TAX ALERT |
Authored by RSM US LLP
The release by the Senate Finance Committee this weekend of draft tax legislative language, adopting and in some cases modifying the House-approved Build Back Better Act (BBBA), brings the reconciliation process one step closer to potential completion. However, timing of final passage and enactment remains elusive. While there are never any guarantees, it is becoming less likely, but not impossible, that a bill will move out of the full Senate by the end of this year, despite Sen. Schumer’s best intentions.
In general, the draft legislative text from the Senate Finance Committee, with some exception (as noted below), closely adheres to the House-passed language in terms of revenue raisers. Some may be surprised at the lack of significant changes to the international provisions, as those were indicated to be a priority of Sen. Wyden, Chairman of the Senate Finance Committee. Other changes, such as the removal of the nicotine tax, were anticipated. As the Senate further considers this measure, it is possible that further changes will be made, the extent and degree of which will be dependent upon multiple factors such as a final CBO score, the direction that SALT deduction relief takes, and the results of a review of the text by the Senate Parliamentarian. The addition of significant, substantive changes, while theoretically possible, is unlikely.
While much of the substance of the House bill remains intact, including the effective dates, there are some changes worth noting.
The House bill amends section 245A so that the section 245A dividends received deduction (DRD) applies only to dividends received from controlled foreign corporations (CFCs). The Senate amendment preserves the current structure but limits the section 245A DRD for dividends received from specified 10% owned foreign corporations (that are not CFCs) to 65%. The Senate amendment also provides that dividends received by a CFC from a specified 10% owned foreign corporation would qualify for the section 245A DRD so long as the U.S. shareholder has an inclusion under section 951(a)(1)(A).
The Senate amendment proposes changes to section 7874 (anti-inversion rules not included in the House bill). The amendment lowers the 80% threshold for treating an inverted corporation as a U.S. corporation to 65% and also lowers the 10-year inversion gain regime from 60% to 50%.
The Senate Finance Committee generally maintains the structure and content of the proposed renewable energy tax credits in Subtitle F – Green Energy section of BBBA. Of significance are the following changes:
- New investment tax credit for ‘hydropower environmental improvement property’
- New provision related to gross up of direct spending related to the direct payment (versus tax credit) provision
- New certification requirement for sustainable aviation fuel related to lifecycle greenhouse gas emissions
For additional information on the green energy provisions, please see our previous alert.
Domestic business items
The Senate Finance Committee-released proposed BBBA (Build Back Better Act) text would make three principal changes relating to the New AMT. The New AMT is the proposed new alternative minimum tax imposed at 15% of adjusted financial statement income (AFSI) on corporations and corporate groups that meet a $1 billion average annual AFSI threshold.
- An adjustment for defined benefit pension plans that (i) backs out the financial statement income (or expense), and (ii) includes income and deductions with respect to the plan on a federal tax basis instead when computed AFSI,
- An adjustment in computing its AFSI so that a partner in a partnership would include only its distributive share of the partnership’s AFSI, and
- A clarification that exempt organizations would be subject to the provision only to the extent that their adjusted financial statement income includes income from an unrelated trade or business and from debt-financed property. The originally drafted provision left unclear the income of large exempt corporations that could be subject to this alternative minimum tax. The adjustment would also apply when determining whether a corporation meets the $1 billion threshold for New AMT applicability.
Proposed section 163(n) would limit the interest deductions of some domestic corporations that are members of international financial reporting groups. The deductibility limit would be the domestic corporation’s allowable percentage of 110% of the net interest expense, and the limit generally would not apply to corporations with net interest expense under $12 million. The allowable percentage generally would be based on the ratio of the domestic corporation’s EBITDA (earnings before income tax, depreciation, and amortization) to the international group’s total EBITDA. Under the Senate proposal, a corporation would elect to use aggregate asset basis to determine the allowable percentage rather than EBITDA. The revision also includes special rules regarding the determination of asset basis for electing corporations. For example, one rule would require a ‘hypothetical’ capitalization of research and experimental expenses and five-year amortization to determine an adjusted basis for those assets for purposes of this computation.
The proposal leaves in the passed changes to retirement plans and IRAs, as discussed in this alert.
Many of the other individual provisions were left unchanged between the House and the Senate.
Like the version of the Bill approved in the House of Representatives, the Finance Committee plan includes a significant amendment of section 6751(b) of the Internal Revenue Code(IRC) of 1998. Both Bills propose elimination of the requirement of a written supervisor approval before any tax penalty (or addition to tax) could be imposed by the IRS examiner as a result of the IRS examination. Both versions of the Bill propose retroactive application of the new provision to the creation of the requirement by the IRC of 1998.
Currently, section 6751(b) states that “No penalty… shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher-level official as the Secretary may designate.” One exception includes penalties “automatically calculated through electronic means.” That would be penalties assessed under sections 6651 (late filing and late payment penalties), 6654 (estimated tax penalty on individuals), 6655 (estimated tax penalty on corporations) or 6662(b)(9).
In lieu of written approval, the Finance Committee’s proposed bill provides for a quarterly certification to the Commissioner. Such certifications will not affect Taxpayer’s liability for any penalty that the examiner can assert against the taxpayer.
Please be on the look out for further insights as we learn more.
This article was written by Debbie Gordon, Alina Solodchikova, Dave Kautter, Nick Gruidl and originally appeared on 2021-12-13.
2021 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP 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. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. 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.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.