Programming Note: The Taxation and Representation Newsletter will not be published next week during the Thanksgiving recess. It will return with Congress during the week of Nov. 27.
Legislative Lowdown
Government on Precipice for Second Shutdown; Year-End Tax Bill Remains a Possibility. With only three days until government funding expires, Speaker Mike Johnson (R-LA) and GOP leadership brought a “laddered” Continuing Resolution (CR) to the House floor, which creates different funding deadlines for the 12 fiscal year (FY) 2024 bills. The House Rules Committee posted a stopgap setting a Jan. 19 deadline for four bills (Agriculture-FDA, Energy and Water, Military Construction-VA, and Transportation-HUD) and a Feb. 2 deadline for eight bills (Commerce-Justice-Science, Defense, Financial Services-General Government, Homeland Security, Interior-Environment, Labor-HHS-Education, Legislative Branch, and State and Foreign Operations). While the staggered deadlines result in a more complicated schedule, the stopgap funding measure does not include poison-pill policy riders or additional spending cuts—a concession for conservatives. The measure also does not include any of the supplemental funding request dollars. On Nov. 14, the House voted to approve the CR by a vote of 336-95, with 127 Republicans voting with 209 Democrats to pass the legislation.
House Republicans have planned votes on at least two more spending bills this week—Commerce-Justice-Science (H.R. 5893) and Labor-HHS-Education (H.R. 5894)—with a vote possible on the Transportation-HUD bill (H.R. 4820), which was pulled from the schedule last week.
To date, the House has passed seven of the 12 appropriations bills, with the remaining bills having failed on the floor, been pulled from the floor, or never passing out of the Appropriations Committee. Speaker Johnson’s goal of passing the remaining five bills before Thanksgiving remains questionable.
On the Senate side, Majority Leader Chuck Schumer (D-NY) filed cloture on a legislative vehicle to keep the government open beyond the Nov. 17 deadline. This move allows for an initial procedural vote to be held this week. Majority Leader Schumer has noted that he is “pleased” to see that Speaker Johnson is moving in the right direction on the CR.
Pursuant to the Fiscal Responsibility Act, which lifted the federal debt ceiling until 2025 in exchange for caps on federal spending programs, if all 12 appropriations bills are not enacted by Jan. 1, 2024, all federal agencies will receive a 1% cut to their FY 2023 budget levels beginning on April 30.
Hanging in the balance of a potential funding deal is a tax bill. Speaker Johnson has expressed interest in a tax deal; this hinges on whether Democrats and Republicans can agree to an extension and expansion of the child tax credit (CTC) and, possibly, affordable housing provisions to balance the extension of several business-related provisions, with a focus on the research and development (R&D) amortization deduction, bonus depreciation and the net business interest deduction:
- R&D Amortization: Historically, taxpayers were permitted to deduct certain research and development (R&D) costs immediately under section 174. However, beginning in 2022, businesses must amortize R&D expenditures over five years. Lawmakers have introduced bipartisan proposals to reverse the restrictions retroactively, although those have failed to be enacted despite growing industry concerns about the impact of the amortization requirement, especially on startup enterprises.
- Accelerated Bonus Depreciation: Through 2022, taxpayers could claim 100% bonus depreciation under section 168(k) for eligible property placed in service during the taxable year. However, starting this year, the bonus-depreciation allowance is 80%, the first step in a phase down by 20% annually until it is entirely eliminated for equipment placed in service after 2026.
- Business Interest Limitation: Through 2021, the deduction for net business interest expense under 163(j) was limited to a maximum of 30% of a taxpayer’s earnings before interest, taxes, depreciation and amortization (EBITDA). Beginning in 2022, the provision narrowed to allow the deduction based on only earnings before interest and taxes (EBIT)—not taking into account depreciation or amortization.
A readout from the latest round of negotiations indicates that Republicans are considering implementing roughly $35 to $40 billion of business relief through restoration of one or more of the Republicans’ top tax priorities. The Joint Committee on Taxation estimated that full restorations, as the Republican-controlled House Ways and Means Committee did in a June markup, would cost $47 billion. Democrats, in turn, have floated the idea of partially restoring the child tax credit at a cost of $49 billion, designed to create parity with Republicans’ priorities so that a package can be developed.
To further complicate matters, Speaker Johnson has signaled his support for the inclusion of a provision that would raise the state and local tax (SALT) deduction cap—a move that won him critical support from Republicans in high-tax states like California and New York. However, the outlook for such a provision remains unclear, especially from a cost perspective.
Budget and Finance Committee Hearings Focus on Wealthy Filers. On Nov. 8, the Senate Budget Committee held a hearing titled “Fairness and Fiscal Responsibility: Cracking Down on Wealthy Tax Cheats.” The hearing discussed ongoing efforts by the Internal Revenue Service (IRS) to utilize funding allocated for the agency by the Inflation Reduction Act (IRA, Pub. L. 117-169), to increase audit rates on wealthy individual filers and corporations, investigate complex partnership structures for potential instances of tax evasion, and improve taxpayer services. Democrats on the committee, such as Chair Sheldon Whitehouse (D-RI), continued calls to fund the IRS and criticized ongoing Republican efforts to strip funding for the agency as pay-fors through appropriations bills and the Israel aid package. Whitehouse claimed that the funding has been effectively used to improve taxpayer service and generate revenue by auditing wealthy individuals, corporations, pass-throughs and partnerships. Republicans, including Ranking Member Chuck Grassley (R-IA), continued to express concerns that the IRS’s vague and ambiguous criteria regarding who will see an increase in audits will “invariably put a target” on small businesses. He urged the IRS to reallocate funds toward improving taxpayer service, rather than increasing enforcement, and called for pausing enforcement funding until the IRS provides a detailed plan for the utilization of funding, and it passes congressional review.
On Nov. 9, the Senate Finance Committee held a hearing titled “Examining How the Tax Code Affects High-Income Individuals and Tax Planning Strategies,” exploring a similar topic as the Budget Committee hearing the day prior, but with more focus on perceived inequities within the tax code and how avoidance and evasion strategies increase tax burdens. Finance Committee Chair Ron Wyden (D-OR) called for the closure of portions of the tax code that allow for wealthy filers to earn a lower effective tax rate than low- and middle-class taxpayers. Crucially, he also advocated for “mark-to-market” economic strategies, which would mean that assets that are unrealized, such as stocks that have not been sold, would be taxed at the current market price or “fair value” instead of having to wait until the asset gain is realized to tax via capital gains. Taxing unrealized gains is a controversial decision, but Sen. Wyden argued that it is necessary because unrealized assets have been able to be passed down to a wealthy individual’s heirs without being taxed, resulting in “unjust” wealth accumulation. Republicans, including Ranking Member Mike Crapo (R-ID), also called for a crackdown on tax evasion and to limit any “gray areas” in the tax code as much as possible, but noted that wealthy filers receive enough scrutiny on compliance and that they already contribute a significant portion of their income to the tax base. He also said that Sen. Wyden’s potential approach to taxing unrealized gains would also affect middle-income taxpayers who are saving for retirement or own capital assets. Sen. Crapo praised the Tax Cuts and Jobs Act (Pub. L. 115-97), which he said simplified tax filing, expanded the child tax credit and limited regressive tax spending such as the state and local tax deduction.
During the hearing, Sen. Wyden indicated that his office would unveil legislation before year-end that combats tax-avoidance schemes by wealthy filers. The legislation for this bill may be similar to legislation he introduced in 2021, which would have imposed an annual tax on appreciation in publicly traded assets such as stocks and bonds and apply to people with more than $100 million in annual income or over $1 billion in assets for three years in a row.
Tax Worldview
IRS Planning on Issuing Additional Foreign Tax Credit Guidance. On Nov. 6, Internal Revenue Service (IRS) Office of Chief Counsel attorney Hayley Rassuchine said that the agency would plan to release guidance on how foreign tax credit regulations interact with the global minimum tax (GMT), despite the fact that the agency is still determining how the new final regulations might be modified. Guidance on the interaction between the foreign tax credit and the GMT is expected at the end of 2023, while the Treasury Department and the IRS continue to consider possible changes to the 2022 foreign tax credit due to the substantial pushback received from the business community. The Treasury Department and the IRS are also expected to extend the temporary suspension of the final regulations that was issued earlier this year.
Chile One Step Closer to Implementing U.S. Tax Treaty. On Nov. 8, the Chile Chamber of Deputies voted unanimously to approve a tax treaty with the United States, which was originally signed in 2010. The bill now heads to the country’s senate, where it is expected to receive a vote by Nov. 23. Finance Minister Mario Marcel said that, if the treaty’s amendments are approved, then the agreement will take effect starting in January 2024. The U.S. Senate ratified the treaty in June. The treaty’s implementation will be significant, as one of only two tax treaties with South American countries, and with one of the world’s largest lithium producers.
Brazil on Track to Complete Tax Reform Before Year-End. On Nov. 8, the Brazilian Senate voted to approve a bill to simplify the country’s tax code, with the bill needing to be reconciled with the version passed by the House. Finance Minister Fernando Haddad stated that he expects the lower house to vote in favor of the Senate’s version quickly, and that the bill should be enacted by December.
The bill would seek to replace Brazil’s current tax code, which currently has five levies and is one of the most complicated tax codes in the world, with a three-levy tax system: a tax on goods and services (IBS), a contribution on goods and services (CBS), and a type of excise tax (IS). The IBS tax rate is determined by states and municipalities, while the CBS and IS are federally determined. The bill has also been promoted as not increasing tax burdens.
Brazil to Unveil Global Minimum Tax. On top of its domestic tax reforms, the government of Brazil is planning to roll out a 15% minimum tax on multinational corporations, in compliance with the Organisation for Economic Co-Operation and Development’s (OECD) Pillar Two global tax regime. With Brazil set to assume the presidency of the Group of 20 (G20) nations starting on Dec. 1, the government will reportedly use its presidency to support OECD guidance on implementation of the regime in the “digital economy,” according to Tatiana Rosito, the secretary of international affairs of the Brazilian finance ministry. Rosito acknowledged, however, that Pillar Two has not yet been finalized, and that universal adoption still has multiple challenges.
1111 Constitution Avenue
IRS Contacting Partnerships to Flag Tax Reporting Issues. During a webinar on Nov. 8, Internal Revenue Service (IRS) Large Business and International (LB&I) division commissioner Holly Paz stated that the agency was sending letters to large U.S.-based partnerships to flag potential tax reporting issues. Paz reported that at the end of September, the agency opened 75 exams, specifically analyzing balance sheet discrepancies. Paz estimated that around 500 partnerships have had this issue identified, amounting to millions of dollars in discrepancies. She said that the agency will conduct next steps based on responses it receives from the partnerships contacted, and that audits and full examinations are in order. These efforts are part of larger efforts conducted by the IRS and the LB&I division to shift focus on requiring corporations, partnerships and wealthy individuals to comply with the tax code through increased audits and scrutiny, using Inflation Reduction Act-allocated funds.
Yellen Highlights IRS Progress During 2023 Filing Season, Sets 2024 Goals. In her remarks at the Internal Revenue Service (IRS) on Nov. 7, Treasury Secretary Janet Yellen stated that, for the 2024 filing season, the IRS would again aim for an 85% level of telephone service and a 500% increase in the number of phone calls answered compared to the 2022 filing season. Yellen noted that funds allocated to the agency in the IRA enabled it to make improvements to taxpayer service and continue its digitization and IT modernization initiatives. The agency has also committed to lowering average wait times to 15 minutes or less and implementing a callback option should wait times exceed 15 minutes. The agency also plans to make improvements to the “Where’s my Refund?” tool to include “conversational voice bot technology.”
Secretary Yellen also discussed the agency’s attempted Direct File tool, which will allow taxpayers with “simple” tax returns residing in certain states to prepare and file their 2023 tax return using an agency-operated online tool. The pilot program is slated to be released as an invitation-only tool and will start with a limited number of volunteer taxpayers. The agency said that, overall, it expects several hundred thousand taxpayers to participate in the pilot.
Secretary Yellen’s remarks corresponded with a press release issued by the IRS on Nov. 7. The release noted that the agency met the first goal of its Paperless Processing Initiative on time, and that taxpayers will now be able to digitally respond to all correspondence. The press release also highlighted the improved “Where’s My Refund” tool, improvements in phone service and in-person service through Taxpayer Assistance Centers, the Direct File program, and the Energy Credits Online portal that will enable transferability of clean vehicle credits as well as Direct Pay and transferability elections of other IRA energy credits.
Senate Democratic Standoff Over Hydrogen Tax Credit Continues; Guidance Expected by Year-End. Sen. Maria Cantwell (D-WA) led 10 Democratic Senate colleagues in a letter to Biden administration officials on Nov. 7, requesting that the agencies not apply additional restrictions—the so-called “three pillars”—to limit the flexibility of the Clean Hydrogen Production Credit (section 45V of the Inflation Reduction Act). The letter argues that these restrictions would impose burdens on the hydrogen energy industry not required by the statute, resulting in higher costs and delayed projects. This letter conflicts with a letter released in October by Sens. Sheldon Whitehouse (D-RI) and Jeff Merkley (D-OR) urging the agency to release guidance regarding the credit that ensures the credit is strictly applied only to qualify for projects using new clean energy sources.
On Nov. 9, Senate Environment and Public Works Committee Chair Tom Carper (D-DE) released his own letter to Treasury Secretary Janet Yellen, Energy Secretary Jennifer Granholm and Assistant to the President and Senior Advisor to the President for Clean Energy John Podesta, advocating for a flexible approach to implementing the new hydrogen tax credit, which he is credited with creating in 2021.
On Nov. 8, Treasury Climate Counselor Ethan Zindler said that the agency plans to issue guidance on the credit by the end of the year and will seek to “strike a balance” between “competing requests,” such as those between industry and environmental activists, and between the two Democratic Senate factions.
At a Glance
IRS Plans on Issuing Tax Credit Monetization Rules Before 2024 Filing Season. The Internal Revenue Service (IRS) and Treasury Department stated that they will release final rules before the filing season regarding how companies and tax-exempt organizations can monetize credits, including finalizing the direct pay and transferability rules. Taxpayers who would like to register their projects and credits before electing to monetize their tax credits must utilize an online portal, which will reportedly be live in the coming weeks. On Nov. 3, IRS Office of Chief Counsel Special Counsel Richard Blumenreich stated that IRS testing of the portal is “almost done.”
IRS Quietly Resumes Sending Collection Notices. After a two-year hiatus, the Internal Revenue Service (IRS) has resumed sending automated collection notices to taxpayers who had a balance due. Several tax professionals noted that taxpayers have received CP501, 503 and 504 notices informing them of outstanding debts owed to the IRS. The IRS previously announced in 2022 that it would pause the issuance of automated collection notices due to a backlog of unprocessed returns and correspondence, and its resumption indicates a clearing of the backlog, as the IRS had reported it had succeeded in doing earlier this year, and the agency’s emphasis on compliance efforts.
Manchin Pushes for Nuclear Industry to Access IRA Energy-Tax Credits. At a conference on Nov. 13, Sen. Joe Manchin (D-WV) stated that he would join any lawsuits against the Biden administration if it does not grant the nuclear energy industry the same level of access to the Inflation Reduction Act’s (IRA) energy-tax credits as the wind and solar energy industries. Manchin argued that the legislation was not meant to exclude nuclear and other non-wind and solar energy technologies from being able to produce clean hydrogen for the purposes of claiming the credit.
Brownstein Bookshelf
IRS Issues Tax Inflation Adjustments for Tax Year 2024. On Nov. 9, the Internal Revenue Service (IRS) issued Rev. Proc. 2023-34, which details the annual inflation adjustments for tax year 2024, including tax rate schedules. The top tax bracket for individual single taxpayers remains at 37%, applied for incomes greater than $609,350 ($731,200 for joint filers). The standard deduction for single filers will be $14,600, an increase of $750 compared to tax year 2023. For joint filers, the standard deduction will be $29,200, an increase of $1,500.
Treasury Department Issues Rules on FinCEN Identifiers for Reporting Ownership Information. On Nov. 7, the Treasury Department issued final rules to specify when and how entities required to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) may use a FinCEN identifier to report the beneficial ownership information of certain related entities. Under the rules, companies must report the names, addresses and other “beneficial ownership” information to FinCEN starting in 2024. The aim of the disclosure requirements is to help law enforcement identify and scrutinize shell corporations suspected of aiding and abetting terrorism, drug trafficking and other global criminal activities.
IRS Issues Proposed Regulations on Certain Foreign Currency Transactions. On Nov. 13, the Internal Revenue Service (IRS) issued proposed regulations that would govern how “qualified business units” (QBUs) under Section 987 of the tax code should treat foreign currency transactions, such as gains and losses, in their own taxable income or loss. These proposed regulations include an election to treat all items of a QBU as marked items (subject to a loss suspension rule), an election to recognize all foreign currency gain or loss with respect to a qualified business unit on an annual basis, and a new transition rule.
IRS Issues Proposed Guidance on Donor-Advised Funds. On Nov. 13, the Internal Revenue Service (IRS) released proposed regulations regarding excise taxes on taxable distributions made by a sponsoring organization from a donor advised fund (DAF), and on the agreement of certain fund managers to the making of such distributions. The regulations would impose a 20% excise tax on each taxable distribution from a DAF, to be paid by the sponsoring organization of the fund.
Hearings and Events
House Ways and Means Committee
On Nov. 15, the House Ways and Means Committee will hold a hearing titled “From Ivory Towers to Dark Corners: Investigating the Nexus Between Antisemitism, Tax-Exempt Universities, and Terror Financing.”
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.