In this episode of Cherry Bekaert’s Tax Beat, Brooks Nelson and Sarah McGregor welcome back Ron Wainwright, Partner with the Tax Credits & Incentives Advisory practice to talk about recent activity in Washington D.C. The conversation opens with a discussion of the President’s proposed budget for fiscal year 2023 and Treasury’s Greenbook. Next, Ron covers tax provisions that may be attached to the “America COMPETES Act of 2022” passed by the House and the “United States innovation and Competition Act” passed by the Senate. We wrap up the conversation talking about provisions in the House passed “Securing a Strong Retirement Act of 2022” or SECURE 2.0.
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BROOKS NELSON: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters. Today's episode is an overview of tax legislation currently working its way through Congress. We'll take a look at certain tax proposals, three bills, and the White House budget proposal that was accompanied by a Green Book, and discuss the possibility of them becoming law and effective in 2022.
BROOKS NELSON: Joining us in the discussion is Ron Wainwright, partner in our firm's Tax Credits and Incentives Practice. Ron, say hello.
RON WAINWRIGHT: Hello, Brooks and Sarah. I'm in Raleigh, North Carolina today.
BROOKS NELSON: As always, joining us is Sarah McGregor. Say hello, Sarah.
SARAH MCGREGOR: Hello, Brooks. I'm calling in from Greenville, South Carolina.
BROOKS NELSON: I'm Brooks Nelson, and today I'm sitting in our Nashville, Tennessee office. The weather here is awful; it's pouring and thundering. How's it there, Ron?
RON WAINWRIGHT: We have an overcast gray day in Raleigh, no rain yet.
BROOKS NELSON: Sarah, how's life treating you today?
SARAH MCGREGOR: Life is good. We're closing in on the April 18 tax deadline, and everyone is working hard. It's an exciting time and you can sense the end of a heavy workload approaching.
BROOKS NELSON: A reminder to listeners: this year's deadline is April 15/April 18, a return to the normal April 15 deadline for many of us.
BROOKS NELSON: Let me set up today's discussion. On March 28, President Biden released his proposed budget for fiscal year 2023. Ahead of that, on February 4, the House passed the America COMPETES Act, and the Senate passed the United States Innovation and Competition Act. On March 29, the House passed the Securing a Strong Retirement Act of 2022, often referred to as SECURE 2.0.
BROOKS NELSON: The President's proposed budget came with a Green Book. We've reviewed prior Green Books in previous podcasts, and many provisions are resurfacing. Ron, how does this budget proposal and Green Book tie to the Build Back Better bill from 2021?
RON WAINWRIGHT: The President's budget and Green Book build off Build Back Better. The Green Book states that many revenue-raising provisions included in the House-passed Build Back Better are assumed as part of this budget. The budget assumes Build Back Better becomes law and proposes approximately $2.5 trillion in tax increases, with significant impacts on corporations, international provisions, and high-income taxpayers.
BROOKS NELSON: Ron, what are the key tax revenue raisers, and what's new compared with last year's Build Back Better?
SARAH MCGREGOR: Great question, Brooks.
RON WAINWRIGHT: The President's budget begins with Build Back Better and assumes its revenue provisions are law. On the corporate side, the budget proposes increasing the corporate tax rate from 21 to 28 percent. It also creates a general business credit equal to 10 percent of eligible expenses paid or incurred to onshore U.S. trades or businesses.
RON WAINWRIGHT: The $2.5 trillion of proposed revenue falls into three primary buckets. About $1.6 trillion relates to business and international provisions, including adoption of an undertaxed profits rule that raises roughly $239 billion. There are other reforms to business and international taxation.
RON WAINWRIGHT: The budget also proposes increases affecting high-income taxpayers. It calls for raising the top marginal individual income tax rate to 39.6 percent. There are several changes to the taxation of capital income estimated to raise about $174 billion. The proposal also imposes a minimum tax on the wealthiest taxpayers, estimated to raise about $360 billion.
RON WAINWRIGHT: In total, the package includes corporate rate increases, international provisions, and measures targeting high-income individuals, accounting for the proposed $2.5 trillion in tax increases.
BROOKS NELSON: To revisit the main groupings: first, the corporate rate would go to a flat 28 percent domestically, and there are several international tax provisions aimed at achieving a global effective minimum on corporations. Second, provisions target high-net-worth individuals. Do you agree, Ron?
RON WAINWRIGHT: Yes. The budget repeals what was referred to as BEAT and replaces it with an undertaxed profits rule, a complex multinational tax focused on overall effective rates. I support moving toward a minimum tax on a worldwide basis.
RON WAINWRIGHT: On high-net-worth individuals, the proposal raises the top bracket to 39.6 percent for joint filers over $450,000. The proposal would tax long-term capital gains at ordinary rates for taxpayers with taxable income over $1 million, effective as of the enactment date. The budget also revisits the estate and gift area eliminated from last year's Build Back Better.
RON WAINWRIGHT: One particularly controversial proposal is taxing unrealized appreciation at death. There are exceptions for spouses, charities, and deferrals for closely held businesses, but taxing unrealized gains at death raises liquidity concerns for estates. The proposal also includes a 20 percent minimum tax on total income, including unrealized capital gains, for taxpayers with net wealth over $100 million and would require reporting an annual balance sheet showing cost and fair market value.
SARAH MCGREGOR: State-level net worth taxes and intangible taxes are not entirely new, but implementing a federal regime of this kind would be difficult. Incentives that encourage realization of gains, such as Opportunity Zone funds, might be a preferable policy tool because they move capital where intended and can be structured to defer tax.
SARAH MCGREGOR: Many of these discussions mirror those from a year ago, and it's unclear whether there will be more success this year than last.
RON WAINWRIGHT: The President's budget assumes Build Back Better, and some commentators on the Hill already considered parts of it unlikely to pass in the Senate. One important technical point is that many provisions are indexed to inflation post-enactment. Given current inflation, that affects the real impact over time.
BROOKS NELSON: Looking at the Green Book and budget, what can you tell us about extenders, especially those supporting innovation, research, and development?
RON WAINWRIGHT: Tax extenders are often a mix of provisions that expire and get renewed. Several extenders expired at the end of 2021. I categorize them in three buckets: provisions tied to the Tax Cuts and Jobs Act of 2017, COVID-related relief provisions, and a set of miscellaneous expiring provisions.
RON WAINWRIGHT: Two key provisions tied to the Tax Cuts and Jobs Act that were of concern are the treatment of research and development expenditures and the interest deduction limitation. Effective January 1, 2022, companies can no longer immediately expense R&D and must capitalize and amortize R&D expenditures over five years for domestic R&D and over 15 years for foreign R&D, unless Congress acts retroactively.
RON WAINWRIGHT: The interest deduction limitation changed under the Tax Cuts and Jobs Act, shifting from an EBITDA-based calculation to an EBIT-based calculation, excluding depreciation and amortization from the limitation. That change began January 1, 2022, and was also part of the extenders discussion.
RON WAINWRIGHT: COVID-era provisions that expired included expansions to the child and dependent care credit, above-the-line charitable deductions, employee retention and rehiring tax credits, and the expanded child tax credit. Congress is expected to address these extenders, but whether they will be made retroactive is uncertain.
RON WAINWRIGHT: Senator Wyden and Representative Richard Neal have indicated their committees recognize the importance of addressing the expired extenders, and there is movement in Congress to act.
BROOKS NELSON: You previously mentioned Congress might use the America COMPETES Act and the Senate's United States Innovation and Competition Act to pass some extenders. What's in those bills that helps manufacturing, distribution, and technology clients?
RON WAINWRIGHT: Both the America COMPETES Act from the House and the United States Innovation and Competition Act from the Senate aim to bolster U.S. industries and domestic supply chains. Both include significant funding for domestic semiconductor R&D and manufacturing, about $52 billion, and approximately $45 billion for programs supporting the domestic supply chain for critical goods, including pharmaceuticals.
RON WAINWRIGHT: Both bills must be reconciled between the House and Senate. They represent a potential vehicle for amendments, including revenue raisers and tax provisions from the President's budget or Build Back Better, and they could provide a bipartisan legislative opportunity. Final passage will require negotiating language acceptable to both chambers and the support of a sufficient number of senators.
BROOKS NELSON: Let's narrow focus to the Securing a Strong Retirement Act, SECURE 2.0. Sarah, what's in this bill for employers?
SARAH MCGREGOR: SECURE 2.0 passed the House with strong bipartisan support. For employers, the bill would require certain employers to automatically enroll employees in deferred compensation retirement savings plans, 401(k)s, 403(b)s, and similar plans, with a minimum beginning participation rate of 3 percent of compensation. The automatic enrollment rate would increase by 1 percent each year until it reaches 10 percent, and employees may opt out at any time.
SARAH MCGREGOR: The bill expands tax credits available to small employers that establish and maintain retirement plans, with the credits beginning in 2023. The automatic enrollment requirement would take effect after 2023.
SARAH MCGREGOR: For individuals, SECURE 2.0 increases catch-up contribution options for older workers. It proposes an additional catch-up contribution of up to $10,000 for those ages 62, 63, and 64, and it indexes the $1,000 IRA catch-up amount to inflation. The bill also progressively raises the required minimum distribution age, from 72 to 73, then 74, and finally 75, allowing individuals to keep money in tax-deferred accounts longer.
BROOKS NELSON: I also like the expanded Roth options in the bill; giving individuals more opportunities to make Roth elections is beneficial in many circumstances.
RON WAINWRIGHT: My closing thought is that taxes are unavoidable, and there's a lot of legislative activity to watch. The conferees for the America COMPETES Act have been selected, and conferees from the House and Senate will reconcile their bills. It's been estimated there could be many amendments, perhaps 200, added during reconciliation, so follow developments over the next 90 days.
SARAH MCGREGOR: It's rare for a President's proposed budget to pass as submitted, but the budget provides talking points and potential revenue raisers that may be implemented in other bills. Senator Wyden has expressed interest in seeing SECURE 2.0 passed this year, and I hope Congress reaches finality on the outstanding provisions that have been pending for a year.
BROOKS NELSON: That concludes our podcast covering the key tax proposals moving through Congress.
BROOKS NELSON: A quick disclaimer: we are not providing tax advice on this podcast. Please consult with your tax advisor, hopefully at Cherry Bekaert, to discuss your specific tax issues or information from today's podcast.
BROOKS NELSON: Check the firm's website at cbh.com for the latest guidance and materials on this and other topics. This concludes today's podcast. Please like, share, and subscribe.
RON WAINWRIGHT: Thank you.
SARAH MCGREGOR: Thank you.
BROOKS NELSON: Thank you, our listeners.
