Legislative Lowdown
GOP Lawmakers Prepare Expansive Tax-Reform Proposal. House Republicans are expected to unveil an economic-growth package in the coming weeks that will encompass tax provisions relevant to a broad cross-section of the U.S. economy. Last month, House Ways and Means Committee Chairman Jason Smith (R-MO) announced his intention to finalize the bill by his birthday, June 16.
While a partisan bill is unlikely to receive consideration in the Democratic-controlled Senate, the proposals offered by Republicans will lay the groundwork for the development of future bipartisan tax legislation in the 118th Congress. Moreover, the effort will kickstart the debate over extensions of certain Tax Cuts and Jobs Act (TCJA) provisions, which is expected to intensify in the lead-up to the expiration of the individual tax cuts in 2025.
GOP lawmakers have not provided explicit details of the proposals that will be included in the package. However, Chairman Smith has frequently noted that his “top priority is delivering for the working families, farmers and small businesses.” Accordingly, the bill is likely to contain substantial tax provisions focused on supporting these three categories of taxpayers, including:
“Working Families.” While expectations are high that the bill will focus significantly on business tax incentives, Republicans may also seek to build on their previous successes in expanding tax relief for low- and middle-income taxpayers.
- Child Tax Credit: Support for working families will most likely be reflected in an expansion of the Child Tax Credit (CTC). Chairman Smith is a strong advocate for extending the increased CTC enacted in TCJA, and he previously introduced legislation to make permanent the $2,000 per-child credit amount. A possible CTC expansion proposal would likely be paired with a continuation of work requirements under current law—a stipulation that Sen. Joe Manchin (D-WV) insisted on throughout negotiations over a potential CTC provision in the Democrats’ FY2022 reconciliation bill.
- Low-Income Housing Tax Credit: The bill may include an expansion of the Low-Income Housing Tax Credit (LIHTC). Last month, a bipartisan, bicameral group of lawmakers introduced the Affordable Housing Credit Improvement Act, which would restore the 12.5% LIHTC cap increase that expired in 2021 and further expand total credit allocations by 50% over the next two years.
- Gas-Tax Relief: The Inflation Reduction Act permanently reinstated the 16.4 cents-per-barrel (inflation-adjusted) Hazardous Substance Superfund Excise Tax on crude oil and imported petroleum products. The economic-growth bill may incorporate legislation proposed by Rep. Mike Carey (R-OH) intended to reduce the costs consumers pay for gasoline by repealing the tax.
“Farmers [and others, including Manufacturers].” To support farmers’ capital equipment purchases, the economic-growth package will likely propose an expansion of expensing for investments in new property and equipment allowances under sections 168(k) and 179. These provisions are expected to continue to be broadly applied to include the agriculture industry as well as companies involved in manufacturing, transportation and energy generation, among other sectors.
- Accelerated Bonus Depreciation: Through 2022, taxpayers could claim the 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 begins to phase down by 20% annually until it is entirely eliminated for equipment placed in service after 2026. The Republican package will likely include an extension or permanence of the full bonus-depreciation allowance.
- Small Business Equipment Expensing: Section 179 is a permanent tax provision and was expanded as part of TCJA to allow taxpayers to expense annually up to $1.2 million (inflation-adjusted) of the cost of new and used qualified property. Notably, the allowance is primarily utilized by small- and medium-sized businesses because it cannot be leveraged by companies with annual total equipment purchases of more than $4.1 million. The Republican tax bill is expected to include legislation introduced by Rep. Blake Moore (R-UT), which would double the current $1.2 million limitation and increase the total equipment cap to expand the scope of taxpayers permitted to use the provision.
“Small Businesses.” A cornerstone of Chairman Smith’s agenda has been a series of Ways and Means Committee field hearings primarily focused on the businesses that form “Main Street America.” Having heard testimony from a wide range of sectors, Republicans will likely include several industrywide pro-business tax proposals in the bill. These provisions are unlikely to be restricted to businesses of a specific size and would instead focus on general economic revitalization.
- 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. Several Ways and Means Committee Republicans, including Rep. Ron Estes (R-KS), are strong advocates of the proposal and will likely insist on its inclusion in the upcoming tax bill.
- 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. Reps. Adrian Smith (R-NE) and Kevin Hern (R-OK) have sponsored legislation to restore the broader section 163(j) deduction based on EBITDA retroactively, and the proposal is likely to be included in the GOP tax package.
- 1099-K Reporting Requirement: The reporting threshold for third-party payment platforms to issue a Form 1099-K decreased from $20,000 and 200 transactions to a flat $600 in 2023. While the change was intended to increase the number of transactions subject to reporting, it attracted bipartisan condemnation from certain lawmakers who argue the lower threshold imposes an undue administrative burden on small businesses and individual sellers. The tax package will likely include a provision to raise the current threshold—potentially mirroring proposals from Reps. Carol Miller (R-WV) and Michelle Steel (R-CA) that would restore the threshold to the pre-2023 amounts.
Energy Boost
Treasury Department and IRS Solicit Feedback on Proposed Rules for Low-Income Communities Bonus Credit. The Treasury Department and Internal Revenue Service (IRS) issued proposed rules (REG-110412-23) on May 31 concerning the section 48(e) Low-Income Communities Bonus Energy Investment Credit Program established by the Inflation Reduction Act (IRA). Unlike other energy-tax incentives included in the IRA, the section 48(e) bonus credit operates through a maximum credit allocation. Accordingly, to receive credits under this provision, taxpayers must submit project applications for consideration under a competitive-award process opening later this year.
The program was created within the existing section 48 Investment Tax Credit (ITC) and allows the Treasury Secretary (through the IRS) to designate specific solar and wind energy-generation projects to receive bonus-credit amounts above the base 30% ITC if they comply with certain environmental-justice initiatives. The rules also reiterate that qualified projects must be built in connection with low-income communities and have a maximum net output of less than 5 megawatts. Under the program, a project can receive an additional 10% or 20% ITC boost if it satisfies the relevant eligibility criteria.
The notice of proposed rulemaking requests comments from stakeholders on any aspects of the bonus credit that require clarification or modification. Comments must be submitted to the Treasury Department and IRS by June 30, 2023.
Treasury Department and IRS Announce Updated Application Timeline for Advanced Energy Project Credit. The Treasury Department and IRS unveiled guidance (IRS Notice 2023-44) on May 31, setting out the application process and review criteria for the Advanced Energy Project Credit under section 48C.
The section 48C credit was refreshed by the Inflation Reduction Act (IRA), allowing for an additional allocation of $10 billion in credits, with $4 billion of the allocation earmarked for projects in certain energy communities. The credit follows a two-tier structure based on the satisfaction of the prevailing wage and apprenticeship requirements. Projects are eligible for a base credit of 6% and a maximum credit of 30% if the conditions are met.
Interested taxpayers must submit concept papers by July 31, 2023, to be considered for the first round of allocations. Round one submissions will be prioritized by the Department of Energy (DOE), providing deference to manufacturing and recycling projects that can fill supply chain gaps with respect to clean-hydrogen technologies, the electric grid, electric heat pumps, electric vehicles, nuclear energy, solar and wind energy and sustainable aviation fuel. Second-order priority will be assigned to proposals relating to greenhouse gas emissions reductions and critical-material projects.
While the guidance does not explicitly solicit comments from stakeholders, it notes that any questions or comments regarding the tax aspects of the notice should be submitted to the Treasury Department and IRS, while those concerning the non-tax portion of the proposal should be directed to DOE. The notice does not provide a deadline for responses, although stakeholders should submit comments promptly to ensure consideration before the application process begins.
Tax Worldview
Senate Committee (Re)approves Chile Tax Treaty. The Senate Foreign Relations Committee voted 20-1 on June 1 to approve a measure to ratify the tax treaty between the United States and Chile. The treaty is expected to increase investment by U.S. and Chilean companies by reducing applicable taxpayers’ withholding tax rates on dividends, interest and royalties. The treaty also addresses concerns regarding multinational corporations’ ability to engage in certain tax-avoidance transactions. The treaty was negotiated and signed by the Obama administration in February 2010 but had been stalled pending Senate ratification for more than a decade.
Since 2010, the treaty has been advanced by the Foreign Relations Committee on four occasions, but it has never been considered by the full Senate. The ratification process was further complicated by international tax reform included in the 2017 Tax Cuts and Jobs Act, which was not reflected in the already-signed treaty. However, lawmakers addressed the potential issues last year through reservation language included in the ratification measure, clarifying that the treaty would not prevent the imposition of the U.S. Base Erosion and Anti-abuse Tax (BEAT), among other modifications.
With the committee’s endorsement, the treaty is expected to receive a vote and be ratified by the Senate. Two-thirds of senators must approve the resolution to provide consent for treaty ratification. Earlier this year, Senate Majority Leader Chuck Schumer (D-NY) indicated that he supported the effort and would move forward with floor consideration following committee approval. Since the Chilean Congress previously ratified the treaty in 2015, approval of the resolution by the U.S. Senate would bring the treaty into effect beginning in January 2024.
At a Glance
Treasury Department to Focus on Universal CAMT Guidance. Speaking at the Federal Bar Association’s Insurance Tax Seminar last week, Treasury Department Office of Tax Policy Attorney-advisor Angela Walitt discussed the agency’s plans for promulgating future guidance concerning the Corporate Alternative Minimum Tax. Walitt said that while “some industry-specific things” would be addressed in upcoming releases, the Treasury Department will focus on “more general answers” intended to apply industrywide. Notwithstanding the emphasis on more inclusive guidance, the Treasury Department and Internal Revenue Service (IRS) issued Notice 2023-20 earlier this year to provide interim guidance specifically for certain contracts relevant to insurance companies.
Biden Expected to Fill Long-Vacant IRS Chief Counsel Position. President Joe Biden announced his intention to nominate Marjorie Rollinson to serve as chief counsel for the Internal Revenue Service (IRS). Rollinson was previously IRS associate chief counsel (international) from 2016 to 2019, before exiting the government to take over as the deputy director of national tax at Ernst & Young. The chief counsel position is one of only two officials serving at the IRS that require Senate confirmation, and the role has remained vacant for the entirety of the Biden administration. If confirmed, Rollinson is expected to play a significant role in the ongoing implementation of the Inflation Reduction Act tax provisions.
Republican Strategy for Further Pillar Two Response. Eric Oman, the deputy chief tax advisor for House Ways and Means Committee Republicans, spoke at the Federal Bar Association’s Insurance Tax Seminar last week on the next steps for the GOP response to ongoing global tax developments. Oman noted that committee Republicans were “frustrated” and “disappointed” by the Biden administration’s failure to consult Congress throughout negotiations over the Organisation for Economic Co-operation and Development (OECD) Pillar Two rules. Moreover, he highlighted legislation proposed in response to the global minimum tax as a first step in the GOP response, noting that there are “other proposals that certainly could come down the pipeline” concerning U.S. counters to Pillar Two.
Brownstein Bookshelf
Updated JCT Scores for the Green-Energy Incentives. Revised preliminary revenue estimates obtained by Tax Notes estimate that the section 30D Clean Vehicle Credits will increase the deficit by about $70 billion—more than 500% the original score provided by the Joint Committee on Taxation (JCT).
Taxpayer Advocate Expansion Bill. Rep. Joe Neguse (D-CO) introduced legislation last week that would provide the National Taxpayer Advocate the authority to comment on proposed Treasury Department regulations.
Proposed Transmission ITC. Sen. Martin Heinrich (D-NM) proposed a bill last week that would create a section 48F Investment Tax Credit (ITC) for the construction of new electric power transmission lines and related property.
Hearings and Events
Senate Finance Committee
On Wednesday, the full committee and the Senate Committee on Small Business and Entrepreneurship will hold a roundtable meeting entitled “Tackling Tax Complexity: The Small Business Perspective.” The following witnesses will testify:
House Small Business Committee
On Tuesday, the Subcommittee on Economic Growth, Tax and Capital Access held a hearing entitled “American Ingenuity: Promoting Innovation Through the Tax Code.” The following witnesses testified:
- Alicia Chapman, Owner and CEO, Willamette Technical Fabricators
- Avonette Blanding, Owner, Blanding Financial Solutions LLC
- Stephanie Camarillo, Owner, Molly Maid of Boise and the Treasure Valley
- Michael Norris, President and CEO, Warrant Technologies
- Roger Harris, President, Padgett Advisors
- Julie Masser Ballay, Vice President and CFO, Sterman Masser Inc.
- Bill Wydra, President, Ashland Technologies
- Michael Kaercher, Director of the Climate Tax Project, The Tax Center at NYU Law