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Looking at Build Back Better – Part 2
In a surprise to most everyone, Senate Majority Leader Chuck Schumer, D-N.Y., and Sen. Joe Manchin, D-West Virginia, announced the Inflation Reduction Act of 2022 (or is it Build Back Better Redux), a proposed reconciliation bill. Manchin is known for blocking previous attempts to pass Build Back Better, which was more extensive in scope.
There does not appear to be all that many provisions that would have a direct impact on most individuals. Some provisions will impact specific taxpayers, both corporate and individual, as well as those concerned about drug pricing and energy and climate incentives. The main areas of the proposed legislation include:
- 15% corporate minimum tax on company book/financial statement income;
- Additional funding for the IRS;
- Changes to the carried-interest tax break;
- Health care changes (prescription drug pricing and Affordable Care Act extension); and,
- Incentives for renewable and clean energy.
How Do These Build Back Better?
Looking at the minimum tax. It would only affect a relatively small number of corporations —those with more than $1 billion in revenue. Only about 200 corporations are that size, and many of them already pay more than 15% in tax. There will have to be significant regulations before we know how it will work. The idea behind the tax is that everyone should contribute and pay at least 15%.
The IRS funding goes toward enhancing governmental enforcement by increasing tax examinations for corporations as well as high-income individual taxpayers, In addition is will be used to improve IRS customer service and modernize technology.
The idea behind the carried-interest changes would be to eliminate favorable capital gain rates for private equity and hedge fund manager income. It would subject it to ordinary tax rates as high as 37%.
The biggest impact for the average tax practitioner will be the increased funding for the IRS. A big part of why it’s in there is to help pay for the climate change provisions, through increased enforcement and compliance. It will also help the IRS modernize their systems, and work more efficiently.