On May 28 the Treasury Department released the General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals. While final legislation could vary significantly in both the major points and the final details–reviewing this document, traditionally known as the Green Book, may assist your tax planning efforts. CBIZ National Tax Office advisors describe and comment on key business and individual provisions and identify significant omissions. Learn more.

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O
n May 28 the Treasury Department released the
General Explanations of the Administration’s Fiscal
Year 2022 Revenue Proposals. This document,
traditionally known as the Green Book, outlines in greater
detail the Administration’s tax proposals which were
initially previewed in the American Jobs Plan and the
American Families Plan. President Biden’s proposals, if
enacted, would have a wide ranging impact on wealthy
individuals and on businesses.
It is important to remember that these proposals are just a
starting point for any potential tax law changes. The Green
Book outlines the President’s “wish list” for tax policy, but
it is Congress that must draft and pass tax legislation.
And because tax legislation must originate in the House
of Representatives, Democrats in the House will be the
early group to watch as any tax legislation takes shape.
The sharply divided Senate would be the next stop, where
procedural rules could require significant revisions to fit
under the Senate’s budget reconciliation rules. And on
June 6, West Virginia Democrat Joe Manchin wrote an
op-ed in the Charleston Gazette-Mail stating his intention
to vote with Republicans to effectively prevent the passing
of the For the People Act that the Administration believes
is needed to secure free and fair elections and protect
against voters restrictions imposed by states. This
could be an early indicator of how he will approach the
Administrations infrastructure and tax bills.
So while the additional detail provided by the Green Book
helps to clarify President Biden’s proposals, any final
legislation could vary significantly in both the major points
and the final details. With that caveat in mind, an overview
of the Green Book’s major points and some observations
follows. This begins with major business provisions,
continues with the individual provisions most likely to
affect wealthy taxpayers, and concludes with some
significant omissions.
Reviewing the details included in the Green Book may help
provide a more detailed roadmap to where changes to tax
legislation may be targeted and assist with business and
individual tax planning efforts.
■ BIDEN TAX PROPOSAL: BUSINESS PROVISIONS
Raise the corporate tax rate to 28%, up from the
current 21%
Effective Date: Jan. 1, 2022
Additional Details: For fiscal year C corporations, there
would be a blended rate in the initial year with the tax
being 21% plus an additional 7% tax applied to the portion
of the taxable year that begins in 2022. This rate increase
would apply to all C corporations regardless of size or
whether they are publicly traded or privately held.
CBIZ Observations: Senator Joe Manchin (D-WV), a critical
vote in any tax plan, indicated that he disfavors the idea
of a 28% corporate tax rate, though he did say that 25%
would be realistic. This is just one of many examples where
individual members of Congress can have significant
influence on the contours of any tax plan.
A 15% minimum tax on book income for large
corporations
Effective Date: Jan. 1, 2022
Additional Details: This provision would impose a 15%
minimum tax on corporations with worldwide book income
that exceeds $2 billion. In particular, taxpayers would
calculate book tentative minimum tax (BTMT)
equal to 15% of worldwide pre-tax book income (calculated
after subtracting any book net operating loss deductions),
less General Business Credits (including research and
experimentation, clean energy, and housing tax credits) and
foreign tax credits. This book income tax would be creditable
against the corporation’s regular tax in future years.
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CBIZ Observations: The book income tax would be limited
to very large corporations, but reports indicate that the
Biden administration has offered to expand this tax as an
alternative to raising the corporate tax rate to 28% as part
of ongoing negotiations. The book income tax bears many
similarities to the corporate alternative minimum tax (AMT)
that was repealed under the 2017 tax law commonly known
as the Tax Cuts and Jobs Act (TCJA). Because GOP members
of Congress have indicated that changes to the TCJA are
nonstarters, the new book income tax (albeit similar to the
former AMT) could perhaps be more palatable.
Make the excess business loss limitation permanent
Effective Date: Jan. 1, 2027
Additional Details: The excess business loss limitation
prevents individuals from deducting business losses in
excess of $250,000 ($500,000 for joint return filers). This
provision, enacted as part of the TCJA, is set to expire at
the close of 2026.
Tax carried interests as ordinary income
Effective Date: Jan. 1, 2022
Additional Details: This proposal would increase the
tax rate for hedge fund managers and other taxpayers
who provide services to investment partnerships and are
allocated income from a profits interest in the investment
partnership. An investment partnership generally is one
where substantially all of its assets consist of investment-
type assets (e.g., certain securities, commodities, real
estate, etc.). Such allocations would be subject to ordinary
tax rates, as well as self-employment taxes, and would not
be eligible for lower capital gains tax rates. The change
would be applicable to all taxpayers making more than
$400,000 per year.
CBIZ Perspective: The TCJA instituted a three-year
holding period on carried interests in an effort to limit the
benefit of the low 23.8% rate. This proposal would apply
regardless of a partner’s holding period. Partners with
adjusted gross income of more than $1 million would
already have capital gains subject to ordinary tax rates
under another of President Biden’s proposals, rendering
this carried interest proposal moot for such taxpayers.
Expand and harmonize the Net Investment Income Tax
(NIIT) and Self-Employment Contributions Act (SECA)
tax system
Effective Date: Jan. 1, 2022
Additional Details: This change would apply either the
NIIT or the SECA tax to pass-through income from both
partnerships and S corporations to high income taxpayers.
First, for taxpayers with adjusted gross income over
$400,000, the net investment tax would apply to gross
income and gain from any trade or business that is not
otherwise subject to self-employment taxes. Secondly,
the classes of income subject to SECA taxes would be
expanded to include distributive shares of pass-through
income to include limited partners, LLC members, or
S corporation shareholders, when the owner provides
services and materially participates in the business.
CBIZ Perspective: The SECA tax proposal would upend
a foundational principle of taxation for S corporation
shareholders, subjecting their income allocations to SECA
tax to the extent they exceed certain threshold amounts.
The SECA tax proposal would also eliminate the “limited
partner” exception for partnerships that has vexed
taxpayers and the courts for years. And the NIIT proposal
would expand its reach so that it would not matter whether
the taxpayer materially participated in the pass-through
business. Notwithstanding these issues, legislation cannot
affect Social Security taxes when enacted using the Senate
budget reconciliation process. This potentially could mean
that only the Medicare portion of the SECA tax can be
altered in order to remain within the confines of these rules.
Cap benefits under the like-kind exchange deferral rules
Effective Date: Exchanges “completed” beginning
Jan. 1, 2022
Additional Details: Gains deferred under like-kind
exchanges would be capped at $500,000 ($1,000,000
for joint filers) per taxable year. Gains in excess of these
thresholds would be recognized and taxed accordingly.
CBIZ Perspective: The $500,000 ($1,000,000)
exception is determined on an aggregate basis and not
a per exchange basis. The wording of the effective date
suggests that in-process exchanges commenced prior to
Jan. 1, 2022 would still be subject to the new cap. Also, it
is unclear how these caps would integrate with exchanges
completed by pass-through entities.
■ BIDEN TAX PROPOSAL: INDIVIDUAL PROVISIONS
Increase the top tax rate for individuals to 39.6%, up
from 37%
Effective Date: Jan. 1, 2022.
Additional Details: The proposal would increase the top
marginal individual income tax rate to 39.6%. This rate
would be applied to taxable income in excess of the 2017
top bracket threshold, adjusted for inflation. In taxable
year 2022, the top marginal tax rate would apply to taxable
income over $509,300 for married individuals filing a joint
return, $452,700 for single individuals.
CBIZ Perspective: The proposed tax bracket thresholds are
an important detail revealed in the Green Book that was not
provided in earlier proposals. These thresholds would be
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lower than those that apply under current law to the highest
tax bracket ($628,300 for married individuals filing a joint
return, and $523,600 for single filers).
Tax capital gains for high income taxpayers at ordinary
income rates
Effective Date: Retroactive to the “date of announcement”
Additional Details: This proposal would tax capital gains
at ordinary income tax rates for taxpayers with adjusted
gross income that exceeds $1 million ($500,000 for
married taxpayers who file separately).
CBIZ Perspective: The Green Book again clarifies a
significant detail that was previously unclear, in specifying
that the $1 million threshold is based on adjusted gross
income, and the threshold applies equally to both single
filers and married individuals filing a joint return. By way
of example, the Green Book also clarifies that all sources
of income (including capital gains) are used to measure
the $1 million threshold. Notwithstanding these nuances,
the effective date creates an additional concern. It is not
yet clear whether the “date of announcement” is April 28,
the day President Biden released the American Families
Plan (AFP), or if it is May 28, the date the Green Book was
released, or if a different date might apply when legislation
is introduced in the House of Representatives. In any
case, the retroactive nature of the provision makes this
a challenge for tax planning. Taxpayers may be forced to
work to mitigate the tax impact instead of being able to
plan for a more favorable outcome.
Treat transfers of appreciated property by gift or on
death as realization events
Effective Date: Jan. 1, 2022
Additional Details: Transfers of property by gift or on
death would no longer be sheltered from taxation at the
time of the transfer. Under the proposal, the excess of
the property’s fair market value on the transfer date over
the transferor’s basis in the property would be deemed
realized as capital gains by the transferor. Additionally
(effective Dec. 31, 2030), gains on property that have not
been the subject of a recognition event in the past 90
years would be deemed realized when transferred to or
from a trust (other than a grantor trust), partnership, or
other non-corporate entity. There is an option to pay the
tax over a 15-year period in certain instances.
Family owned and operated businesses would not be
subject to this deemed realization rule until the interest
in the business is sold or the business is no longer family
owned and operated. The $250,000 ($500,000 MFJ)
exclusion from capital gains on a principal residence would
be maintained. Gains from transfers of tangible personal
property, such as household furniture and personal effects
(excluding collectibles), would be exempt. There would also
be a $1 million per-person (indexed for inflation) exclusion
for gifts and transfers at death. This exclusion would be
per spouse and any unused portion is transferrable from
one spouse to the other upon the death of a spouse.
CBIZ Perspective: When gains are triggered under the
deemed realization rule, the recipient obtains a basis in
inherited/gifted property equal to its fair market value
on the transfer date. However, the deemed realization of
gains on transfer would cause “phantom” income to the
transferor, meaning transferors may not have cash to pay
the resulting tax. Furthermore, it is not clear whether a
threshold for de minimis gifts (currently $15,000) would
continue to be excluded. Although it is not mentioned
in the Green Book, presumably gifts to spouses and to
charities would be exempt from such phantom income.
Regarding the gain exclusion on a principal residence, it
is unclear whether the exclusions will be applied only to
actual sales or exchanges, or if they will be applied to a
deemed transfer of the principal residence when the other
deemed transfer rules are triggered.
Significant Omissions
As previously discussed, some legislators from high-
tax states have stated that they will not support tax law
changes without a repeal of the $10,000 state and local
tax (SALT) cap. In light of the fierce advocacy for repeal by
these legislators, it is notable that repeal is not mentioned
in the Green Book. A full repeal of the SALT cap would
require additional offsetting tax increases and would
benefit wealthier individuals, which likely weighed against
inclusion in the Green Book.
The Green Book also does not discuss a cap or any other
significant change to the Qualified Business Income (QBI)
deduction. Repealing QBI benefits for individuals making
more than $400,000 was part of President Biden’s
campaign. Because this would be a substantial revenue
raiser, it may later emerge if other revenue raisers prove to
be unfeasible.
Concluding Thoughts
The Green Book provides greater detail on the President’s
tax plan that was eagerly awaited in the wake of earlier
proposals. Again, the Green Book simply outlines the
President’s agenda for tax policy, and it is Congress that
will have to draft, and eventually pass, any tax legislation.
Although President Biden enjoys a Democratic majority in
the House of Representatives, the Senate is likely to be
the chamber that creates the most difficulties for him to
be able to move forward with his infrastructure and tax
proposals. As a result, the contours of final legislation may
vary significantly in both the major points and the final
details. For additional information on the Administration’s
tax plan, please contact us.