Tax Reform Bill – How Will It Impact You?

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2021 WithumSmith+Brown, PC
Tax Reform Bill – How
Will It Impact You?

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Today’s Presenters
Daniel Mayo
Principal, JD, LLM, National Lead,
Federal Tax Policy
973.532.8847
dmayo@withum.com
Jeremias Ramos
CPA, Lead, National Tax Services
212.829.3248
jramos@withum.com
Kimberlee Phelan
Partner, CPA, MBA, Market Leader,
International Services
609.520.1188
kphelan@withum.com
Hal Terr
Partner, CPA, PFS, CFP®, AEP®,
Lead, Private Client Services
609.945.7946
hterr@withum.com

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Elections Have Consequences
• Democratic control of the White House, House and Senate created an opportunity for
Progressive tax reform
• Republican control in 2017 led to the TCJA which was hailed as “once in a lifetime” tax
reform
• Tax reform pendulum creates uncertainty … proceed with caution

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Biden Campaign Proposals

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Biden’s Individual Tax Proposals
Raise highest marginal individual tax rate from 37% to 39.6% for taxpayers with income > $400K
Phase out §199A Qualified Business Income (QBI) for taxpayers with income > $400K
Phase out itemized deductions taxpayers with income > $400K
Cap the tax benefit of itemized deductions at 28% of value
Subject wages in excess of $400,000 to 6.2% Social Security portion of FICA (not clear whether he would
tax wages between $137,700 and $400,000)

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Biden’s Corporate Tax Proposals
Increase
maximum
corporate
tax rate
from 21% to
28%
Create new
minimum
15% tax on
global book
income on
companies
with at least
$100M in
book income
Provide tax
credits to
promote
revitalizing,
renovating,
and
modernizing
existing or
recently-
closed
facilities
Expand tax
credits to
turbocharge
growth in
domestic
manu-
facturing
Provide 10%
advanceable
credits to
companies
that invest in
manu-
facturing
Establish new
incentives,
including tax
credits, for
companies to
make critical
new products
in the U.S.
28% 15% 10%

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Polling Question #1

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House Ways & Means Proposals

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Tax Rates & Tax Brackets
Ordinary
Income Tax
Rates
37% to 39.6%
LTCG Rates
20% to 25%
retroactive to
9/13/2021
Surcharge
3% on modified
AGI >$5M?; 5% on
MAGI >$10M, and
another 3% on
MAGI >$25M
Top Tax
Brackets
MFJ - $450K
HOH - $425K
Single - $400K

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Ordinary Income Tax Rates
• Would raise top rate from 37% to 39.6% (pre-TCJA rates)
• Promise not to raise taxes on anyone making >$400K
• No provision to tax capital gains at ordinary rates, but would raise top rate on long-term
capital gain from 20% to 25%, retroactive to 9/13/2021
• Additional funds to IRS to hire more auditors, update technology, and expand its
enforcement division
 Bank reporting to IRS for accounts with more than $10K of nonwage deposits

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LTCG & Qualified Dividend Income
• Top rate going from 20% to 25%
• Retroactive on any LTCG and QDI after 9/13/2021
• Unless written binding agreement in effect before effective date
• 3.8% Medicare surtax still applies
• 3% surtax on MAGI > $5M applies to all income?; 5% surtax on MAGI > $10M, and another
3% on MAGI > $25M
• Total tax rate of 31.8% (25% + 3.8% + 3%)

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Qualified Small Business Stock (QSBS)
• Elimination of 75% and 100% exclusions
• All taxpayers with AGI > $400K (including the amount realized on the sale of QSBS)
• All trust & estates regardless of AGI
• 50% exclusion available for all taxpayers
• Retroactive to sales/exchanges after 9/13/2021

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Net Investment Income (NII) Tax
• Would expand the base to include active business income for those making
more than $400K
• Active income and gains coming from K-1s would be subject to the 3.8% surtax

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Qualified Business Income (QBI) Deduction
• The QBI deduction would be limited to a maximum deduction of –
• MJF - $500K
• Single/HOH - $400K
• MFS - $250K
• Trusts - $10K
 This is an additional cap and not an AGI limitation – married taxpayers with $2.5 million in
QBI can still get a $500K QBI deduction

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Excess Business Loss Limitations
• No sunset in 2026 for non-corporate taxpayers (likely only those earning more than $400K)
• Disallows any excess business losses for the taxable year
• Allows for carryover of disallowed losses
• Effect is that individuals would no longer be able to deduct ordinary business losses against
investment income even if they were actively involved in the business

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Wash Sales & Constructive Sales
• Would expand both of these provisions to include digital assets like
cryptocurrencies and non-fungible tokens (NFTs)
• Would also subject commodities and currencies to the wash sale rule

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Lord of the Roths
• ProPublica piece on tech mogul Peter Thiel who amassed $5 billion in a Roth
IRA
• Proposals would put limits on contributions and tax-free accumulation of
wealth through IRAs
• Applies to taxpayers with high AGIs:
• MFJ - $450K
• HOH - $425K
• Single - $400K

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Retirement Changes
• Caps contribution to IRAs/Roth IRAs if balance > $10M
• Accelerates RMDs for IRAs, Roth IRAs, and defined contribution retirement account if
balance > $10M
• Closes “back-door” Roth IRA strategies
• Prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA
contributions from being converted to Roth regardless of income level after 12/31/2021

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Carried Interest
• Extends holding period from 3 to 5 years to get LTCG treatment
• Applies to taxpayers with AGI > $400K
• Additional rules for tiered partnership structures and timing of 5-year holding
period

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SALT Deduction Limitation
• Some modification to SALT cap is expected but not final
• Latest proposal:
• Elimination of SALT cap for 2022 and 2023
• Extend cap for 2 years after currently-planned expiration in 2025

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Wildcard – Billionaires Income Tax
• Oct. 27, 2021 – Senate Finance Committee Chair Ron Wyden releases tax proposal for an annual mark-to-market of unrealized gains on
billionaires’ tradable assets
• Expected to apply to about 700 individuals and to raise hundreds of billions of dollars
• Goal is to prevent billionaires from holding appreciated assets, borrowing against those assets to fund their lifestyles, and then avoiding
any tax on death through the step-up in basis
• Would apply to taxpayers with more than $100 million in annual income or more than $1 billion in assets for three consecutive years
• Would include loss carryover provisions, and a limited carryback provision for up to 3 years
• Would include a deferred interest charge on gain from the sale of nontradable assets (the deferral recapture amount)
• Allocates gain over each year in the taxpayer’s holding period and then assesses interest based on the tax that would have been due
each year
• Transition rule provides an election to pay the first years’ tax over 5 years
• For more info, see text of 107-page bill, one-page summary, and 11-page section-by-section summary

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Corporate Taxes
Tax Rates and S Corp Conversions

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Tax Rates
• Would replace flat tax rate with graduated rate structure
• 18% for corporations with NI < $400K
• 21% for corporations with NI ≥ $400K and ≤ $5M
• 26.5% for corporations with NI > $5M
• Flat 26.5% rate for personal service corporations, like law and accounting firms
 1% surcharge on corporate stock buybacks

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S Corp Conversions
• S corps in existence on May 13, 1996 (before check-the-box regs) have 2 years
to convert to partnership status without triggering a taxable liquidation

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Corporate Profits Minimum Tax
• Oct. 26, 2021 – Senators Warren, King, and Wyden release proposal for 15% minimum tax on
corporate profit, starting for tax years beginning after 12/2022
• Expected to generate hundreds of billions in revenue over 10 years
• Goal is to tax large corporations that report large profit but do not pay corporate income taxes
• The tax is expected to apply to about 200 companies in the manufacturing and tech sectors
• Would apply only to companies with 3-year average book income greater than $1 Billion
• Would allow offsets for general business credits (R&D, clean energy, housing tax credits, etc.)
• Would allow carryforward of losses and minimum tax credits to offset regular tax
• For more info, see text of 21-page bill and one-page summary

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Polling Question #2

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International Tax Reform

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Tax Reform: GILTI & FDII
• Section 250 Deduction reduction from 50% to
o 31.75% for GILTI
o 21.875% for FDII
• Qualified Business Asset Investment reduced from 10% to 5%
o Used to determine Deemed Tangible Investment Return
o FDII-eligible income will increase
o GILTI income inclusion will also increase
• GILTI calculation on a Country-by-Country Basis
o Currently, calculation is done at the shareholder level
o Netting no longer available
• GILTI Tested Loss carryforwards will be allowed
• GILTI Foreign Tax Credit increased from 80% to 95% of properly allocable taxes

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GILTI Example 1
Current Proposed
Pre-Tax Tested Income 1,000,000 1,000,000
QBAI 500,000 500,000
10% QBAI 50,000
5% QBAI 25,000
Subtotal 950,000 975,000
Section 250
50% Deduction 475,000
31.75% Deduction 309,563
GILTI 475,000 665,438
21% Corporate Tax 99,750 139,742
Foreign Tax Paid 125,000 125,000
80% Limitation 100,000
95% Limitation 118,750
Net US Tax - 20,992

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GILTI Example 2
Current Proposed
Country A Country B Combined Country A Country B Combined
Pre-Tax Tested Income 1,000,000 2,000,000 1,000,000 2,000,000
QBAI 500,000 100,000 500,000 100,000
10% QBAI 50,000 10,000
5% QBAI 25,000 5,000
Subtotal 950,000 1,990,000 975,000 1,995,000
Section 250
50% Deduction 475,000 995,000
31.75% Deduction 309,563 633,413
GILTI 475,000 995,000 1,470,000 665,438 1,361,588 2,027,025
21% Corporate Tax 99,750 208,950 308,700 139,742 285,933 425,675
Foreign Tax Paid 170,000 200,000 170,000 200,000
80% Limitation 136,000 160,000 296,000
95% Limitation 161,500 190,000
Net US Tax 12,700 - 95,933 95,933

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FDII Example
Current Proposed
Foreign Derived Income 1,000,000 1,000,000
QBAI 500,000 500,000
10% QBAI 50,000
5% QBAI 25,000
FDII 950,000 975,000
Section 250
37.5% Deduction 356,250
21.875% Deduction 213,281
Taxable Income 643,750 786,719
21% Corporate Tax 135,188 165,211
Effective Tax Rate on Foreign Income 13.52% 16.52%

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Foreign Tax Credits
• Country-by-Country application
o No longer able to cross credit taxes among different jurisdictions
• Repeal of the foreign tax credit carryback period
o Currently a 1-year carryback is allowed
• Carryforward period reduced from 10 years to 5 years
• Allow carryover for foreign taxes paid on GILTI
o Currently, GILTI FTCs must be used in the year of the GILTI income inclusion

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Controlled Foreign Corporations
• Section 245A Deduction (deduction for foreign-source portion of dividends received by domestic corporations
from specified 10% owned foreign corporations) will be applicable ONLY for CFCs
o Impact US C corporations that are >10% but less than 50% shareholders in a foreign corporation that is
not a CFC
• Modifications in the rules regarding attribution from foreign persons for purposes of calculating inclusions
from a CFC
o Reinstatement of the prohibition on “downward attribution” from foreign persons
o Enact a new Section 951B to address perceived abuses the repeal of downward attribution was intended
to prevent

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BEAT: Base Erosion Anti-Avoidance Tax
• RATE:
o Current 10% tax rate applicable only to tax years beginning before 1/1/2024
o Rate will increase to 12.5% of tax years beginning before 12/31/2025
o Increase again to 15% for tax years beginning after 12/31/2025
• Certain credits to be allowed when computing Modified Taxable Income
• Expanded definition of Base Erosion payments to include
o Payments to foreign parties that are required to be capitalized into inventory
o Amounts paid to foreign parties for inventory that exceeds the foreign party’s cost for the property
• Exceptions provided for
o Payments that are subject to US tax, and
o Payments that are subject to foreign tax at an effective rate equal to or greater than the applicable BEAT tax rate

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Taxation of the Digital Economy
• Who has the right to tax?
• How should profit be allocated?
• International Consensus
o Mechanism for resolving controversy
o Avoiding double taxation
• Example: Netflix
• Pillar 1 – Market/Consumer Presence Based Taxation
o Applies to companies with > 20 billion Euro in revenue
o Profit Margin > 10%
o 25% of profit reallocated to be taxed in jurisdictions where they have sales other than home country

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Global Minimum Tax
• 15% Tax Rate
• 136 Countries (4 OECD members yet to agree: Kenya, Nigeria, Pakistan, Sri Lanka)
• Proposed new rules to be implemented by 2023
• Pillar 2 – Worldwide Global Minimum Tax
o Global Minimum Tax companies > 750 million Euro in annual global sales
o Tax home country can “top up” taxes on applicable corporations to achieve a 15%
minimum effective tax rate

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Polling Question #3

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House Ways & Means Committee Draft
Legislation – Estate and Gift Tax Reform

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Current Estate and Gift Tax Law
• The 2017 TCJA doubled the Basis Exclusion Amount and GST exemption from 2018 – 2025 ($10
million in 2011 dollars)
• In 2021, the current Estate, Gift and GST Exemption is $11.7 million per individual ($23.4 million for
married couples)
• In 2026, the Estate, Gift and GST Exemption is set to go back to pre-TCJA law ($5 million in 2011
dollars)
• The Proposed Legislation is to accelerate the sunset to January 1, 2022 where the Estate, Gift and
GST Exemption would be projected to be $6 million

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Current Estate and Estate Tax Law
• The Proposed Legislation does not change:
• Estate and Gift Tax Rate of 40%
• Annual exclusion of $15,000 per donor ($30,000 for a married couple)
• Step-Up in Basis in Assets held at Death, Carryover in Basis for Gifts of Assets
• Portability of a Deceased Spouse’s Unused Exemption
• Annual Withdrawal Right (Crummey Powers) from Existing Non-Grantor Trusts

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Use the Gift and GST Exemption Now
• IRS issued final regulations in November 2019 which would not cause recapture of gifts made in excess of the
lifetime exemption at the time of an individual’s passing
• Example: An individual makes a gift of $11.7 million in 2021 and passes away in 2022 when the exemption is $6
million, the individual’s estate is not subject to estate tax on the $5.7 million excess gift
• Donors cannot use part of the $11.7 million exemption now and preserve the balance for later use
• Example: An individual makes a gift of $6 million in 2021 and passes away in 2022 when the exemption is $6
million, the individual’s estate has no remaining exemption
• If married, have one spouse make a large gift to utilize their $11.7 million exemption to get “at least one bite of the
apple”

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Use the Gift and GST Exemption Now
• Make large gifts to family members or trusts for their benefit in excess above the potential
exemption of $6 million in 2022
• Establish a Spousal Lifetime Access Trust (SLAT) before the enactment of the proposed
legislation
• Be careful of Reciprocal Trust Doctrine if Creating two SLATS for each spouse

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Grantor Trusts
• The Proposed Legislation would add new section 2901 which would cause grantor trusts to be included in the gross estate
of the grantor
• Distributions from grantor trusts to a beneficiary (other than the grantor or grantor’s spouse) during the life of the
grantor would be considered a gift at time of distribution
• Trusts converting to non-grantor trusts during the grantor’s lifetime would be considered at gift at the time of
conversion
• The Proposed Legislation would add new section 1062 which would cause transactions between grantor trusts and their
grantors to be recognized for income tax purposes
• Effectively eliminating the ability for individuals to implement Sales to Defective Grantor Trusts
• Proposal would eliminate the ability for the grantor to swap highly appreciated assets from grantor trust with cash or
other high-cost basis investments
• Proposed Legislation would only apply to trusts created on or after the date of enactment and to transfers to pre-existing
trusts on or after the date of enactment
• Proposals may cause inclusion of pre-existing Irrevocable Life Insurance Trusts (ILITs) if gifts are made after the date of
enactment of the proposal. Individuals may want to prefund these ILITs before date of enactment

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Valuation Rules
• Proposed Legislation would eliminate section 2031 to eliminate valuation adjustments for lack of
marketability and control for gifts of non-business assets after the date of enactment
• Non-business assets include any asset not used in the active conduct of a trade or business (i.e.,
marketable securities, passive real estate)
• Non-business assets do not include real property trades or business in which the donor materially
participates
• Consider establishing Family Limited Liability Companies with marketable securities and/or passive real
estate and make gifts prior to the date of enactment

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Polling Question #4

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Speaker Contacts
Daniel Mayo
Principal, JD, LLM, National Lead,
Federal Tax Policy
973.532.8847
dmayo@withum.com
Jeremias Ramos
CPA, Lead, National Tax Services
212.829.3248
jramos@withum.com
Kimberlee Phelan
Partner, CPA, MBA, Market Leader,
International Services
609.520.1188
kphelan@withum.com
Hal Terr
Partner, CPA, PFS, CFP®, AEP®,
Lead, Private Client Services
609.945.7946
hterr@withum.com

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