The “Green Book”

President Biden released his budget last week.  As part of that process, he also released his revenue proposals to pay for the budget.  This is commonly referred to as the “Green Book”.  There will be substantial help for families with children that we have addressed in previous posts.  This post will outline the major revenue proposals that will likely impact farmers (and other taxpayers) the most.

• Raise the corporate income tax rate to 28% – The current corporate tax rate is 21%. This increase would be effective January 1, 2022.  Fiscal year corporations would have a pro-rata tax rate based on number of months.  There is no mention of having any type of graduated tax rate for smaller corporations.
• Establish tax credits for Heavy and Medium Duty Zero Emissions Vehicles – Certain passenger cars and light-duty trucks qualify for a federal tax credit of up to $7,500, but there is no credit for larger vehicles. Starting in 2022, Class 3 vehicles could qualify for a $25,000 tax credit (1-ton pick-ups).  The credit increases to $120,000 for Class 7-8 long-haul vehicles.  The credit starts to be phased-out in 2025.
• Increase the top marginal tax rate for high earners – The current rate is 37%. The proposal increases this to 39.6% effective January 1, 2022.  For 2022, the top rate would start at $509,300 for married couples and $452,700 for singles.
• Reform the taxation of capital income as follows:
  • Long-term capital gains and qualified dividend income would now be subject to the 39.6% tax rate on net capital gains over $1 million of taxable income. As an example – assume you have a capital gain of $1 million from selling farmland and total taxable income of $1.4 million. Only $400,000 would be taxed at 39.6%.  The other $600,000 would be taxed at current capital gains rates.
  • This top rate is effective for transfers after the date of the announcement of the American Family Plan or April 28, 2021.
  • Transfers of appreciated property would be subject to a “capital gains” tax. It appears that ordinary income property such as equipment, grain inventories, etc. would be taxed at “capital gains” rates in this situation. 
  • The transfer tax applies during lifetime or at death. Each person would have a personal $1 million exemption (indexed) that could be ported over to the surviving spouse if not totally used.  Appreciation on a personal residence of $250,000 for each is allowed too.
  • Partial interests in property would not be allowed a minority interest discount.
  • Distributions of appreciated property from a trust, partnership, or other non-corporate entity will be subject to taxation. This is a substantial change from current law which allows tax-free transfers out of partnerships (in most situations).
  • Transfers to spouses and charities are not subject to the tax, but no step-up is allowed either.
  • Transfers to a charitable remainder trust will now be taxable except for the portion that is deemed “owned” by the charity.
  • The tax would not apply for appreciated personal property excluding collectibles.
  • The exclusion under current law for certain small business stock would continue to apply.
  • An heir would receive “step-up” in basis on any inherited assets (after the decedent’s estate pays the capital gains tax). Gifted property during lifetime only receives a step-up if the donor pays a capital gains tax.
  • Payment of the tax on certain family-owned and operated businesses (such as farms) could be deferred and paid over 15 years. Security would be required.
  • If the property continues to be family-owned and operated, then no tax is due. However, no details on what constitute family-owned and operated and how long you need to continue before the deferred tax is eliminated (if ever).
  • Broad authority is given to the IRS to implement this proposal.
  • This transfer tax would be effective for transfers after December 31, 2021.
• Partners or S corporation owners with adjusted gross income in excess of $400,000 will now owe either the 3.8% net investment income tax (NIT) or the 3.8% self-employment (SE) tax. Many farmers are structured as a manager-managed LLC or S corporation and in many cases this income is not subject to either tax.  This proposal changes the definition of net investment income to include income from any trade or business that is not subject to SE tax.
  • The $400,000 level would not be indexed for inflation.
• Limited partners and LLC members who provide services and materially participate in their partnerships or LLCs would be subject to SE tax on their share of income to the extent it exceeds a threshold. Exemptions related to rents, dividends, capital gains, etc. would continue to apply.  The same rules would apply to S corporations.  It appears that this rule would make all materially participating business income of S corporations or partnerships (including LLCs) subject to SE tax.  There is an exemption once you reach $400,000 of income, however, that simply states that instead of being subject to the 3.8% SE tax, you are now subject to the 3.8% NIIT tax.  If enacted, this would effectively eliminate any reason to have a farm S corporation.  Not sure if this would apply to spouses who have ownership and only have material participation via spouse attribution.
• Cumulative Section 1031 deferred gain would be limited to $500,000 per person (married couples could have $1 million of deferred gain), per year.
• The Excess Business Loss (EBL) rules would be made permanent.

What is not in the proposal:

• Section 199A 20% deduction would continue as under current law. The proposal did not eliminate this for taxpayers with more than $400,000 of AGI.  Remember that this is scheduled to expire in 2026.
• The lifetime estate/gift exemption amount of $11.7 million was not addressed.

How much revenue will be raised over 10 years:

• Increase top corporate tax rate – $858 billion,
• Increase top individual tax rate – $132 billion,
• Capital gains tax changes – $323 billion,
• NIIT and SE tax changes – $237 billion,
• Repeal 1031 gain deferral – $20 billion,
• Make EBL permanent – $43 billion.

Will this become law?  No.  This is a proposal by the White House.  Congress makes the law.  However, it is likely that the President has vetted this with his party in Congress (which is slightly in control) and perhaps much of it may pass.  We will keep you posted.