Balancing Uncle Sam's Checkbook: Biden's Tax Proposals

CW
Cadwalader, Wickersham & Taft LLP

Contributor

Cadwalader, established in 1792, serves a diverse client base, including many of the world's leading financial institutions, funds and corporations. With offices in the United States and Europe, Cadwalader offers legal representation in antitrust, banking, corporate finance, corporate governance, executive compensation, financial restructuring, intellectual property, litigation, mergers and acquisitions, private equity, private wealth, real estate, regulation, securitization, structured finance, tax and white collar defense.
In President Biden's recent State of the Union Address, he called on corporations and wealthy taxpayers to pay their "fair share" through proposals to end tax breaks...
United States Tax
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In President Biden's recent State of the Union Address, he called on corporations and wealthy taxpayers to pay their “fair share” through proposals to end tax breaks for private jets, further limit deductions for executive pay, and raise the corporate minimum tax to 21%. On March 11, 2024, the Biden Administration released its Fiscal Year 2025 Budget Proposals (the “FY 25 Budget”, available here), and the Treasury Department released its General Explanations of the Administration's Fiscal Year 2025 Revenue Proposals (the “Greenbook”, available here). The Greenbook elaborates on revenue proposals in the FY 25 Budget.

While the FY 25 Budget includes some new tax proposals, it largely reintroduces identical tax proposals from prior Biden budgets. Part I below summarizes the key new tax proposals, and Part II below highlights the key tax proposals that were reintroduced.

Part I: Some of Biden's more noteworthy new tax proposals would:

  • Increase the corporate alternative minimum tax (“CAMT”). This proposal would increase the CAMT from 15% to 21%. The CAMT is a 15% minimum tax on the adjusted financial statement income of so-called applicable corporations, which are corporations whose average Adjusted Financial Statement Income exceeds $1 billion for any three consecutive tax years ending after 2021 (or in the case of certain domestic corporate members of foreign-parent multinational groups, $100 million for any three consecutive tax years ending after 2021).
  • Increase the excise tax rate on corporate stock repurchases.  This proposal would (i) increase the excise tax on stock repurchases from 1% to 4% and (ii) extend the excise tax to stock acquisitions of certain foreign corporations by certain of their foreign corporate affiliates that are also controlled foreign corporations (“CFCs”).
  • Limit corporate tax deductions for certain salaries in excess of $1 million.  This proposal would expand existing deduction limitations on C-suite-level compensation paid by public corporations in excess of $1 million to both (i) privately held corporations and (ii) compensation paid to all employees, not just C-suite-level employees.
  • Increase the tax cost of private jet usage.  This consists of two proposals, one of which would limit the value of depreciation deductions for noncommercial airlines by extending the recovery period for aircraft from five years to seven years, thereby aligning the recovery periods for commercial and noncommercial aircraft. The other proposal would increase the excise tax for jet fuel used by noncommercial jets by approximately 400%.
  • Limit benefits for private placement life insurance. This proposal would define a new class of insurance contracts (“Covered Contracts”), including private placement life insurance contracts, private placement annuities, and other insurance contracts, which are “predominantly investment oriented” as described in the Greenbook. Notably, the tax treatment of Covered Contracts would differ from the tax treatment of other life insurance and annuity products as follows: (i) distributions prior to an annuity's starting date would be taxed as ordinary income to the extent that the contract's investment value exceeded the amount invested in the contract, (ii) amounts paid on life-insurance style Covered Contracts upon the death of the insured would be taxable as ordinary income to the extent that the beneficiary's share of the contract's investment value exceeded the beneficiary's share of the amount invested in the contract, and (iii) taxable distributions from a Covered Contract would be subject to an additional 10% tax. Additionally, the IRS would be authorized to require insurance companies and policyholders to report the existence of, and specific details regarding, any Covered Contracts. 
  • Expand the 10% shareholder exclusion from the portfolio interest exemption to include shareholders that own 10% of the value of a corporate borrower.  Interest received by a foreign person may be exempt from U.S. withholding tax under the portfolio interest exemption. The portfolio interest exemption does not apply to interest payments received by a lender who is also a 10% shareholder of the borrower (currently determined on the basis of voting power alone). This proposal would expand the 10% shareholder definition to include lenders owning 10% of the value of a corporate borrower. 
  • Require that a controlled foreign corporation's taxable year match the year of its majority U.S. shareholder.  This proposal would eliminate a CFC's ability to elect a taxable year ending one month earlier than its majority U.S. shareholder. 

Part II: Some of the more noteworthy reintroduced tax proposals, which we previously described in greater detail hereherehere, and here would:

  • Increase the corporate income tax rate from 21% to 28%.
  • Tax carried interest in investment services partnerships as ordinary income for certain high-earners.  This proposal would apply to a service partner with more than $400,000 in taxable income and would characterize as ordinary income such service partner's income and a portion of its gains attributable to a profits interest in an investment partnership (e.g., partnerships with substantially investment-type assets and passive investor partners).
  • Prevent basis shifting between related partners.
  • Eliminate capital gains rates for high earners (e.g., persons with income exceeding $1 million) and gain deferral on certain gifts or transfers at death.
  • Broaden the base of income subject to the net investment income tax (“NIIT”) to include business income earned through pass-through entities and increase the NIIT from 3.8% to 5%.
  • Impose a 25% minimum tax on the income, including unrealized gains, of taxpayers with a net worth greater than $100 million.
  • Increase the top individual marginal income tax rates from 37% to 39.6%.
  • Clarify the treatment of digital asset transactions by extending nonrecognition treatment to certain digital asset lending activities, applying mark-to-market accounting to actively traded digital assets, applying the wash sale rules to digital assets, and extending FATCA and foreign financial asset reporting to digital assets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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