The Biden administration released its fiscal year 2025 proposed budget, which, according to the administration would raise revenues, expand tax credits for workers and families, and improve tax administration and compliance.
The proposed budget would reduce the deficit by around $3 trillion over the next decade (according to the Office of Management and Budget), while proposing tax increases by nearly $5 trillion on the wealthy (individuals with income greater than $400,000) and large corporations.
In conjunction with President Biden’s proposed budget, the Treasury Department released its “General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals.” This document, referred to as the “Greenbook,” provides explanations of the 100-plus revenue proposals in President Biden’s proposed budget.
The tax proposals, as anticipated, target corporations and higher-income individuals. Similar to last year’s budget proposal documents, this budget message was released to a divided Congress, and none of the revenue proposals in the budget proposal are expected to be enacted during the second session of the 118th Congress. However, the proposals are instructive as to Democratic tax priorities and will most certainly be part of the discussion leading up to the 2025 expiration of TCJA provisions.
Some key proposals are noted below. Those marked with an asterisk are new items in the FY 2025 proposed budget compared to FY2024.
Corporate
Proposed corporate tax increases include measures to:
- Increase the corporate tax rate from 21% to 28%.
- Raise the Inflation Reduction Act’s corporate minimum tax rate from 15% to 21%*.
- Increase the tax rate on corporate stock repurchases to 4% and broaden the net of applicable acquisitions in the foreign corporation context.
- Deny deductions for all compensation over $1 million paid to any employee of a C corporation*. (This is separate from changes to section 162(m) that are already effective for taxable years after Dec. 31, 2026, under the American Rescue Plan Act.)
International
Proposed international tax increases include measures to:
- Revise the global intangible low-taxed income (GILTI) minimum tax regime to align with Pillar Two, limit inversions, and make related reforms to align with Pillar Two including:
- The qualified business asset investment (QBAI) exemption in GILTI would be eliminated, so that the U.S. shareholder’s entire net controlled foreign corporation-tested income is subject to U.S. tax.
- The section 250 deduction for the GILTI inclusion would be reduced to 25%, generally increasing the U.S. effective tax rate under GILTI (to 21% under the proposed U.S. corporate income tax rate of 28%).
- The “global averaging” method for calculating a U.S. shareholder’s GILTI would be replaced with a “jurisdiction-by-jurisdiction” calculation.
- Decrease the 20% disallowance of GILTI foreign tax credits (FTCs) incurred to 5% and allow the GILTI FTCs to be carried forward 10 years (within a single jurisdiction).
- Allow GILTI net operating losses (NOLs) to be carried forward (within a single jurisdiction).
- Repeal the high-tax exception to Subpart F income.
- Repeal the Base Erosion Anti-Abuse Tax (BEAT) regime and replace it with an undertaxed profits rule (UTPR) that is consistent with the UTPR described in the Pillar Two Model Rules.
- Repeal the deduction allowed for foreign-derived intangible income (FDII). The resulting revenue will be used to encourage research and development.
- Limit the deduction for excessive interest for members of a financial reporting group.
- Create a new general business credit equal to 10% of the eligible expenses paid or incurred in connection with onshoring a U.S. trade or business.
Individual and pass-through
Proposed individual/pass-through tax increases include measures to:
- Restore the top individual tax rate to 39.6% from the current 37% rate for those making more than $400,000 per year and married couples making more than $450,000 per year.
- Tax capital gains at the same rate as wage income for those with more than $1 million in income.
- Impose a 25% minimum tax on those taxpayers with wealth of more than $100 million.
- Raise Medicare tax rates on earned and unearned income from 3.8% to 5% for those with incomes over $400,000.
- Tax carried (profits) interest at the higher ordinary income tax rates rather than lower capital gains tax rates.
- Modify estate, gift, and income tax rules to limit tax-saving strategies used by estate planners.
- Limit annual exclusion gifts to $50,000 per donor.
- Restrict common estate planning techniques to minimize estate and gift taxes using trusts and formula clauses.
- Require gain recognition on transfers of appreciated assets by donors and decedents, including sales to grantor trusts.
- Ensure transfer taxes apply to multi-generational trusts by limiting the duration of generation-skipping transfer tax exemptions.
- Make permanent the limitation on excess business losses (noncorporate taxpayers), and treat any excess business loss carryforwards as excess business losses in the following year.
- Prevent basis shifting by related parties through partnerships.
- End tax-free like-kind exchange treatment for real property.
Other noteworthy proposals
- Restore the full Inflation Reduction Act investment in the IRS by making sure that, in the administration’s view, wealthy Americans and big corporations pay the taxes they owe through tax compliance initiatives and to continue improving service for taxpayers who are just trying to pay what they owe. With this proposal, the administration intends to provide new funding for the IRS over the long term and continue cutting the deficit.
- Eliminate tax subsidies for oil and gas company investments, as well as other fossil fuel tax preferences.
- Eliminate tax subsidies for cryptocurrencies by modernizing the tax code’s anti-abuse rules to apply to cryptoassets just like they apply to stocks and other securities.
Tax policy outlook
While the Biden administration’s proposed FY 2025 budget promises to feature in tax policy discussions leading up to Election Day in November and perhaps into 2025, the short-term focus remains the Tax Relief for American Families and Workers Act.
That legislationwhich passed the House in January is currently stalled in the Senate. Competing legislative priorities in the upper chamber and challenging political dynamics have sapped the bill’s momentum. It is unclear whether it will regain traction, especially as the broader political focus shifts toward the general election.
In the meantime, businesses continue to grapple with continued uncertainty around certain tax issues, including the treatment of R&D expenses, limits on the deduction of business interest expense, and bonus depreciation, among others.
