The Build Back Better Act: The Senate Bill
On November 19th, the House approved the Build Back Better Act (BBBA), H.R. 5376 (House Bill), by a vote of 220-213 on party lines. The $1.7 trillion bill includes a package of targeted individual tax relief, clean energy incentives, and increased spending on healthcare, education, childcare, and other programs. The legislation is currently being considered in the Senate, where changes are expected to be made to many of the bill’s provisions.
In a True Insight published in December 2021, we summarized the provisions in the bill affecting individuals. We also published a True Insight that provides details of the House Bill with respect to business and international tax issues as well as a True Insight that summarized the clean energy tax incentives included in the House Bill.
On December 11, 2021, the Senate Finance Committee (SFC) released its draft tax language for the BBBA (SFC Bill). The SFC Bill includes both substantive changes and technical modifications to the tax provisions in the House Bill. It does not address some issues in the House Bill, such as the cap on individual itemized deductions for state and local taxes (SALT), and it does include some new provisions.
This True Insight discusses the key changes included in the SFC Bill and the prospects and timing for advancement of the BBBA.
Status of Senate Action on the BBBA
Despite the intention of Senate Majority Leader Schumer to complete action in the Senate on the BBBA by the end of 2021, that goal was not met due to the opposition of Senators Manchin and Sinema to certain provisions in the bill, thereby depriving the Democratic leadership of the 50 votes they needed for approval of the budget reconciliation legislation. After the Senate reconvened in early January, negotiations on the BBBA continued with the two Senators, but an agreement thus far has proven to be elusive.
In his press conference on January 19th, President Biden suggested that it may be necessary to “break up” the BBBA into smaller pieces in order to move forward with some of his key priorities. It is important to note that Democratic leadership has only one opportunity to use the budget reconciliation process under the FY 2022 budget process which is what allows them to avoid the filibuster rules on the Senate Floor and pass a bill with only 50 votes (with the vote of the Vice President breaking the tie). They would need to approve a 2023 budget resolution this year in order to create another budget reconciliation bill opportunity.
The current goal appears to be to advance some proposals in the BBBA prior to the State of the Union address on March 1st. February 18th is the date when the current Continuing Resolution expires, which could also serve as a target date for this legislation.
TPC Observation: Although there is currently no set deadline for completion of the BBBA, realistically the White House and Congressional Democratic leadership need to get approval by the end of 1Q 2022. Otherwise, the election season for the 2022 mid-term elections will likely interfere with their ability to pass this type of major legislation as some Members may become reluctant to vote for a bill that could be labeled “tax and spend” legislation. It would also be very helpful for Democrats to have another significant legislative victory going into the 2022 election season in addition to the 2021 COVID relief package and the infrastructure bill.
When the BBBA is considered on the Senate Floor, the SFC Bill would be considered as an amendment to H.R. 5376 as passed by the House. It is expected that the bill text released in December will be revised prior to Senate Floor consideration.
In releasing the 1180-page legislative text, SFC Chair Ron Wyden (D-OR) stated that the tax package would be fully paid for “by ensuring profitable mega-corporations and wealthiest Americans pay their fair share.” He also stated that the SFC Bill made “both technical and policy changes, as well as modifications to ensure compliance with Senate budget rules.”
The SFC Bill includes a paid leave program, an extension of the expanded child tax credit, and several clean energy tax incentives. It also includes a corporate minimum tax and a stock buyback tax similar to the proposals in the House Bill as well as several international tax revenue raisers including rules on corporate inversions. There is a placeholder heading in the bill for a SALT compromise proposal.
The SFC Bill has been submitted to the Senate Parliamentarian in order to determine whether all provisions comply with the Senate budget reconciliation rules. Any provision that is deemed out of compliance with rules such as the “Byrd Rule,” will likely have to be dropped from the SFC Bill.
A revenue estimate has not yet been released, nor has an official committee summary of the provisions.
If changes are made to the BBBA in the Senate as expected, the revised version will then have to be approved by the House or conference committee negotiations will take place to resolve the differences after which both the House and Senate would have to approve the conference agreement.
Key SFC Revisions to the House-Approved BBBA
TPC Observation: During his press conference comments on breaking up the current bill into smaller pieces, President Biden indicated some areas where he thought compromise could be reached such as climate change and clean energy as well as some of the corporate and international tax revenue offsets. The provisions of the House Bill and the Senate Bill which are most likely to survive as part of a smaller package include:
- Climate change and energy incentives
- Corporate minimum tax and international changes
- Stock buyback tax
- Net investment income tax increase
- IRS enforcement funding
- Universal pre-K
- Affordable Care Act tax credit extension
- Prescription drug cuts
The fate of other proposals, including several that have drawn criticism from Senator Manchin, is less certain. Complicating the negotiations is the fact that responding to opposition from Senator Manchin with changes to or termination of current proposals could result in the loss of other Democratic support.
One approach that is being considered is to select fewer proposals for inclusion in a revised bill and extend them for longer periods of time, such as the Child Tax Credit. Some House Democrats continue to insist that a SALT change (discussed in the next section) must be included. Paid leave probably has a small chance of inclusion in a new bill, although there may be the possibility of a new bipartisan proposal in the future. Senator Manchin appears to be willing to negotiate on the climate and clean energy proposals.
Issue Not Addressed in the SFC Bill – Cap on State and Local Tax Deductions
The SFC Bill does not include any proposal on the $10,000 cap on state and local tax (SALT) deductions for individuals that was enacted in the Tax Cuts and Jobs Act (TCJA), which is currently in effect through 2025. A placeholder in the text appears to indicate that such a provision may be added before the legislation is considered on the Senate Floor.
The House Bill would temporarily increase the SALT cap on from $10,000 to $80,000, which is a provision that is important to several House members from high-tax states, such as New Jersey, New York, and California. Senators Sanders (I-VT) and Menendez (D-NJ) have been working for several weeks to develop an alternative proposal that would address concerns that this proposal would benefit wealthy households, but no agreement has been reached. They have proposed different income threshold levels (such as $400,000), but there appears to be agreement that the cap would be extended (with the new income caps) beyond the current expiration date of 2025. It is important that any compromise reached in the Senate on this issue be acceptable to the House members who insisted on this issue being addressed in the House Bill.
Corporate Alternative Minimum Tax
The SFC Bill retains the new financial statement-based 15% corporate minimum tax on the profits of large corporations but would make certain changes. Corporations (other than S corporations, regulated investment companies, or real estate investment trusts) with more than $1 billion in average annual adjusted financial statement income (AFSI) for the three previous tax years would be liable for a tax of 15% of AFSI (over the corporate adjusted minimum tax foreign tax credit for the tax year).
This proposal is included in order to provide a backstop against tax avoidance at large companies who report large profits in their SEC filings but pay low (or no) taxes to the IRS. The proposal would raise $318 billion over a 10-year period.
The House definition of AFSI would be adjusted to:
- Disregard any book income, cost, or expense with respect to defined benefit pension plans, and
- Include any item of income of deduction included in the computation of taxable income with respect to defined benefit pension plans.
AFSI for tax-exempt entities would be adjusted to take into account only unrelated business taxable income or unrelated debt-financed income.
The AMT foreign tax credit would be modified for foreign corporations.
TPC Observation: The change related to excluding defined benefit pension plans was included because otherwise companies would have owed taxes on the growth in pension income without having access to funds to pay the taxes owed. Also, companies might have decided to freeze or terminate pension plans if they were not allowed deductions related to the defined benefit pension plans.
International Tax Issues
Section 163(n) Interest Expense Limitation
Under Section 163(j), which was enacted by the TCJA, US corporations generally are allowed a deduction for business interest expense only to the extent that it exceeds their business interest income plus 30% of EBITDA (earnings before interest expense, tax expense, depreciation, depletion, and amortization) (or EBIT, beginning after 2021). The House Bill would further limit interest deductions of US members of multinational groups that prepare consolidated financial statements if their net interest expense for financial reporting purposes exceeds 110% of their proportionate share of the net interest expense reported on those financial statements (determined based on their share of the group’s EBITDA).
The SFC Bill would add a taxpayer-friendly election to the House provision that gives the US corporation an option to determine its share of book net interest expense based on the “adjusted basis of assets” rather than EBITDA for purposes of computing the limitation, which, if elected, may not be revoked for five years.
The proposal would be effective for tax years beginning after 2022, and would apply only to US corporations whose average annual net interest expense (determined on a three-year rolling basis and taking into account all US corporations in the group) exceeds $12 million. Interest expense disallowed under either Section 163(j) or new Section 163(n) could be carried forward.
Prior to the 2017 change, all of a company’s interest was generally tax-deductible. Under current law, there is a 30% cap on interest deductions, which was initially defined as 30% of EBITDA but changes to EBIT (earnings before interest and taxes) starting in tax year 2022. The effect will be to put more of the company’s interest over the cap. Companies will still be able to carry forward the nondeductible portion of their interest to apply to future years. In 2020, the CARES Act temporarily raised the cap on interest deductions to 50%, but that change has now expired.
The SFC estimates that the revenue loss from taxpayer’s claiming this election would be offset by the new anti-inversion proposal discussed below.
TPC Observation: The SFC Bill provides some relief to companies with respect to keeping their interest payments tax deductible by offering companies an alternative method of measuring how much of its business is in the US. However, the change to Section 163(j) that became effective in 2022 could have a broader and harsher effect on many companies than the proposed Section 163(n) limitation, particularly in capital-intensive industries such as energy or manufacturing.
Section 7874 Anti-Inversion Rules
The current anti-inversion rules under Section 7874 contain two different regimes. First, if a foreign corporation acquires a domestic entity (including corporations and partnerships) and former owners of the domestic entity subsequently own 60% or more of the foreign acquiring corporation, then the domestic entity is classified as a “surrogate foreign corporation” and becomes limited in its ability to claim certain deductions and credits. Second, if 80% or more of the foreign parent corporation is owned by former owners of the domestic entity, then the foreign corporation is treated as a domestic corporation for US federal income tax purposes and subject to tax on its worldwide income.
The SFC Bill proposes to expand the anti-inversion regime in Section 7874. It would lower the 80% threshold for treating an inverted corporation as a domestic corporation to 65% and would lower the threshold for being a surrogate foreign corporation from 60% to 50%. The threshold for testing whether there is a “substantially all” acquisition would also be expanded by looking at acquisitions of all of a domestic entity’s properties or by looking just at properties constituting a trade or business.
Finally, it broadens the rules beyond the application to domestic partnerships so that acquisitions of substantially all of a foreign partnership’s properties that are effectively connected with a US trade or business would be potentially subject to the anti-inversion rules.
The provision applies to taxable years ending after December 31, 2021, and any transaction completed after the date of enactment would be subject to revised thresholds. This proposal is included, in part, to offset the cost of the changes to the Section 163(n) provision.
Base Erosion and Anti-Abuse Tax (BEAT)
The SFC Bill includes a change to the BEAT’s treatment of indirect costs associated with cost of goods sold (COGS), whereby the provision would take into account the changes to the treatment of COGS when determining the 3% base erosion percentage for 2022 and 2023.
Dividend Received Deduction (DRD) – Section 245A
Section 245A, which was enacted by the TCJA, exempts US corporations from tax on dividends paid by certain 10%-owned foreign corporations, even when the foreign corporations are not CFCs and thus their earnings are not subject to current US taxation under the subpart F and GILTI regimes. Both the House and Senate versions of the BBBA would limit the 100% exemption to dividends paid by CFCs, and US corporations would be allowed to elect to treat certain foreign corporations as CFCs. The Senate version would allow a 50% credit for 10%-owned foreign corporations that are not CFCs. Both the House and Senate versions would apply to tax years beginning after the date of enactment.
Miscellaneous Business and International Tax Provisions
Research and Development Expenditures
Under current law, Section 174 allows for an immediate deduction of research and development (R&D) costs. This rule expired at the end of 2021 as a result of changes in the TCJA, thereby requiring taxpayers to capitalize and amortize these expenses over a 5-year period beginning in 2022 and over a 15 year period for foreign R&D. The House Bill would extend rules for immediate deductions under Section 174 until 2025, so that the requirement to capitalize and amortize those costs would not take effect until 2026. The Senate Bill also includes this proposal without any changes to the language.
TPC Observation: With the delay in approval of the BBBA, this new rule has now gone into effect, which will mean that some companies will see increased taxes due to decreased deductions in addition to increased compliance costs. This proposal is one of the few in the BBBA that has bipartisan support. Based on this, many companies may have assumed this rule change would be delayed and have not prepared for it.
Miscellaneous Issues – No Changes in the Senate Bill
The Senate Bill does not make substantive changes to these provisions in the House Bill:
- Excise Tax on Repurchase of Corporate Stock
- Modifications to Inclusion of Global Intangible Low-Taxed Income (GILTI)
- Modifications to Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)
- Repeal of Election for One-Month Deferral in Determination of Taxable Year of Specified Foreign Corporations
- Modifications of Foreign Tax Credit Rules Applicable to Dual Capacity Taxpayers
- Modifications to Foreign Tax Credit Limitations
- Foreign Oil-Related Income Inclusion of Oil Shale and Tar Sands
- Modifications to Determination of Deemed Paid Credit for Taxes Properly Attributable to Tested Income
- Limitation on Foreign-Based Company Sales and Services Income
- Modifications to Treatment of Certain Losses (Section 165(g))
- Adjusted Basis Limitation for Divisive Reorganization
- Modifications to Exemption for Portfolio Interest
- Partnership Interest Derivatives
- Adjustments to Earnings and Profits of CFCs
- Dividends from CFCs Treated as Extraordinary Dividends
- Limitation on Certain Special Rules for Section 1202 Gains
- Constructive Sales Rules
- Rules Relating to Common Control
- Modification of Wash Sale Rules
- Clarification of Treatment of DISC Gains and Distributions of Certain Foreign Shareholders
- Treatment of Certain Qualified Sound Recording Productions
- Increase in Research Credit against Payroll Tax for Small Businesses
- Termination of Employer Credit for Paid Family and Medical Leave
Tax Increases for High-Income Individuals
The SFC Bill retains these provisions with no substantive changes being made to the House version.
- Application of Net Investment Income Tax to Trade or Business Income of Certain High-Income Individuals
- Limitations on Excess Business Losses of Noncorporate Taxpayers
- Surcharge on High-Income Individuals, Estate and Trusts
Rules Relating to Retirement Plans
The SFC Bill retains these provisions with no substantive changes:
- Contribution Limit for Individual Retirement Plans of High-Income Taxpayers with Large Account Balances
- Increase in Minimum Required Distributions for High-Income Taxpayers with Large Retirement Account Balances
- Tax Treatment of Rollovers to Roth IRAs and Accounts
- Statute of Limitations with Respect to IRA Noncompliance
- IRS Owners Treated as Disqualified Persons for Purposes of Prohibited Transaction Rules
- Prohibited Transactions Relating to Holding DISC or FSC in an IRA
Climate /Energy Tax Incentive Proposals
The SFC Bill makes changes to several provisions in the House Bill.
TPC Observation: A package of climate and energy tax incentives is likely to survive in any smaller, revised tax package based on the fact that there is some bipartisan support for many of the proposals. SFC Chair Wyden has stated that these provisions are key parts of the path to 50 votes in the Senate, and Senator Manchin has said that he believes this is an area where they can come to agreement more quickly than other parts of the bill. In his recent press conference, President Biden also noted this area as one he believes will be a priority in a revised bill.
Section 45 Production Tax Credit (PTC)
The SFC Bill modifies the definition of “energy community” to:
- Include brownfield sites;
- Include tracts where, for the calendar year prior to the calendar year in which construction of the qualified facility begins, at least 5 percent of the employment in such tract was within the oil and gas sector; and
- Exclude any area that is considered forested land, i.e. is either at least 10% stocked with trees of any size or is a designated Forest Legacy Area.
It also eliminates the 50% PTC rate reduction for qualified hydroelectric production and marine and hydrokinetic renewable energy and expands the definition of marine and hydrokinetic facilities to include pressurized water used in a pipeline that is operated for the distribution of water for agricultural, municipal or industrial consumption and not primarily for the generation of electricity.
Section 48 Investment Tax Credit (ITC)
The SFC Bill adopts the revised energy community definition of Section 45 for purposes of the bonus credit for energy communities. It also reduces the ITC extension for waste energy recovery and combined heat and power system property from 10 years to 3 years.
It expands the definition of energy property to include “hydropower environmental improvement property.” Hydropower environmental improvement property is generally property which:
- Adds or improves safe and effective fish passage with respect to a qualified dam;
- Maintains or improves the quality of water retained or released by a qualified dam; or
- Promotes downstream sediment transport process and habitat maintenance with respect to a qualified dam.
Finally, it eliminates the selection criteria that would have been used for determining which qualified solar and wind facilities would have been allocated environmental justice solar and wind capacity limitation.
Direct Pay Rules
The SFC Bill clarifies that direct pay applies to property and facilities placed in service after 2021.
Section 48D Transmission ITC
The SFC Bill extends the termination date to construction that begins before 2032 rather than property placed in service before 2032.
Section 45X Clean Hydrogen PTC
The SFC Bill redesignates Section 45X as Section 45W. It also adds a rule that provides that a facility originally placed in service before 2022 that is modified to produce clean hydrogen is deemed to have been originally placed in service as of the date the property required to complete such modification is placed in service.
Section 48C Advanced Energy Project Credit
The SFC Bill adopts the revised “energy community” definition of Section 45 for purposes of the bonus credit for qualified energy projects located in energy communities. It also clarifies that the set-aside rules for automotive and energy communities do not apply to unused tax credit amounts that are carried over to a subsequent year.
The SFC Bill also eliminates certain selection criteria related to the net impact on greenhouse gas emissions, domestic job creation, and job creation in certain areas and gives greatest priority to (1) manufacturers (as opposed to assemblers) and (2) new application deployment.
Consistent with the Section 48C provision in the Clean Energy for American Act, the SFC Bill would modify and expand the technologies that qualify for the credit to include:
- Equipment designed to refine, electrolyze, or blend any fuel, chemical, or renewable or low-carbon and low-emission products;
- Equipment for the production of
- Property designed to produce energy conservation technologies;
- Light, medium, or heavy duty electric or fuel cell vehicles, as well as technologies, components, or materials for such vehicles, and associated charging or refueling infrastructure; and
- Hybrid vehicles with a gross vehicle weight of at least 14,000 pounds, as well as technologies, components, or materials for such vehicles; and
- Projects that equip an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20 percent.
Section 45 BB Technology Neutral PTC
The SFC Bill renumbers Section 45BB as Section 45AA. It modifies the provision to apply to a facility placed in service after 2026 rather than a facility where the construction begins after 2026. It accelerates the deadline for guidance from the Treasury to January 1, 2026 (rather than 2027). Finally, it adopts the revised “energy community” definition of Section 45 for purposes of the bonus credit for qualified facilities located in energy communities.
Section 48F Technology Neutral ITC
The SFC Bill modifies the provision to apply to a facility placed in service after 2026 rather than a facility where the construction begins after 2026. It accelerates the deadline for guidance from the Treasury to January 1, 2026 (rather than 2027). It also adopts the revised “energy community” definition of Section 45 for purposes of the bonus credit for qualified facilities located in energy communities.
It eliminates the criteria that were to be used in allocating low-income community bonus ITC similar to the change for Section 48. Finally, it clarifies that the tax credit would not apply to the zero emission nuclear power production credit under Section 45V.
Section 45CC Technology Neutral Clean Fuels PTC
The SFC Bill renumbers Section 45CC as Section 45BB. It adds certification requirements for sustainable aviation fuel to establish the lifecycle greenhouse gas emissions reduction. Finally, it accelerates the deadline for guidance from the Treasury to January 1, 2026 (rather than 2027).
The SFC Bill makes minor changes to the House Bill with respect to these provisions in the bill:
- Extension, Increase and Modifications of Nonbusiness Energy Property Credit
- Residential Clean Energy Credit
- Energy Efficient Commercial Building Deduction
- Refundable New Qualified Plug-In Electric Drive Motor Vehicle Credit for Individuals
- Credit for Previously Owned Qualified Plug-In Electric Drive Motor Vehicles
- Credit for Certain New Electric Bicycles
- Advanced Manufacturing Investment Credit
- Advanced Manufacturing Production Credit
- Qualified Environmental Justice Program Credit
Provisions Retained in the SFC Bill
The SFC Bill includes the following House Bill provisions:
- Child Tax Credit
- Earned Income Tax Credit
- Temporary Increase in Employer-Provided Child Care Credit
- Expanding Access to Health Coverage and Lowering Costs – tax provisions
- Higher Education – tax provisions
- Payroll Credit for Compensation of Local News Journalists
- Credit for Clinical Testing of Orphan Drugs
- Extension of the Tax to Fund the Black Lung Disability Trust Fund
- Modifications to Limitation on Deduction of Excessive Employee Remuneration (Section 162(m))
Expansion of Tobacco Excise Taxes
The SFC Bill deletes a proposed excise tax on nicotine used in smokeless tobacco products, which would have raised $8.6 billion over 10 years.
IRS Compliance and Procedures
Several specific appropriations are made for funding for the IRS related to specific activities including:
- taxpayer services such as filing and accounting services and taxpayer advocacy services;
- tax enforcement activities, including determining and collecting owed taxes, conducting criminal investigations, monitoring cryptocurrency compliance and to enforcing criminal statutes related to violation of IRS laws
- operations support services such as rent, printing, research and statistics of income, information technology and other administrative purposes;
- business systems modernization program
- funds necessary to implement the BBBA
The increased funding in the SFC Bill will allow the IRS to recruit and hire more personnel and expand its enforcement activities. It has been estimated by Treasury that the increased funding will allow it to bring in an additional $320 billion over the period of the funding.
The SFC Bill retains the provision that requires payment settlement entities (e.g., Venmo, PayPal, Cash App, etc.) to report payments for services where the aggregate for the calendar year is $600 or more. It also makes some changes to the House provision that relates to procedural requirements relating to the assessment of penalties.
With the possibility that some of the proposals in the BBBA will be enacted in the near future, businesses are well advised to monitor reports on the negotiations between Congress and the White House related to these proposals.
If you have questions about any of the information in this True Insight, please contact a member of your TPC engagement team.