Programming note: Taxation & Representation will return on May 1, following the one-week congressional recess.
PROTECT Coalition: Dedicated to Preserving the 199A Deduction
Brownstein’s National Tax Policy Group has created the PROTECT (Passthroughs Relying On Tax Equity & Championing Thriving Businesses) Coalition—a group dedicated to preserving the Section 199A Qualified Business Income Deduction. This provision was enacted as part of the Tax Cuts and Jobs Act (TCJA) to equalize the tax rate between corporations and passthrough entities. The provision allows passthrough business owners to deduct 20% of qualified business income when determining their federal tax liability, meaning that passthrough owners who are taxed at the highest statutory rate of 37% have an effective tax rate of 29.6%. The Section 199A deduction facilitates the growth of small and family-owned businesses, the majority of which operate as passthroughs.
The Section 199A deduction—like many other TCJA tax provisions—is set to expire in 2025, but many factors may limit lawmakers’ ability and willingness to extend the deduction. The PROTECT Coalition is designed to provide a unified voice calling for the extension of Section 199A, through engagement with policymakers, economists, business owners and other interested stakeholders. If you would like to learn more about the PROTECT Coalition or become a member, please contact Russ Sullivan or Rosemary Becchi.
Legislative Lowdown
Senate Finance Committee Hearing Discusses Tax-Filing Season, Direct File: On April 16, the Senate Finance Committee held a hearing titled “The President’s Fiscal Year 2025 IRS Budget and the IRS 2024 Filing Season.” Internal Revenue Service (IRS) Commissioner Daniel Werfel testified on progress made during the 2024 tax-filing season, including on taxpayer-service initiatives and the Direct File pilot program.
Democrats on the committee, including Finance Committee Chairman Ron Wyden (D-OR), praised the Direct File program, saying that reviews of the pilot program were positive and demonstrated the IRS’s ability to create a functional tax-filing platform. Chairman Wyden called for the extension and expansion of the Direct File program into 2025. He also praised the IRS for improving taxpayer service and enforcement initiatives, including responding to increased call volumes, shorter call waiting times, improving in-person services, and cracking down on wealthy taxpayers evading tax-filing obligations.
Republicans, including Ranking Member Mike Crapo (R-ID), expressed more skepticism over Direct File and the use of IRS funds allocated by the Inflation Reduction Act (IRA, Pub. L. 117-169) for taxpayer service and enforcement. Ranking Member Crapo said that, though there have been some improvements in taxpayer service, millions of items of taxpayer correspondence remain unanswered and half a million identity theft cases remain unresolved. He also criticized the Direct File program for being unnecessary and inefficient, as well as not following best practices with regard to cost and benefit substantiation.
There was no major discussion of the Tax Relief for American Families and Workers Act (H.R. 7024) during the hearing, and notably, Ranking Member Crapo made no mention of the bill during his opening statement or line of questioning. This is significant, as Senate Republicans, spearheaded by Ranking Member Crapo, have held up the bill over numerous concerns with the bill’s current provisions. It will be up to Senate Majority Leader Chuck Schumer (D-NY) to decide whether to bring the bill to the floor, which would add further pressure for Senate Republicans to make a decision on the bill.
House Ways and Means Committee Discusses Potential TCJA Extenders: On April 11, the House Ways and Means Committee held a hearing titled “Expanding on the Success of the 2017 Tax Relief to Help Hardworking Americans,” which provided a preview into how tax policy may be shaped in 2025 as many crucial tax provisions in the Tax Cuts and Jobs Act (TCJA, Pub. L. 115-97) are set to expire.
Republicans, including Ways and Means Chairman Jason Smith (R-MO), largely praised the TCJA for directly contributing to U.S. economic growth prior to the turmoil caused by the COVID-19 pandemic, noting that in the two years after its passage, real wages grew nearly 5%, the median household income increased by $5,000, the poverty rate dropped to its lowest level, and Black and Hispanic unemployment rates decreased. Chairman Smith indicated his intention to extend the TCJA provisions, including those contained in the Tax Relief for American Families and Workers Act (H.R. 7024). He rejected various Biden administration proposals, such as tax rate increases, outlined in the fiscal year (FY) 2025 budget request, stressing that these proposals would increase taxes, worsen inflation and increase the federal deficit.
Democrats, including Ranking Member Richard Neal (D-MA), attributed the post-TCJA economic productivity to broader economic conditions during that period. He asserted that the country’s slow economic recovery from the Great Recession coincided with TCJA’s passage, citing a study from the Joint Committee on Taxation that found that corporate gains from the TCJA largely benefited shareholders and high-paying executives. Ranking Member Neal instead praised the provisions contained within the Inflation Reduction Act for contributing to U.S. economic growth in the aftermath of COVID-19.
The most-discussed TCJA provisions during the hearing included the Section 199A Qualified Business Income deduction, treatment of research and development expenses, and the reduced corporate and individual income tax rates, with Republicans arguing that these provisions benefited middle-class taxpayers and facilitated the growth of small and family-owned businesses, while Democrats contended that most of the financial benefits of the TCJA’s tax provisions flowed to filers in the top 1% of income-earners.
Tax Worldview
France, Brazil to Jointly Introduce Information-Sharing Proposals: On April 15, the French Ministry of Economics, Finance and Industrial and Digital Sovereignty announced that France and Brazil’s finance ministers will unveil joint proposals to increase requirements on information sharing between the tax authorities of G20 countries. The proposals would also increase transparency obligations and implement anti-tax avoidance mechanisms. Discussing the proposal, French Minister of the Economy, Finance, Industrial and Digital Sovereignty Bruno le Maire signaled that the new rules will facilitate the execution of the global minimum tax, saying, “I will put the same determination into implementing this minimum tax on income as I put into implementing the tax on digital giants or the minimum tax for large multinationals.”
1111 Constitution Ave.
Tax Day Report—Returns Processed Exceed 100 Million; Updates on IRS Direct File, Free File and Customer Service Initiatives: April 15 was Tax Day, marking the deadline for most U.S. taxpayers to file their federal tax returns. Reportedly, the filing season went relatively smoothly, with IRS statistics as of April 5 showing that the IRS has once again processed over 100 million returns. Of those 100 million returns, more than 98 million were filed electronically. Though the number of taxpayers who received refunds decreased, the total amount refunded and the average amount refunded per taxpayer both increased. In addition, the number of visits to IRS.gov increased by more than 18%, indicating higher usage of IRS informational resources as well as the expanded “Where’s My Refund?” tool.
This year, the IRS offered two options for taxpayers seeking to file their tax returns for free using online tax software: the Free File program, involving IRS partnerships with the commercial tax-preparation industry to offer a variety of free filing options depending on adjusted gross income (AGI), state residency and other requirements; as well as the Direct File pilot program, which allowed taxpayers in 12 states to file their taxes directly with the IRS. Free File saw an uptake in usage, with more than 2 million returns filed through the partnership program, an increase of 11.2% over 2023. Separately, according to a press release from the Treasury Department, the IRS Direct File program has reached its goal of 100,000 filers with the pilot program, although the IRS had previously said it expected “several hundred thousand” people to use Direct File. Last week, the Government Accountability Office reported that the IRS had failed to substantiate cost estimates or purported benefits of Direct File, though Commissioner Werfel noted that the IRS would be publishing the costs of operating Direct File by the end of April. It remains to be seen whether Direct File will be renewed or expanded for the 2025 tax-filing season.
Along with successes in giving taxpayers various filing options, the IRS also stated that taxpayer service had dramatically improved in the last two years, which the agency attributes to increased taxpayer-service funding in the Inflation Reduction Act (IRA). Along with increased traffic to IRS.gov, the IRS level of phone service reached more than 88%, compared to 15% prior to the IRA’s passage. In addition, more calls were answered, response times were faster and more callback options were offered to taxpayers. Along with improved phone service, in-person assistance at Taxpayer Assistance Centers increased, as well as tax returns filed through the Volunteer Income Tax Assistance and Tax Counseling for the Elderly volunteer programs. Responding to the improvement in service, IRS Commissioner Daniel Werfel stated that “this filing season marks another important chapter where we’ve improved service for taxpayers, continuing an accelerating trend in the story of transforming the IRS.”
However, the IRS’s improved service came at a steep cost, as the IRS has already used more than a third of the $3.2 million the IRA allocated for taxpayer service through 2032, and has projected to exhaust its taxpayer-service funds in the next 18 months. The IRS has repeatedly urged Congress to increase its taxpayer-service budget, with Commissioner Werfel expressing hope that the IRS “can convince Congress to ensure that we have both the money necessary to run the day-to-day operations and the necessary money to modernize.” However, IRS funding for the next filing season will likely depend on the political makeup of the White House and the subsequent 119th Congress.
Treasury Department Issues Stock Buyback Rule Proposals: On April 9, the Treasury Department published a package of proposed stock buyback regulations (REG-115710-22 and REG-118499-23). The tax, enacted as part of the Inflation Reduction Act in August 2022, places a 1% levy on the fair market value of stock repurchased (net of certain stock issuances) that are valued over $1 million. The package provides long-awaited rules concerning how the new stock-buyback excise tax will be calculated and administered.
The proposed regulations largely adopt the framework from Notice 2023-2 published in January 2023, detailing the kinds of transactions that are, and are not, subject to the new tax. The proposed regulations also provide procedural guidance on how and when companies should pay the tax. The stock-buyback excise tax also applies to transactions that are economically similar to share repurchases, which can include buybacks of corporate stock in connection with certain mergers, separations, merger and acquisition transactions, as well as acquisitions of a corporation’s stock by certain affiliates.
The tax applies to net repurchases beginning in 2023. Corporations are required to report the excise tax on Form 720, Quarterly Federal Excise Tax Return, along with another Form 7208, which is used to calculate the amount of tax owed. A draft version of Form 7208 was also released as part of the package. According to the IRS press release announcing the proposed regulations: “As anticipated in Announcement 2023-18, the proposed regulations would establish that, for taxpayers with a taxable year ending after Dec. 31, 2022, but before the publication of final regulations, any liability for the stock repurchase excise tax for the taxable year must be reported on the Form 720 that is due for the first full quarter after the date the final regulations are published, and that the deadline for payment of the tax is the same as the filing deadline.”
The IRS is accepting comments until May 13 on the proposed regulations relating to the procedural rules for the excise tax and until June 11 on the proposed rules relating to the excise tax calculation.
GAO Report on Direct File Confirms Lack of IRS Cost and Benefit Substantiation: On April 9, the Government Accountability Office (GAO) released a report titled “IRS Direct File: Actions Needed during Pilot to Improve Information on Costs and Benefits.” The report analyzes how much funding will be required to support the IRS Direct File pilot program, including how much spending will need to be allocated to ensure sufficient consumer service. The Inflation Reduction Act, which appropriated funds for the Internal Revenue Service (IRS) to conduct a study into the viability of a government-run tax-filing system, also required the GAO to oversee the distribution and use of these funds.
The GAO found that the IRS’s May 2023 estimate of the costs of operating the Direct File program—between $64 million and $249 million—did not include and document all costs involved, and the IRS further had no documentation to support the data, analysis or assumptions used in calculating Direct File costs. Further, the GAO found that the IRS is likely not collecting enough data from its pilot to inform a more comprehensive cost estimate, and is not taking advantage of the pilot’s operational aspects to inform costs like those for customer service. Regarding plans after the conclusion of the pilot, the GAO found that the IRS will have little time to analyze information from the 2024 pilot before they must make a decision on whether to offer Direct File in 2025.
GAO’s recommendations to the IRS include ensuring that best practices are used to determine the full cost of operating Direct File and collecting adequate data from the administration of the pilot program to inform future decisions about Direct File.
At a Glance
Treasury Department, IRS Release Additional Guidance on Hydrogen Credit: On April 10, the Treasury Department and the Internal Revenue Service (IRS) issued a notice of proposed rulemaking relating to the Section 45V Hydrogen Production Credit enacted as part of the Inflation Reduction Act. The proposed regulations provide guidance on how taxpayers can request an emissions value from the Department of Energy (DOE) in order to petition the Secretary of the Treasury for a determination of a provisional emissions rate. The notice indicates that taxpayers will be required to request an Emissions Value Request Application from the DOE, which is expected to include instructions and details concerning the calculation of the emissions value. The proposed regulations are open for public comment until May 13.
Treasury Department, IRS Issue Corrected Guidance on Section 30C Alternative Fuel Refueling Property Credit: On April 12, the Treasury Department and Internal Revenue Service (IRS) issued a press release announcing corrections to Appendix A and B of Notice 2024-20, concerning the Section 30C Qualified Alternative Fuel Vehicle Refueling Property Credit, which was expanded as part of the Inflation Reduction Act. The correction adds additional census tracts determined to meet the eligibility criteria set out in Notice 2024-20. For more information on the initial guidance, please see the Jan. 24 issue of “Taxation & Representation.”
Hearings and Events
House Ways and Means Committee
On April 16, the House Ways and Means Subcommittee on Social Security held a hearing titled “The Windfall Elimination Provision and Government Pension Offset.”
Senate Finance Committee
On April 16, the Senate Finance Committee held a hearing titled “The President's FY2025 IRS Budget and the IRS 2024 Filing Season.”