding. By way of perspective, the agency's actual expenditures in fiscal year 2020 were $12.3 billion. Official estimates of the additional tax revenue that would be generated by increased tax enforcement over the next ten years range from $200 billion (Congressional Budget Office estimate) to $400 billion (Treasury Department estimate).

New Reporting Requirements for Third Party Network Transactions: This provision amends Code Sec. 3406(b) to add to the list of reportable payments any payments in settlement of third party network transactions, but only if the aggregate annual payment made by the third party settlement organization to the payee equals or exceeds $600, the third party settlement organization was required under Code Sec. 6050W to file a return for the preceding year with respect to the payee, or if during the preceding calendar year the payment organization made reportable payments to the payee with respect to which amounts were required to be deducted and withheld under Code Sec. 3406(a). This provision is effective for calendar years beginning after December 31, 2021. A transition rule for 2022 adds the requirement that the aggregate number of annual transactions between the third-party settlement organization and the payee exceeds 200.

Modification of Procedural Requirements Relating to Assessment of Penalties: This provision repeals the requirement in Code Sec. 6751(b)(1) that any assessment of penalties must be approved by a supervisor of the employee making such determination. This amendment is effective as if included in Section 3306 of the Internal Revenue Service Restructuring and Reform Act of 1998, which applies to notices issued, and penalties assessed, after December 31, 2000.

Retirement Plans

Contribution Limit for Individual Retirement Plans of High-Income Taxpayers with Large Account Balances: This provision adds Code Sec. 409B which prohibits further contributions to a Roth or traditional IRA for a tax year if the contributions would cause the total value of an individual's IRA and defined contribution retirement accounts as of the end of the prior tax year to exceed or further exceed $10 million. The limit on contributions would only apply to single taxpayers (or taxpayers married filing separately) with income over $400,000, married taxpayers filing jointly with income over $450,000, and heads of households with income over $425,000 (all indexed for inflation). The provision also adds a new annual reporting requirement for employer defined contribution plans on aggregate account balances of at least $2.5 million. The reporting would be to both the IRS and the plan participant whose balance is being reported.

Increase In Minimum Required Distributions for High-Income Taxpayers with Large Retirement Account Balances: Under this provision, which would be effective after 2028, if an individual's combined traditional IRA, Roth IRA and defined contribution retirement account balances generally exceed $10 million at the end of a tax year, a minimum distribution would be required for the following year. This minimum distribution is only required if the taxpayer's income is above the thresholds listed above (e.g., $450,000 for a joint return). The minimum distribution generally is 50 percent of the amount by which the individual's prior year aggregate traditional IRA, Roth IRA and defined contribution account balance exceeds the $10 million limit, reduced by a specified amount. In addition, to the extent that the combined balance amount in traditional IRAs, Roth IRAs and defined contribution plans exceeds $20 million, that excess would be required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans. Once the individual distributes the amount of any excess required under this 100 percent distribution rule, then the individual is allowed to determine the accounts from which to distribute to satisfy the 50 percent distribution rule above, except that generally no amounts may be allocated to stock in a private company ESOP.

Tax Treatment of Rollovers to Roth IRAs and Accounts: In order to close a so-called "back-door" Roth IRA strategy, and a similar one for retirement plans, this provision prohibits all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to Roth accounts regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021. In addition, the provision eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision would apply to distributions, transfers, and contributions made in tax years beginning after December 31, 2031.

Statute of Limitations with Respect to IRA Noncompliance: This provision expands the statute of limitations for IRA noncompliance related to valuation-related misreporting and prohibited transactions from three years to six years to help IRS pursue these violations that may have originated outside the current statute's three-year window.

IRA Owners Treated as Disqualified Persons for Purposes of Prohibited Transactions Rules: Under this provision, for purposes of applying the prohibited transaction rules with respect to an IRA, the IRA owner (including an individual who inherits an IRA as beneficiary after the IRA owner's death) is always a disqualified person.

Green Energy Tax Provisions

Extension and Modification of Credit for Electricity Produced from Certain Renewable Resources: This provision amends Code Sec. 45(d) to extend the production tax credit (PTC), which allows energy producers to claim a credit based on electricity produced from renewable energy resources, through 2026.

Extension and Modification of Energy Credit: This provision amends Code Sec. 48 to extend the investment tax credit (ITC), which allows taxpayers to claim a tax credit for the cost of energy property. In most cases, the provision extends the credit for property for which construction begins by the end of 2026.

Increase in Energy Credit for Solar and Wind Facilities Placed in Service in Connection with Low-Income Communities: This provision adds new Code Sec. 48(e) to provide an increase in the energy credit for solar and wind facilities placed in service in connection with low-income communities.

Elective Payment for Energy Property and Electricity Produced from Certain Renewable Resources: This provision adds a new elective payment for energy property and electricity from certain renewable sources. Under new Code Sec. 6416, taxpayers can elect to be treated as having made a payment of tax equal to the value of the credit for which they would otherwise be eligible. Rather than opting to carry forward credits to years when their credits can offset their tax liability, taxpayers can elect to treat the amount of credit as a payment of tax. This allows entities with little or no tax liability to accelerate utilization of these credits, including tax-exempt and tribal entities. The provision applies to tax years beginning after December 31, 2021. Projects can make elections starting 270 days after date of enactment.

Investment Credit for Electric Transmission Property: This provision adds new Code Sec. 48D to provide for a tax credit for the basis of qualifying electric transmission property placed in service by the taxpayer. This credit is effective for property placed in service after December 31, 2021, and before January 1, 2032.

Extension of Credit for Carbon Oxide Sequestration: This provision amends Code Sec. 45Q(d) to extend the credit for carbon oxide sequestration facilities that begin construction before the end of 2031.

Green Energy Publicly Traded Partnerships: This provision amends Code Sec. 7704(d)(1)(E) to expand the definition of qualified income for publicly traded partnerships from certain income derived from minerals and natural resources to include income derived from green and renewable energy. These additions include income from certain activities related to energy production eligible for the PTC, property eligible for the ITC, renewable fuels, and energy and fuel from carbon sequestration projects eligible for credits under Code Sec. 45Q.

Zero-Emission Nuclear Power Production Credit: This provision adds new Code Sec. 45W to provide a credit for the production of electricity from a qualified nuclear power facility. This provision applies to electricity produced and sold after December 31, 2021, and terminates on December 31, 2027.

Extension of Incentives for Biodiesel, Renewable Diesel, and Alternative Fuels: This provision amends Code Sec. 40A(g) to extend the income and excise tax credits for biodiesel and biodiesel mixtures at $1.00 per gallon through 2026. The provision also extends the $0.10-per-gallon small agri-biodiesel producer credit and the $0.50 per gallon excise tax credits for alternative fuels and alternative fuel mixtures through 2026.

Extension of Second-Generation Biofuel Incentives: This provision amends Code Sec. 40(b)(6)(J)(i) to extend the second-generation biofuel income tax credit through 2026.

Sustainable Aviation Fuel Credit: This provision adds new Code Sec. 40B to provide, beginning in 2023, a refundable blenders tax credit for each gallon of sustainable aviation fuel sold as part of a qualified fuel mixture. This provision applies for fuel sold or used after December 31, 2022. The credits allowed under this provision expire after December 31, 2026.

Credit for Production of Clean Hydrogen: This provision adds new Code Sec. 45X to create a new tax credit for the production of clean hydrogen produced by a taxpayer at a qualified clean hydrogen facility beginning in 2022 during the ten-year period beginning on the date such facility is placed in service. No credit shall be allowed for facilities which begin construction in 2029 and thereafter.

Extension, Increase, and Modifications of Nonbusiness Energy Property Credit: This provision amends Code Sec. 25C(g)(2) to extend the nonbusiness energy property credit to property placed in service before the end of 2031. Beginning in 2022, the provision modifies and expands the credit, including by (1) increasing the percentage of the credit for installing qualified energy efficiency improvements from 10 percent of the cost to 30 percent; (2) replacing the lifetime cap on credits with a $1,200 annual credit limitation and a $600 limitation per-item of property; (3) updating various standards and associated limits to reflect advances in energy efficiency and removing eligibility of roofs, advanced main air circulating fans, and certain windows, (4) requiring that manufacturers and taxpayers comply with reporting the identification number of certain property placed into service in order to access the credit, and (5) expanding the credit to cover the costs of home energy audits, allowing a credit of 30 percent of such costs up to a maximum credit of $150.

Residential Energy Efficient Property: This provision amends Code Sec. 25D(h) to extend the credit for the cost of qualified residential energy efficient property expenditures, including solar electric, solar water heating, fuel cell, and small wind energy, and geothermal heat pumps. The provision extends the full 30 percent credit for eligible expenditures through the end of 2031. The credit then phases down to 26 percent in 2032 and 22 percent in 2033. The credit expires after the end of 2033. The provision also expands the definition of eligible property to include battery storage technology. This credit is made refundable starting in 2024.

Energy Efficient Commercial Buildings Deduction: This provision amends Code Sec. 179D(c)(2) to provide, starting in 2022, an expansion of the energy efficient commercial buildings deduction by increasing the maximum deduction, determined on a sliding scale. It also changes this maximum from a lifetime cap to a three-year cap, updates the eligibility requirements, and allows taxpayers to elect to take an alternative, parallel deduction for energy efficient lighting, HVAC, and building envelope costs placed into service in connection with a qualified retrofit plan. The amendments made by this provision expire after December 31, 2031.

Extension, Increase, and Modifications of New Energy Efficient Home Credit: This provision amends Code Sec. 45L(g) to extend the new energy efficient home credit through 2031. In the case of new homes acquired after 2022 which are eligible to participate in the ENERGY STAR Residential New Construction Program or Manufactured Homes Program, the provision provides a $2,500 credit for energy efficient single family and manufactured new homes meeting certain energy star requirements. A higher tier credit of $5,000 credit applies for eligible single family and manufactured new homes certified as a zero energy ready under the Department of Energy Zero Energy Ready Home Program.

Modifications to Income Exclusion for Conservation Subsidies: This provision amends Code Sec. 136(a) to provide an exclusion from income for water conservation, storm water management, and wastewater management subsidies provided by public utilities, state or local governments, or storm water management providers.

Credit for Qualified Wildfire Mitigation Expenditures: This provision adds new Code Sec. 28 to create a tax credit equal to 30 percent of qualified expenditures for individuals and businesses who participate in a qualified state-based wildfire resiliency program. The provision applies to expenditures paid or incurred after the date of enactment.

Refundable New Qualified Plug-In Electric Drive Motor Vehicle Credit for Individuals: This provision adds new Code Sec. 36C to provide for a refundable income tax credit for new qualified plug-in electric drive motor vehicles placed in service by the taxpayer during the tax year. The amount of credit is equal to the base amount of $4,000 plus an additional $3,500 for certain vehicles placed into service before January 1, 2027. The amount credit allowed for a qualified vehicle is increased by $4,500 if the final assembly of the vehicle is at a facility in the United States which operates under a union-negotiated collective bargaining agreement. The amount of credit allowed for a qualified vehicle is increased by $500 if the vehicle model are powered by battery cells which are manufactured within the United States.

Credit for Previously-Owned Qualified Plug-In Electric Drive Motor Vehicles: This provision adds new Code Sec. 36D to create a new refundable credit for the purchase of used battery and fuel-cell electric cars after date of enactment through 2031. Buyers can claim a base credit of $2,000 for the purchase of qualifying used EVs, with an additional $2,000 based on battery capacity. The credit is capped at the lesser of $4,000 or 50 percent of the sale price.

Credit for Qualified Commercial Electric Vehicles: This provision adds new Code Sec. 45Y to create a new credit for qualified commercial electric vehicles placed into service by the taxpayer. The amount of credit is equal to 30 percent of the cost of such vehicle, or 15 percent in the case of hybrid vehicles. A leasing company may elect to determine the credit using the structure of the individual credit under Code Sec. 36C if the vehicle is leased to an individual. This provision would take effect after December 31, 2021.

Qualified Fuel Cell Motor Vehicles: This provision amends Code Sec. 30B(k)(1) to extend the credit for the purchase of a qualified fuel cell motor vehicle through 2031, but only with respect to vehicles not of a character subject to depreciation. Beginning on January 1, 2022, commercial fuel cell vehicles otherwise eligible for this credit will be eligible for the new Code Sec. 45Y credit for qualified commercial electric vehicles.

Alternative Fuel Refueling Property Credit: This provision amends Code Sec. 30C(g) to extend the alternative fuel vehicle refueling property credit through 2031. Beginning in 2022, the provision expands the credit for zero-emissions charging and refueling infrastructure of a nature subject to depreciation by providing a base credit of 6 percent for expenses up to $100,000 and 4 percent for allowable expenses in excess of such limitation if certain requirements are met. The provision provides an alternative bonus credit level of 30 percent for expenses up to $100,000 and 20 percent thereafter. To qualify for the credit for expenses in excess of the $100,000 limitation, the property must: (1) be intended for general public use and either accept credit cards as a form of payment or not charge a fee, or (2) be intended for exclusive use by government or commercial vehicle fleets.

Reinstatement and Expansion of Employer Provided Fringe Benefits for Bicycle Commuting: This provision amends Code Sec. 132(f)(5)(F) to eliminate the temporary suspension of the exclusion for qualified bicycle commuting benefits and increases the maximum benefit from $20 per month to $81 per month. This provision expands the definition of qualified benefit to include the direct or indirect provision of qualified commuting property by an employer and employer reimbursement of expenses incurred for the purchase, financing, lease, rental (including bikeshare), improvement, or storage of qualified commuting property (which generally includes bicycles, electric bicycles, and scooters) if the employee regularly uses such property for travel between the employee's residence and place of employment or mass transit facility connecting an employee to place of employment.

Credit for Certain New Electric Bicycles: This provision adds new Code Sec. 36E to provide for a 30 percent refundable tax credit for qualified electric bicycles placed into service before January 1, 2026. Beginning in 2022, taxpayers may claim a credit of up to $900 for electric bicycles placed into service by the taxpayer for use within the United States. The credit phases out starting at $75,000 of modified adjusted gross income ($112,500 for heads of household and $150,000 for married filing jointly).

Extension of the Advanced Energy Project Credit: This provision revives the Code Sec. 48C qualified advanced energy property credit. Projects receive a base credit rate of 6 percent of qualified investments in qualified advanced energy projects. To receive a bonus rate of 30 percent, taxpayers must satisfy (1) prevailing wage requirements and (2) apprenticeship requirements during the construction of the project.

Labor Costs of Installing Mechanical Insulation Property: This provision adds new Code Sec. 45Z to provide a credit of the labor costs incurred by a taxpayer in installing mechanical insulation property into a mechanical system which was originally placed in service not less than 1 year before the date on which such mechanical insulation property is installed. The base credit rate is 2 percent, which is increased to 10 percent for projects meeting prevailing wage and apprenticeship standards. The credit is available for costs paid starting in 2022 through the end of 2025.

Advanced Manufacturing Investment Credit: This provision adds new Code Sec. 48E to create an investment tax credit worth up to 25 percent for advanced manufacturing facilities. The investment tax credit is available for property for the manufacturing of semiconductors or semiconductor tooling equipment, including buildings and equipment that are integral to such manufacturing, which begin construction before January 1, 2026.

Advanced Manufacturing Production Credit: This provision adds new Code Sec. 45AA to provide a production credit for each eligible component that is produced and sold. Eligible components include solar polysilicon, wafers, cells, and modules, and wind blades, nacelles, towers, and offshore foundations. The amount credit allowed for eligible components is increased by 10 percent if the final assembly of the components is at a facility in the United States which operates under a union-negotiated collective bargaining agreement.

Qualified Environmental Justice Program Credit: This provision adds new Code Sec. 36G to create a capped refundable competitive credit of $1 billion for each year from 2022 through and including 2031 to institutions of higher education for environmental justice programs.

Reinstatement of Superfund: This provision amends Code Sec. 4611(e) to reinstate the Hazardous Substance Superfund Financing Rate on crude oil and imported petroleum products at the rate of 16.4 cents/per gallon, indexed to inflation, and reinstates the tax on taxable chemicals.

Clean Electricity Production and Investment Credit: This provision creates a new emissions-based incentive for electricity generating facilities. Taxpayers may choose between a PTC under Code Sec. 45BB or an investment tax credit (ITC) under Code Sec. 48F, which is provided based on the carbon emissions of the electricity generated.

Increase in Clean Electricity Investment Credit for Facilities Placed in Service in Connection with Low-Income Communities: This provision amends Code Sec. 48F to provide for an enhanced incentive for facilities qualifying for the Code Sec. 48F ITC (not including certain facilities that produce electricity through combustion or gasification) with respect to which the Treasury Secretary makes an allocation of environmental justice capacity limitation. This is similar to the enhanced incentive under Code Sec. 48 for solar and wind facilities placed in service in connection with low-income communities.

Cost Recovery for Qualified Facilities, Qualified Property, and Grid Improvement Property: This provision amends Code Sec. 168(e)(3)(B) to provide that any facility described in the clean electricity production credit and any qualified property or grid improvement property described in the clean electricity investment credit is treated as five-year property under GDS for purposes of Code Sec. 168.

Clean Fuel Production Tax Credit: This provision adds new Code Sec. 45CC to create a technology-neutral incentive for the domestic production of clean fuels. Fuels may qualify for the credit if the fuel's lifecycle emissions are at least 25 percent less than the current U.S. nationwide average.

International Provisions

The following outbound international provisions are included in the bill:

(1) Modifications to Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)

(2) Modification of the Definition of a "10-Percent Shareholder" Whose Interest Is Exempt from Portfolio Interest;

(3) Repeal of Election for 1-Month Deferral in Determination of Taxable Year of Specified Foreign Corporations

(4) Modifications of Foreign Tax Credit Rules Applicable to Certain Taxpayers Receiving Specific Economic Benefits

(5) Modifications to Foreign Tax Credit Limitations

(6) Foreign Oil Related Income to Include Oil Shale and Tar Sands

(7) Modifications to Inclusion of Global Intangible Low-Taxed Income

(8) Modifications to Determination of Deemed Paid Credit for Taxes Properly Attributable to Tested Income

(9) Deduction for Foreign Source Portion of Dividends Limited to Controlled Foreign Corporations, etc.

(10) Limitation on Foreign Base Company Sales and Services Income

With respect to inbound international taxation, the BBB makes modifications to the Base Erosion and Anti-Abuse Tax, including a series of annual rate increases beginning in 2022.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com