The Build Back Better Act: Major tax proposals for investment fund managers

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The developing reconciliation bill known as the Build Back Better Act is a massive proposal calling for trillions of dollars of spending for investments in infrastructure, as well as increased funding for healthcare, education, social welfare initiatives, and much more. The cost of the program initially estimated to be $3.5 trillion, but poised to decrease as negotiations continue is largely to be funded by increases in tax rates.

Read on for some of the significant tax changes proposed by the House Ways & Means Committee that would most impact investment fund managers. Note that details are subject to change as the final bill takes shape and that some of the provisions are extremely complex; stay tuned for more information and insights. (Make sure you’re subscribed to receive our email updates.)

  • Increases to individual tax rates
    • The top marginal rate would go from 37% under current law to 39.6% for individuals, estates, and trusts.
    • The proposal would impose a new 3% income tax surcharge on individuals with modified adjusted gross income of over $5 million for taxpayers who are single, head of household, or married filing jointly. The income limit would be reduced to $2.5 million for taxpayers who are married filing separately, and a much lower threshold of $100,000 for estates and trusts. If this surcharge is enacted in its current form, tax planning would need to be revisited for estates and trusts to consider its impact.
    • The top rate for taxation of long-term capital gains and qualified dividends would increase from 20% to 25% effective Sept. 13, 2021.
    • Initially President Biden proposed increasing the maximum capital gain rate to 39.6% for taxpayers above $1 million of income. While the proposed rate increase is much smaller, many more taxpayers will be affected, as the proposal now provides that the 25% rate would affect taxpayers at an income level of approximately $450,000 and above.
    • The 3.8% net investment income tax (NIIT) would be expanded to include active business income that is not subject to self-employment tax. This would only apply when above adjusted gross income exceeds $500,000 married filing joint, $250,000 married filing separately, or $400,000 for all other taxpayers.
  • Corporate tax rate
    • The proposal would return to a progressive tax structure with a top rate of 26.5% for corporations above $5 million of income. This would be an increase from the current 21% rate.
  • Pass-through deduction (Section 199A)
    • The proposal caps 199A deductions at $500,000 for joint filers, $400,000 for single filers, $250,000 for a married individual filing separately, and $10,000 for estates and trusts. There is currently no such limitation to the 199A deduction, which is scheduled to expire on Dec. 31, 2025.
  • Qualified Small Business Stock Exclusion (QSBS), Section 1202 Stock:
    • A taxpayer other than a corporation is currently allowed to exclude from income up to 100% of gains on the sale of qualified small business stock.
    • If enacted, the proposed change would cap the exclusion to 50% for individuals with modified adjusted gross income of $400,000 or more and all trusts and estates for all sales of QSBS after Sept. 13, 2021.
      • The 50% of gains that cannot be excluded for these taxpayers would be subject to a higher rate of 28%, and in addition there would be alternative minimum tax (AMT) implications, which would make Section 1202 much less attractive than the current ability to exclude 100% of the gain on qualifying stock.
    • Many portfolio companies were structured as C corporations as opposed to partnerships due to the ability to exclude gains on an exit pursuant to this provision. If this change is enacted, combined with an increase in the corporate tax rate, structuring as a C corporation vs. a partnership may need to be re-considered.
  • Section 1061 Carried Interest:
    • Under current law, Section 1061 recharacterizes long-term capital gains on carried interest as short-term capital gain unless the asset sold has a greater-than-three-year holding period. The proposal would revise Section 1061 in several significant ways:
      • Increase the holding requirement for long-term capital gains treatment from three years to five years. The three-year holding period would be maintained for taxpayers below $400,000 of AGI, or for real property trade or businesses.
      • The determination of the holding period would be based not on the fund’s holding period of the underlying assets, but on when “substantially all” of the assets held by the fund are acquired. This may have the effect of extending the required holding period beyond five years.
      • Section 1231 gains, qualified dividend income, and Section 1256 gains, which are excluded from Section 1061 recharacterization under current law, would be subject to recharacterization.
      • Any transfers of carried interest would result in gain recognition without regard to non-recognition provisions that might otherwise apply. This would have significant impacts on the ability to gift carried interest, which is a common estate planning technique.
  • International provisions:
    • The deduction for global intangible low-taxed income (GILTI) would be reduced from 50% to 37.5%, and the deduction for foreign-derived intangible income (FDII) from 37.5% to 21.875%. Once the proposed corporate income tax increase is factored in, the proposed changes could increase the effective tax rates of U.S. corporations (and individuals who elect to be taxed on their GILTI as if they are a corporation) from approximately 10.5% to 16.5% on GILTI inclusions and from 13.125% to 20.7% for FDII-eligible income.
    • In addition, the amount of income shielded from GILTI by the Qualified Business Asset Investment (QBAI) deduction would be reduced from 10% of the basis in QBAI to 5%.
    • The bill would require taxpayers to calculate GILTI and foreign tax credits on a country-by-country basis and would reduce the GILTI haircut on foreign tax credits from 20% to 5%.
    • The changes would reduce the number of taxpayers that qualify for the portfolio interest exemption to the 30% withholding tax that would otherwise apply on payments of U.S. source interest to nonresident aliens and entities. Currently, interest recipients who own stock in the corporation paying the interest that represents 10% or more of the vote of a corporation do not qualify for the portfolio interest exemption. The proposal would modify this exception to exclude shareholders who have 10% or more of the vote or value of the corporation. This could affect many structures for offshore investors that rely on the portfolio interest exemption.
    • Several other changes to the international provisions have also been included in the proposal, including a fix for the downward attribution problem introduced in the Tax Cuts and Jobs Act of 2017 (TCJA) that created unexpected Controlled Foreign Corporations (CFCs) as ownership of certain foreign corporations was attributed to brother-sister U.S. corporations and certain subsidiaries. The new rule would require direct U.S. ownership in making the determination as to whether a foreign corporation is a CFC. This rule is proposed to be retroactive to tax years beginning after Dec. 31., 2017.

What does CohnReznick think?

Notably missing from the proposed legislation is a “fix” to the $10,000 cap on the state and local tax deduction, which is a priority of Democrats in high-taxed states and has affirmatively been mentioned as an item to be included in future versions of the bill.

At this point it is unclear if this legislation can pass in either the House or Senate, as GOP members are opposed to a bill of this size that increases taxes, and the very thin majority currently held by the Democratic party makes passing legislation of this size very challenging. It is likely there will be changes to the proposed legislation. However, the initial approval of the text in the House is a starting point for shedding light on the basic proposals that may eventually be approved by Congress.


Robert Richardt, CPA, Partner


Al Lowry, CPA, Director


Bradley Mainguy, Senior Manager



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This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.