In the Fiscal Year 2025 Budget released March 11, President Biden proposes a series of reforms aimed at generating over $5 trillion in tax revenues over the next decade so that the Biden Administration can achieve its goal of expanding tax credits for workers and families while enhancing tax administration and compliance. The Green Book, a document detailing the president’s revenue proposals, encompasses various areas of tax policy that the Biden Administration believes will create a more equitable and efficient tax system overall. Remember that the Green Book represents the president’s “wish list” for tax policy, while Congress must draft and pass any associated legislation.
This year’s business tax proposals echo many of the previous proposals and include increasing the corporate income tax and alternative minimum tax rates, increasing the stock buyback excise tax rate, ending corporate tax deductions for employee compensation over $1 million and closing perceived business tax loopholes.
International tax proposals seek to strengthen the taxation of foreign earnings and reduce incentives for profit shifting and offshoring, aligning with the global minimum tax agreement. These changes aim to enact legislation to implement the global minimum tax in order to create what the administration believes would be a fairer environment for U.S. businesses and workers while providing stability in international tax rules.
Proposals related to individual taxpayers include raising income tax rates for individuals with higher incomes, eliminating capital gains avoidance techniques and introducing a new 25% wealth tax for taxpayers viewed as extremely wealthy. Additionally, proposals aim to increase the incidence of Medicare taxes for some pass-through business owners and would further curtail tax preferences related to carried interests. Proposals also include reforms for workers and families and include expanding the child tax credit through 2025, while permanently making the Child Tax Credit fully refundable with monthly determinations and advance payments.
Let's take a closer look at some of the Biden Administration's more significant proposals within the Fiscal 2025 Budget.
Domestic Business Tax Proposals
Increased Corporate Income and Alternative Income Tax Rates
The proposal would raise the corporate income tax rate from 21% to 28% as well as raise the corporate alternative minimum tax rate from 15% to 21%, both effective for years beginning after Dec. 31, 2023.
CBIZ Observations: The 28% corporate income tax provision is the largest revenue-raising proposal and appeared in previous Green Book proposals.
Increase Corporate Stock Repurchase Excise Tax
The proposal would raise the stock repurchase excise tax rate from 1% to 4%, effective after Dec. 31, 2023, and extend the stock repurchase excise tax to the acquisition of stock of an applicable foreign corporation by a specified affiliate that is a controlled foreign corporation (CFC).
CBIZ Observations: The 4% excise tax provision appeared in previous Green Book proposals.
Increased Dividend Treatment of Corporate Distributions
The proposal entails several changes aimed at modifying the treatment of distributions, particularly focusing on increasing the dividend treatment of certain transactions. Among these changes, leveraged distributions made by a corporation related to a creditor corporation would be treated as dividends originating from the creditor corporation if the primary purpose of the arrangement is to avoid dividend taxation. Also, the purchase of “hook” stock by a subsidiary would be deemed a distribution of property to the issuing corporation. Hook stock is stock issued by a parent corporation and held by its subsidiary. Both changes would be effective for transactions occurring after Dec. 31, 2024.
CBIZ Observations: These measures collectively aim to refine the tax treatment of dividend distributions. Both of the profiled provisions appeared in previous Green Book proposals.
New Divisive Reorganization Requirements for Corporations
This proposal aims to curtail the use of divisive reorganizations as a means to obtain tax-free distributions. It does this by changing the rules for transferring “controlled boot and securities” to creditors of the distributing corporation without triggering taxes. The proposal introduces a new concept called the “excess monetization amount,” which is calculated by subtracting certain amounts of boot and debt relief from the basis of assets transferred from the distributing corporation to the controlled corporation. The distributing corporation would recognize gain in this circumstance in two ways: First, it would recognize gain equal to the smaller of the excess amount or the controlled corporation’s boot transferred to creditors. Second, it would recognize gain with respect to the remaining portion of the excess amount by treating a corresponding amount of the controlled corporation’s debt as if it were sold in a taxable sale.
This proposal also would cause gain to be recognized by the distributing corporation when it transfers contingent liabilities to a controlled entity that impairs the controlled entity’s ability to remain economically viable.
Both parts of this proposal would be effective for transactions occurring after the date the law change is enacted.
CBIZ Observations: These provisions appeared in previous Green Book proposals.
Tax Carried (Profits) Interests as Ordinary Income
For tax years beginning after Dec. 31, 2024, this proposal would increase the tax rate for income and gains with respect to a carried (profits) interest in future partnership profits received in exchange for the performance of services. Such income and gains would be taxed as ordinary income (even if notionally reported as capital gains) and subject to self-employment taxes. This proposal would be applicable only if the partner's taxable income (from all sources) exceeds $400,000.
CBIZ Observations: This provision appeared in previous Green Book proposals. The Tax Cuts and Jobs Act (TCJA) established a three-year holding period on carried interests in an effort to limit the benefit of the lower 23.8% rate. This proposal would make the ordinary tax rates applicable regardless of a partner’s holding period. Partners with adjusted gross income of more than $1 million would already have capital gains subject to ordinary tax rates under another proposal (discussed below), rendering that part of this proposal moot for such taxpayers.
Expand and Harmonize the Net Investment Income Tax (NIIT) and Self-employment Contributions Act (SECA) Tax
For tax years beginning after Dec. 31, 2023, this proposal would apply the NIIT to nonpassive income allocated from both partnerships and S corporations and would raise the tax rates for both the NIIT and the SECA tax. First, for taxpayers with adjusted gross income over $400,000, the NIIT would apply to gross income and gain from any trade or business in which the taxpayer materially participates that is not otherwise subject to SECA tax. Second, the NIIT rate would increase from 3.8% to 5% for taxpayers with modified adjusted gross income over $400,000. Third, the “additional Medicare tax” that is imposed on self-employment earnings above certain thresholds would increase from 0.9% to 2.1% (raising the total Medicare tax rate from 3.8% to 5%) for taxpayers with more than $400,000 in earnings.
CBIZ Observations: These provisions appeared in previous Green Book proposals. The NIIT proposal would expand its reach so that it would not matter whether the taxpayer materially participated in the pass-through business. This essentially ensures that pass-through income will be subject to either the NIIT or SECA tax in all cases. Because income allocated from S corporations cannot be subject to the SECA tax, all allocations from S corporations (passive and nonpassive) would be subject to the NIIT. It is notable that these provisions would be retroactive to the beginning of 2024.
Partnership Matching Rule
This proposal would restrict related parties' use of partnerships to shift the inside basis of partnership assets from non-depreciable to depreciable property, effective for taxable years beginning after Dec. 31, 2024. It targets instances where distributing partnership property results in an increase in the basis of the partnership's non-distributed assets. To address this, a matching rule is proposed, preventing related partners from benefiting from the basis step-up until the recipient partner disposes of the distributed property in a fully taxable transaction.
CBIZ Observations: This provision appeared in previous Green Book proposals.
Make Permanent the Excess Business Loss Limitation
For taxable years beginning after Dec. 31, 2024, this proposal aims to permanently establish the limitation on excess business losses. The excess business loss limitation prevents individuals from deducting business losses (including those allocated from pass-through entities) in excess of an annual cap, which is $305,000 ($610,000 for joint return filers) for 2024. The provision also would treat excess business losses carried forward from the previous year as losses for the current year, rather than as net operating losses.
CBIZ Observations: This provision appeared in previous Green Book proposals. Treating excess business losses carried forward as losses for the current year effectively makes them again subject to the limitation, whereas treating them as net operating losses does not subject them to the limitation in the subsequent years.
Deduction Restriction on Compensation in Excess of $1 million
For taxable years beginning after Dec. 31, 2024, this proposal aims to strengthen the deduction limitation for employee compensation by making it applicable to all C corporations, both publicly and privately held. It would restrict deductions for all compensation exceeding $1 million paid to any employee by the corporation. Additionally, the proposal introduces an aggregation rule treating all members of a controlled group as one entity for purposes of applying the deduction limitation. Furthermore, it ensures that deductible compensation paid to an employee, even if not directly paid by the corporation, falls under the deduction disallowance.
CBIZ Observations: This is a new proposal in this year’s Green Book. Making the provision applicable to privately held C corporations will greatly expand its scope. And making the provision applicable to compensation paid to any employee will also greatly expand the scope of the deduction limitation, which presently applies only to compensation paid to “covered” employees. Previous Green Book proposals addressed this topic but only with respect to accelerating the phase-in of an expanded definition of employees subject to the deduction cap.
International Business Tax Proposals
Align U.S. International Tax with Pillar Two
This proposal aims to revise the global minimum tax system concerning earnings from controlled foreign corporations (CFCs) for taxable years beginning after Dec. 31, 2024. First, it eliminates the Qualified Business Asset Investment (QBAI) exemption, subjecting the entire net CFC tested income to U.S. tax. Second, it reduces the Section 250 deduction for global minimum tax inclusion from 50% to 25%, potentially increasing the U.S. effective tax rate from 10.5% to 21%. Third, it replaces the "global averaging" method with a "jurisdiction-by-jurisdiction" calculation, which means taxes paid in higher taxed jurisdictions won't reduce taxes on income from lower taxed jurisdictions.
Additionally, the proposal would decrease the 20% disallowance of foreign tax credits (FTCs) incurred to 5%, would allow net operating losses (NOLs) to be carried forward (within a single jurisdiction), and would allow FTCs to be carried forward ten years (within a single jurisdiction). In each case, the carryover would be at the U.S. shareholder level.
CBIZ Observations: These provisions appeared in previous Green Book proposals.
Adopt the Undertaxed Profits Rule
The proposal would replace the Base Erosion and Anti-Abuse Tax (BEAT) with an Under Tax Payment Regime (UTPR) that aligns with international standards, for tax years beginning after Dec. 31, 2024. The UTPR introduces a domestic minimum top-up tax aimed at safeguarding U.S. revenues from similar rules in other countries. It achieves this by disallowing U.S. tax deductions for specific low-taxed foreign income, notably affecting foreign-parented multinational corporations operating in low-tax areas. This prohibition is determined through a jurisdiction-by-jurisdiction calculation, ensuring a minimum effective tax rate of 15% in each jurisdiction. The proposal also outlines rules and exemptions based on financial reporting group size and revenue, targeting groups with global annual revenue of at least €750 million euros in at least two of the last four years.
However, it wouldn't apply to income subject to the qualifying inclusion rule or income of U.S.-parented multinational enterprises (MNEs) subject to the revised global minimum tax.
CBIZ Observations: These provisions appeared in previous Green Book proposals.
Individual Tax Proposals
Increase the Top Tax Rate, Tax Capital Gains at Ordinary Rates and Enact a Wealth Tax
This proposal would raise the highest individual marginal income tax rate to 39.6% for tax years beginning after Dec. 31, 2023. The top marginal tax rate would apply to taxable income over $450,000 for married individuals filing a joint return and surviving spouses, $400,000 for unmarried individuals (other than surviving spouses and head of household filers), $425,000 for head of household filers and $225,000 for married individuals filing a separate return.
Additionally, taxpayers with taxable income over $1 million would no longer benefit from long-term capital gains and qualified dividend treatment, where such income would be taxed at ordinary rates. This provision would be effective for gains required to be recognized and for dividends received on or after the date of enactment.
Furthermore, taxpayers with wealth over $100 million would face a 25% minimum tax on unrealized capital gains, payable in yearly installments, for taxable years beginning after Dec. 31, 2024.
CBIZ Observations: These provisions appeared in previous Green Book proposals. It is particularly notable that the effective date of the tax rate increases would be retroactive to the beginning of 2024. Together with other proposed changes to the NIIT, the combined top marginal tax rate on long-term capital gains and qualified dividends would be 44.6%. The $1 million threshold for this 44.6% rate would apply equally to both single filers and married individuals filing a joint return.
Proposals to Support Workers and Families
The budget proposes two refundable tax credits for homebuyers and home sellers, for transactions occurring after Dec. 31, 2023, and before Jan. 1, 2026. First-time homebuyer and home seller credits would be equal to 10% of the home's price, capped at $10,000. Both credits decrease as income surpasses $100,000 and fully phase out at $200,000.
Additionally, the proposal would reinstate the enhanced Child Tax Credit for 2024 and 2025 and make it fully refundable, regardless of earned income. It would therefore provide $3,000 per child aged six and older, and $3,600 per child under six. The credit would decrease for certain income levels: above $150,000 for married joint filers or surviving spouses, above $112,500 for head of household filers, and above $75,000 for other filers, with adjustments for large families.
CBIZ Observations: The Child Tax Credit provisions appeared in previous Green Book proposals. The homebuyer and home seller credit provisions are a new proposal in this year’s Green Book.
Estate and Gift Tax Proposals
Treat Transfers of Appreciated Property by Gift or on Death as Realization Events
This proposal would force capital gain recognition, at the time of the transfer, when appreciated assets are transferred by gift or upon death by a donor or decedent. This provision would be effective for transfers after Dec. 31, 2024. Additionally (effective Dec. 31, 2033), gains on property that have not been the subject of a recognition event in the past 90 years would be deemed realized when transferred to or from a trust (other than a grantor trust), partnership or other non-corporate entity.
Transfers to a U.S. spouse or to a charity would not be treated as a realization event but would be subject to carryover basis rules. The gift tax in its present-law form would continue to apply, but the exclusion would be reduced to $5 million per person for gifts and transfers during life, with the unused exclusion available at death. This exclusion would be per spouse and any unused portion would be transferrable from one spouse to the other upon the death of a spouse.
CBIZ Observations: These provisions appeared in previous Green Book proposals. When gains are triggered under the deemed realization rule, the recipient obtains a basis in inherited/gifted property equal to its fair market value on the transfer date. However, the deemed realization of gains on transfer would cause “phantom” income to the transferor, meaning transferors may not have cash to pay the resulting tax.
Modify Tax Rules for Certain Grantor Trusts
For transactions occurring on or after the date of enactment, this proposal would treat sales of property between a grantor and a trust that is not fully revocable as taxable transactions for income tax purposes. Also, for trusts created on or after the date of enactment, this proposal would treat the payment of income tax by a grantor on the income of a grantor trust as an additional gift. Additionally, for trusts created on or after the date of enactment, the proposal would require that the remainder interest in a Grantor Retained Annuity Trust (GRAT) at the time the interest is created must have a minimum value equal to the greater of 25% of the GRAT assets or $500,000, and the GRAT term must be between 10 years and the annuitant's life expectancy plus 10 years.
CBIZ Observations: These provisions appeared in previous Green Book proposals.
Modify Rules for Valuation Discounts
For valuations as of a valuation date on or after the date of enactment, this proposal would limit valuation discounts involving liquidation restrictions for intrafamily transfers of partial interests in non-publicly traded property, if the family collectively holds at least 25% of the property.
CBIZ Observations: This provision appeared in previous Green Book proposals.
Proposed Changes to Annual Gift Exclusion and Definition of Gift
For gifts made after Dec. 31, 2024, this proposal would eliminate the requirement for gifts to be of a present interest. Furthermore, there would be a new annual total gifting limit of $50,000 per donor that would apply on top of the $18,000 gifting limit per donee.
CBIZ Observations: This provision appeared in previous Green Book proposals.
Final Thoughts
In conclusion, while the proposals outlined in the Fiscal 2025 Budget present ambitious plans for tax reform, it's essential to recognize that they are only legislative ambitions. The fate of these proposed changes ultimately lies in the hands of Congress, which appears unlikely to consider these proposals until at least after this year’s election cycle. Should you have further questions about how these proposals may impact you or your business, please contact us.