Treasury Releases Its 2023 Revenue Proposals
On March 28, 2022, the Biden Administration issued its so-called “Green Book,” General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals.
Over 100 pages in length, the 2023 Green Book covers a broad array of topics – business and international taxation, housing, fossil fuel taxation, taxation of high-income individuals, taxation of families and students, estate and gift taxation, “loophole” closing, tax administration and compliance, and modernizing certain tax rules to include digital assets.
As a whole, the proposals contained in the Green Book represent the Administration’s “wish list” for the next fiscal year. Many of the proposals (e.g., carried interests) are very similar to provisions contained in the Administration’s 2022 Green Book. While important, the significance of these proposals should not be overstated at this time. First, appropriate legislation needs to be drafted by Congress – which may or may not be fully consistent with the Administration’s proposals. Then, of course, any such legislation must be passed by Congress and signed by the President. Given the current political environment, particularly in the U.S. Senate, the fate of tax legislation in advance of the 2022 mid-term elections must be considered uncertain at best.
While close to 50 discreet proposals are described in the Green Book, following are selected highlights. As the legislative process moves forward, EisnerAmper will provide you with further detail and updates as appropriate.
- Corporate Income Tax Rate. The proposal would increase the tax rate for C corporations from 21% to 28%, effective for taxable years beginning after December 31, 2022. For taxable years beginning before January 1, 2023, and ending after December 31, 2022, the corporate income tax rate would be equal to 21% plus 7% times the portion of the taxable year that occurs in 2023.
- Top Marginal Income Tax Rate for High Earners. The top marginal tax rate would increase to 39.6%, for taxable years beginning after December 31, 2022. This would apply to taxable income over $450,000 for married individuals filing a joint return, $400,000 for unmarried individuals (other than surviving spouses), $425,000 for heads-of-household, and $225,000 for married individuals filing a separate return, all indexed for inflation after 2023.
- Taxation of Capital Income. Long-term capital gains and qualified dividends of taxpayers with income of more than $1 million would be taxed at ordinary income rates, with 37% being the highest rate (40.8% including net investment income tax). Note that if the highest marginal rate were raised to 39.6%, this provision would adjust accordingly. The proposal would apply only to the extent that the taxpayer’s taxable income exceeds $1 million ($500,000 for married filing separately), subject to an inflation adjustment after 2023.
- Subject to certain exclusions, the donor or deceased owner of an appreciated asset would realize a capital gain at the time of transfer. The amount of gain realized would be the excess of the asset’s fair market value on the date of gift or on decedent’s date of death over the decedent’s basis in that asset. That gain would be taxable income to the decedent on the federal gift or estate tax return or on a separate capital gains return. In addition to other exclusions, the proposal would allow a $5 million per-donor exclusion from recognition of unrealized capital gains on property transferred by gift during life, applied only to unrealized appreciation on gifts to the extent that the donor’s cumulative total of lifetime gifts exceeds the basic exclusion amount in effect at the time of the gift. This provision would apply to gains on property transferred by gift, and on property owned at death by decedents dying after December 31, 2022.
- Gain on unrealized appreciation also would be recognized by a trust, partnership, or other non-corporate entity that is the owner of property if the property has not been subject of a recognition event within the prior 90 years. The provision would apply to property not subject to a recognition event since December 31, 1939, so the first recognition event would be deemed to occur on December 31, 2030. The provision would be effective for certain property owned by trusts, partnerships, and other non-corporate entities on January 1, 2023.
- Minimum Income Tax on Wealthiest Taxpayers. Effective for taxable years beginning after December 31, 2022, a minimum tax of 20% of total income, including unrealized gain, would be imposed on all taxpayers with “wealth” (i.e., assets minus liabilities) of more than $100 million. Taxpayers could choose to pay the first year of minimum tax liability in nine equal annual installments. For subsequent years, taxpayers could choose to pay the minimum tax imposed for those years (not including installment payments due in that year) in five equal annual installments. Payments of the minimum tax would be treated as a prepayment available to be credited against subsequent taxes on realized capital gains to avoid taxing the same amount of gain more than once. Taxpayers with wealth greater than the threshold amount would be required to report to the IRS on an annual basis the total basis and total estimated value (as of December 31 of the taxable year) of their assets in specified asset classes, and the total amount of their liabilities. Special rules would apply to “illiquid” assets.
- Estate and Gift Taxation. The Administration’s proposals would modify estate and gift taxation as follows with varying effective dates.
- It would impose limits on “GRATS” (Grantor Retained Annuity Trusts) to increase their downside risk, including the requirement that the GRAT remainder interest have a value at least equal to the greater of 25% of the GRAT assets or $500,000 and that the GRAT have a minimum term of ten years and maximum term of the annuitant’s life expectancy plus ten years.
- Certain tax benefits of grantor trusts would be eliminated. A sale or exchange between a grantor and his/her grantor trust would be treated as a taxable exchange and the grantor’s payment of the trust’s income tax would be treated as a gift.
- The duration of the generation-skipping transfer tax exemption would be limited.
- Taxation of Carried (Profits) Interests. This provision would subject profits interests to tax at ordinary income rates and also subject to self-employment tax. Effective for taxable years beginning after December 31, 2022, a partner’s share of income on an “investment services partnership interest” (ISPI) in an “investment partnership” would generally be taxed as ordinary income (and not capital gain), regardless of the character of the income at the partnership level, if the partner’s taxable income from all sources exceeds $400,000. Partners in such investment partnerships would also be subject to self-employment taxes on ISPI income if the partner’s taxable income from all sources exceeds $400,000. Similarly, gain recognized on the sale of an ISPI would generally be taxed as ordinary income, not as capital gain, if the partner is above the income threshold. Subject to certain exceptions, an ISPI is a profits interest in an investment partnership held by a person who provides services to the partnership. As defined, generally, a partnership is an investment partnership if substantially all of its assets are investment-type assets, but only if over half of the partnership’s contributed capital is from partners in whose hands the interests constitute property not held in connection with a trade or business. This proposal would also repeal IRC Sec. 1061 (Partnership Interests Held in Connection with Performance of Services) for taxpayers with taxable income from all sources in excess of $400,000.
- Like-Kind Exchanges. The proposal would allow the deferral of gain of up to an aggregate amount of $500,000 ($1 million in the case of married individuals filing a joint return) each year for real estate like-kind exchanges. Gains from like-kind exchanges in excess of such amounts would be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the exchange. This would be effective for exchanges completed in taxable years beginning after December 31, 2022.
- Improving Tax Administration and Compliance. Tax administration and compliance would be addressed through a number of provisions.
- Electronic filing would be required for returns filed by taxpayers reporting larger amounts or that involve complex business entities. Electronic filing would be required for specified forms. Also, return preparers that expect to prepare more than ten corporate income tax returns or partnership returns would be required to file such returns electronically.
- IRS regulation of tax preparers would be expanded.
- The period of assessment of tax for certain qualified opportunity fund (“QOF”) investors would be extended. In situations where the taxpayer fails to properly include deferred gain in gross income as a result of an “inclusion event,” the statute of limitations (“SOL”) would not expire before three years after the date on which the IRS is furnished all information needed to assess the related deficiency. The proposal would generally be effective for inclusions of deferred gains where the deferral elections based on QOF investments were made after December 31, 2017 (but would not apply where the SOL for assessment has expired before the date of enactment).
- The statute of limitations for listed transactions and for certain tax assessments would be extended.
- Effective for returns filed after the date of enactment, the proposal would impose an affirmative requirement on taxpayers to disclose a position on a return that is contrary to a regulation. (Under current law, there is no affirmative obligation for taxpayers to inform the IRS, via Form 8275-R, that they are taking such a position.) Except to the extent provided in regulations for failures due to reasonable cause and not willful neglect, the penalty for failing to make the required disclosure would be 75% of the decrease in tax shown on the return as a result of the position, with a minimum penalty of $10,000 and a maximum of $200,000, adjusted for inflation. The penalty would not apply if a taxpayer reasonably and in good faith believed that its position is consistent with the regulation. However, the penalty would apply regardless of whether the taxpayer’s interpretation of the regulation is ultimately upheld.
- The proposal would make certain changes to the centralized partnership audit regime to allow a net negative change in tax that exceeds a partner’s income tax liability in a reporting year to be treated as an overpayment that may be refunded.
- Modernizing Certain Tax Rules, Including to Reflect Digital Assets. A number of tax rules would be updated to reflect the development of digital assets.
- The securities lending nonrecognition rules would be amended to apply to loans of actively traded digital assets recorded on cryptographically secured distributed ledgers, provided the loan has terms similar to those currently required for loans of securities, effective for taxable years beginning after December 31, 2022. The proposal would also provide regulatory authority to extend the securities loan nonrecognition rules to other assets, such as interests in publicly traded partnerships.
- Reporting would be required by certain taxpayers of foreign digital asset accounts, effective for returns required to be filed after December 31, 2022.
- Effective for taxable years beginning after December 31, 2022, dealers or traders in digital assets would be able to mark actively traded digital assets (and derivatives on, or hedges of, such digital assets) to market at their election under rules similar to those that apply to actively traded commodities.
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