The Good News About Build Back Better Act (BBBA) Not Moving Forward
December 22, 2021
The Full Story
The BBBA eliminates a permitted exclusion in the Net Investment Income tax provisions by subjecting all trade or business income of individuals with earnings over $400,000 (individual) or $500,000 (married couples) to the 3.8% net investment income tax—except to the extent already subject to self-employment tax.
This is an unfavorable change for owners of partnerships or S corporations who materially participate in the business and were not previously subject to the 3.8% tax or self-employment tax.
This proposed expansion is of particular importance for sellers because the surcharge on income in excess of the applicable thresholds coupled with the expansion of the 3.8% net investment income tax to apply to gain from the sale of limited partnerships or S corporations could increase the tax liability on a portion of the gain recognized for transactions that close during 2022 or later by as much as 11.8 percentage points compared with those that close before the 2021 year-end.
The proposal would ensure that high-income owners of certain pass-through businesses pay either the 3.8 percent net investment income tax (NIIT) or the 3.8 percent Medicare employment tax on their income. According to Joint Committee on Taxation, this reform would raise about $250 billion over a decade.
The fate of the Democrats’ $1.75 trillion spending plan is now uncertain. Senate Majority Leader Chuck Schumer vowed that the chamber would “vote on a revised version of the Build Back Better and we will keep voting on it until we get something done.”
A major question, among many that remains, is whether the Net Investment Income Tax Expansion will be enacted as drafted given the legislative process will inevitably narrow the bill’s scope and cost, meaning that fewer rather than more tax provisions are likely to move forward.
The bottom line
About the Author
Cardell is a partner in the Transaction Advisory Services group at Aprio. Cardell has over 15 years of tax consulting experience serving clients across a wide range of industries, including construction, distribution, financial services, manufacturing and telecommunications. Cardell focuses on advising financial and strategic clients on the tax aspects and structuring of taxable and tax-free transactions. These include mergers and acquisitions, dispositions, restructurings, leveraged buy-outs and recapitalizations.