Legislative Lowdown
Lawmakers and Industry Groups Push for Lame-Duck Tax Extenders as Deadline Looms. In the four weeks since lawmakers returned to Washington, D.C., following the midterm elections, there has been very little progress toward bipartisan consensus on a year-end tax deal. Though lawmakers on both sides of the aisle have expressed support for a broad range of tax objectives, the policy agenda of recent weeks has been crowded by debates over must-pass budget bills and a myriad of other non-tax legislative priorities.
However, last week, several developments slightly increased the possibility of a last-minute tax deal.
Most recently, reports indicated that the White House told congressional Democrats that the administration is willing to support an expansion to the Child Tax Credit (CTC), even if work requirements are imposed on the credit. Most congressional Republicans, as well as Sen. Joe Manchin (D-WV), strongly support these restrictions, which would mandate that parents show proof of employment to receive the full credit amount. Previously, the Biden administration vehemently opposed work requirements, and a public disagreement with Manchin over the policy ultimately led to the removal of the entire CTC proposal from early drafts of the Inflation Reduction Act (IRA).
Last week, CTC advocate Sen. Michael Bennet (D-CO) addressed a possible bipartisan credit expansion, telling reporters that ongoing discussions on the provision have included Republican input. He also expressed a new openness to accepting more limited, temporary CTC expansions if long-term reform is not viable. Bennet subsequently referred to Sen. Mitt Romney (R-UT) as “an incredible partner” in the ongoing debate on the issue. This indicates that a bipartisan deal may mirror some aspects of Romney’s proposed Family Security Act 2.0. This Republican proposal would enact a simplified CTC worth up to $350 monthly per child that would be paid for by eliminating several other federal entitlement programs.
Despite a renewed willingness from Democrats to engage on a more limited CTC expansion, earlier today, Sen. John Thune (R-SD) expressed pessimism noting that while there is a lot of tax policy on the table that enjoys bipartisan support, “there is a ransom to be paid when it comes to tax policy and the price may be too high.”
Similarly, Senate Minority Leader Mitch McConnell (R-KY) continues to push back against the inclusion of an expanded CTC.
If a deal cannot be reached on the CTC, bipartisan priorities, such as a proposal that would allow businesses to continue to immediately deduct research and development (R&D) costs may also be eliminated.
Republicans have long said they would only consider individual tax cuts if Democrats conceded their opposition to several expiring business tax proposals. This includes addressing the shift in the deduction for net business interest expenses under section 163(j) through an extension of proposals enacted in the Tax Cuts and Jobs Act (TCJA). Yesterday, members of congressional tax-writing committees were further pressured to act on 163(j) by a public letter from over 230 companies advocating for a four-year extension of the increased interest deduction limit.
Republicans are also seeking an extension of other TCJA items, including the current full bonus depreciation on certain fixed assets. In a letter sent last week to congressional leadership, a coalition of manufacturing, telecom and other prominent industry groups expressed support for delaying the upcoming accelerated depreciation phaseout.
Despite recent developments and the skepticism on the inclusion of a year-end tax deal, retirement legislation still seems to be the top priority for congressional tax writers.
Adjustments to Finance Committee Following Recent Political Developments. On Dec. 9, Sen. Kyrsten Sinema (I-AZ) announced her decision to leave the Democratic party and register as an Independent. Sinema explained that her choice to become the third Independent serving in the U.S. Senate was influenced by disillusionment with the Democratic establishment, as well as a perceived misalignment between the goals of the party and her constituents.
In recent days, the announcement has garnered intense responses from myriad sources, but it is ultimately unlikely to noticeably affect tax policy in the 118th Congress. Senate Majority Leader Chuck Schumer (D-NY) said earlier this week that Sinema would be allowed to keep her committee assignments, regardless of her new party nonaffiliation. Sinema has also announced that she does not intend to change her voting patterns in any way, though she will no longer attend weekly Democratic Caucus meetings next year.
While she is unlikely to be made a member of the Senate Finance Committee in the near future, it is still expected that Sinema will continue to be involved in upcoming tax negotiations throughout the 118th Congress, just as she was during this current session. However, with Republicans in control of the House, any successful tax policy over the next two years will require bipartisan support that will no longer hinge on the approval of moderate Democrats like Sinema.
Perhaps more critical to congressional action in the upcoming Congress, on Dec. 6, Sen. Raphael Warnock (D-GA) defeated Republican challenger Herschel Walker in Georgia’s runoff election. Though this victory was not needed to ensure Democratic control of the chamber, Warnock’s triumph introduces several key elements that disrupt the current power-sharing agreements that hampered Democratic action in the Senate throughout the 117th Congress.
Notably, a 51-seat Senate majority will allow moderate members of the party, like Sens. Sinema and Joe Manchin (D-WV), to occasionally vote against some controversial confirmations without derailing these efforts completely. This will be especially important as these moderates are forced to take tough votes in anticipation of their upcoming 2024 elections. Speedy confirmations will be vital in placing the high-level administration officials needed to administer the $80 billion in additional IRS funding provided through the IRA. This is especially reassuring to Democrats in the face of upcoming controversial tax appointments, including incoming IRS Commissioner Danny Werfel, as well as the speculated replacement for current Treasury Secretary Janet Yellen.
From a procedural angle, Democrats could not use markup procedures on several nominations and bills in the 117th Congress because Republicans were able to block the process with their equal membership on each Senate committee. In the upcoming Congress, however, Chuck Schumer (D-NY) will be able to shift committee membership ratios in the Democrats’ favor, giving his party an additional voting member on each Senate committee. In effect, future partisan bills may again be advanced through committees in the Senate.
Tax Worldview
European Council Moves Forward on OECD Pillar 2. According to a press release yesterday, the European Council has reached an agreement to move forward on the Pillar 2 global minimum-tax regime. While there is no mention of Hungary’s previous opposition, the release indicates that unanimous support has been reached for the agreement. Each European Union country will have until the end of 2023 to implement the new regime in the country’s domestic tax laws. The Organisation for Economic Co-operation and Development (OECD) is also expected to issue additional implementation guidance in the coming week.
1111 Constitution Ave.
1099-K Update. Though taxpayers have been aware of upcoming changes to third-party transaction reporting requirements for almost two years, recent stakeholder action over the last few weeks has brought the issue back into the public spotlight.
Before 2022, third-party payment networks needed to report via Internal Revenue Service (IRS) Form 1099-K if any single payee registered more than 200 transactions for services or goods that exceeded a total of $20,000 in value. However, included in the passage of the American Rescue Plan Act (ARPA) was a provision that significantly reduced the threshold of the “de minimis exception” to only $600 in total aggregate payments for a single taxpayer, with no requirement for a total transaction count.
As a result of these changes, Third-Party Settlement Organizations (TPSOs) have been mandated to significantly modify existing processes to obtain a participating payee’s taxpayer identification number (TIN) so that they can send them a Form 1099-K. Failure to do so could trigger backup withholding obligations or other monetary penalties. Platforms affected include payment transaction networks like Venmo and Cash App, as well as online peer-to-peer retailers like Ticketmaster and eBay. In recent months, several large TPSOs have already announced their intention to send 1099-Ks by the end of January 2023. These platforms will begin to place holds on accounts if users do not confirm tax information by this time.
As a result of these changes to third-party reporting, individuals and small businesses may be taxed on much higher income amounts if they previously did not report third-party income streams. Further complicating the process, experts also speculate that the already overburdened IRS will face difficulties administering such a complex new program that targets minimal transaction values. An IRS analysis estimated that current unreported individual and small business noncompliance has resulted in nearly $150 billion in unreported taxes, much of which the agency hopes to recoup through these imminent reporting changes.
The IRS has already begun involvement in preliminary legal action over the definition of a TPSO as platforms have attempted to define themselves as 1099-K-exempt entities. One high-profile example of the ambiguity concerning TPSO definitions is evident through the online payment platform Zelle, which currently has over 60 million users. The company recently claimed the new IRS reporting rules did not apply to them because they were a 1099-K-exempt automated clearinghouse (ACH) and not a traditional TPSO. If additional payment platforms can argue that they act as ACHs and do not technically hold funds, they will also receive exemptions from new TPSO mandates.
In conjunction with efforts to avoid classification as TPSOs, other companies have increased lobbying efforts to either delay the 1099-K reporting changes or increase the de minimis exception threshold. Most prominently, a group called the Coalition for 1099-K Fairness has expanded its network to include 17 members, including high-profile platforms like Airbnb, eBay and PayPal.
These groups have also advocated in favor of legislative proposals like the Saving Gig Economy Taxpayers Act introduced by Rep. Carol Miller (R-WV) that would revert the threshold to the pre-ARPA $20,000. The bill has garnered support from 40 Republican co-sponsors, including House Ways and Means Ranking Member Kevin Brady (R-TX) and Republican Conference Chair Elise Stefanik (R-NY), both of whom added their name to the bill within the last two weeks. Rep. Chris Pappas (D-NH) also proposed legislation earlier this year to increase the threshold to $5,000.
While it is unlikely that lawmakers will reach bipartisan consensus on an increased threshold before 2023, the debate over 1099-K reporting will almost certainly continue to play out in the 118th Congress—especially if the IRS struggles to properly implement these changes in this upcoming filing season.
At a Glance
Brownstein Bookshelf
Hearings and Events
- Status of Permitting and SAFE Banking in NDAA. On Dec. 8, the House passed the National Defense Authorization Act (NDAA) to provide $858 billion in defense spending for fiscal year 2023. The Senate is expected to take up the bill later this week. Ultimately, several high-profile proposals were left out of the bill, despite last-minute efforts by some lawmakers to incorporate these legislative riders. Included in this category was a proposal pushed by Sen. Joe Manchin (D-WV) to reform the federal permitting process for new energy projects. Earlier today, however, Senate Majority Leader Chuck Schumer (D-NY) announced that the chamber is likely to take a vote on an amendment to include permitting reform in the NDAA. If this amendment passes in the Senate, it would still require House approval. Lawmakers were also unable to garner support for inclusion of the SAFE Banking Act, a bill that would provide safe harbors to institutions that offer financial or other ancillary services to legitimate cannabis businesses.
- Race for Ways and Means Chairmanship Delayed. Facing criticism from some members of his own party, House Minority Leader Kevin McCarthy (R-CA) has elected to delay the election of House committee chairs until closer to the speakership election on Jan. 3. This decision has significant ramifications for the highly contested battle for the top Republican spot on the Ways and Means Committee as Reps. Vern Buchanan (R-FL), Adrian Smith (R-NE) and Jason Smith (R-MO) continue to vie for support from Republican leadership. In the last month, Jason Smith has gained ground in the race, making headlines last Wednesday for comments that, if elected, he would be open to collaborating with Democrats to potentially increase the child tax credit or expand tax incentives for low-income taxpayers if it also included a work requirement.
- Yellen Warns Lawmakers of Potential Stimulus Fraud. Last week, Treasury Secretary Janet Yellen was reported to have sent a letter to both Democratic and Republican leaders in both chambers of Congress to warn of growing threats of financial fraud. Yellen said this potential abuse was connected to the $350 billion in COVID-19 aid for state and local governments provided through the American Rescue Plan Act (ARPA). In her opinion, Congress must pursue legislation to provide the Treasury Department greater flexibility over ARPA’s administrative funding. She said this would ensure that her department can identify and mitigate fraud, without curtailing the proper administration of this funding.
- Enrolled Agents Blast IRS Helpline. On Dec. 6, the National Association of Enrolled Agents (NAEA) sent a letter to acting IRS Commissioner Douglas O’Donnell. The organization said the special phone line designated for tax practitioners has become virtually unusable. The NAEA subsequently suggested several long-term solutions that could improve these IRS resources.
- Republicans Tell Biden to Ensure Energy Credits Do Not Support Forced Labor. In a letter to Homeland Security Secretary Alejandro Mayorkas, a group of Republican lawmakers advocated for strict restrictions on the oversight of tax incentives provided for green-energy projects through the Inflation Reduction Act (IRA). The legislators said that these financial incentives should not subsidize solar panels and other energy products manufactured in China using the forced labor of predominantly Muslim ethnic groups.
- Wyden Continues Investigation into Offshoring. Senate Finance Committee Chair Ron Wyden (D-OR) sent a letter to Amgen, a U.S. multinational pharmaceutical company, requesting more information on the company’s tax practices. This request follows a previous request sent to Amgen last August, which posed several questions that Wyden says were not adequately addressed. With control of the Senate in the 118th Congress, Wyden is likely to expand his investigations into the tax practices of multinational corporations in 2023.
- IRS Guidance on Clean Vehicle Tax Credit. Yesterday, the IRS and Treasury Department issued a Revenue Procedure concerning the new clean vehicle tax credits implemented through the IRA. This guidance primarily discusses procedures for entering into written agreements with the IRS, as well as requirements for periodic reporting related to manufactured vehicles
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- IRS Proposed Rules on Consolidated Groups. Earlier today, the IRS published a notice of proposed rulemaking concerning the treatment of certain foreign income attributable to companies that are part of consolidated groups.
- House Ways and Means Committee
On Wednesday, the Subcommittee on Trade will hold a hearing entitled “Promoting Sustainable Environmental Practices Through Trade Policy,” during which the following witnesses will testify:
- Alexander von Bismarck, Executive Director, Environmental Investigation Agency
- Roy Houseman, Legislative Director, United Steelworkers
- Michele Kuruc, Vice President, Ocean Policy, World Wildlife Fund
- Rich Powell, Chief Executive Officer, ClearPath
Senate Finance Committee
The committee has no upcoming hearings scheduled for this week.
Senate Commerce Committee
Earlier today, the Subcommittee on Oceans, Fisheries, Climate Change and Manufacturing held a hearing entitled, “Promoting and Investing in Small American Manufacturers,” during which the following witnesses testified:
- Carrie Hines, President and CEO, American Small Manufacturers Coalition
- Kelvin Lee, Institute Director, National Institute for Innovation in Manufacturing Biopharmaceuticals
- David Vasko, Senior Director for Advanced Technology, Rockwell Automation
- Sujai Shivakumar, Director and Senior Fellow, Renewing American Innovation Project
- C. Todd Zakreski, President, HUSCO Automotive
Senate Small Business and Entrepreneurship Committee
On Wednesday, the full committee will hold a hearing entitled, “Improving Access to Capital in Underserved Communities,” during which the following witnesses will testify:
- Jon Gaines, Vice President, Business Services & Finance, Wisconsin Women’s Business Initiative Corporation
- Nick Schwellenbach, Senior Investigator, Project on Government Oversight
- Robert Villarreal, Chief External Affairs Officer, Momentus Capital-CDC Small Business Finance
- Annemarie Murphy, Executive Vice President and President of SBA Lending, First Bank of the Lake
Administration
Tuesday, Dec. 13
Small Business Administration
Taxes Q&Q Open Forum for Individuals and Businesses
Wednesday, Dec. 14
Department of Transportation
Meeting to Discuss the IRA Section 40007 Grant Program: Fueling Aviation’s Sustainable Transition via Sustainable Aviation Fuels (FAST‐SAF) and Low‐Emission Aviation Technologies (FAST‐Tech)
Private Sector
Thursday, Dec. 15
Economic Policy Institute
Family Economic Supports: A Policy Forum With Rep. Suzan DelBene (D-WA)
Tax Policy Center
The Prescription: Fiscal Policy for Today’s Economy with Len Burman
Friday, Dec. 16
American Enterprise Institute
Inflation, the Economy, and the Federal Reserve: A Conversation with San Francisco Federal Reserve President Mary C. Daly
Saturday, Dec. 17
National Bureau of Economic Research
Entrepreneurship, Public Policy, and Economic Outcomes, Fall 2022
Tuesday, Dec. 20
American Bar Association
Tax Planning to Reduce Tears Over Crypto Losses
Brookings Institute
A Debate: Should Crypto Be Regulated by the Federal Government?