Legislative Lowdown
Lawmakers’ Discussions on Tax Bill Continue, with Timing Slipping into 2024. With the possibility of a year-end tax package having all but evaporated, lawmakers on the House Ways and Means and Senate Finance committees will have to look to potential opportunities early in 2024, such as the Taiwan tax agreement or current government funding extensions, which are set to expire in January and February.
During this interim period, lawmakers on both sides of the aisle are discussing topline estimates for the proposals and potential modifications to the extenders to address cost concerns while maintaining support from both sides of the aisle. With regard to the inclusion of an expanded Child Tax Credit (CTC), a Democratic ask to balance with Republicans’ request for three Tax Cuts and Jobs Act (TCJA)-era business tax provisions, Republicans have continued to express concern over the cost of various CTC modifications as well as the need to maintain the credit’s work requirement. Cost issues also continue to be a concern for both parties.
Senate Finance Committee Republicans met on Dec. 5 to discuss their strategy for the ongoing negotiations, including whether to move forward with negotiations at all. Some Republican senators have stated that they believe the state of play remains uncertain due to a lack of clarity on the House’s position.
One CTC modification put forward by Sens. Maggie Hassan (D-NH) and Todd Young (R-IN) would revise the CTC to phase in the credit at the first dollar of earnings, rather than at the $2,500 minimum income requirement. This proposal would be accompanied by a restoration of the full research and development expensing deduction. Though this proposal would be less costly than reinstating a fully-expanded CTC, a final package is also likely to keep the three TCJA business provisions together in order to allow for broader revisions to the CTC. Details on potential offsets that could garner bipartisan support remain sparse, although the ongoing controversy over the 2020-2021 employee retention tax credit continues to attract the attention of the tax-writing committees.
Leaked Details of Proposed Treasury Department Guidance Alarms Hydrogen Industry. For more than a year, the hydrogen industry has been eagerly awaiting guidance from the Treasury Department on the types of hydrogen production that would qualify for the new clean hydrogen production credit, which has been increasingly contested in recent months, with environmental groups calling for severe restrictions to the credit. Recently leaked details of the guidance reportedly includes “guardrails” that mandate that projects must only utilize newly constructed renewable energy as well as requiring hydrogen producers to match renewable energy with hydrogen production on an hourly basis beginning in 2028.
Though Deputy Energy Secretary David Turk stated that the administration is “still working to deliberate and put the final package together,” the leaked details have alarmed the hydrogen industry, based on concerns that the rumored limitations would effectively neutralize the credit. Hydrogen producers have repeatedly advocated for more flexible guidance, especially as the new clean hydrogen credit comes on line, to encourage industry growth. American Clean Power Association CEO Jason Grumet said that if the leaked guidance were implemented, “the Biden administration’s proposed strategy for implementing these provisions will fail to get this new industry off the ground.” Treasury Department officials have stated in recent weeks that initial guidance is on track to be released by year-end, although the leaked details call that timeline into question. They also suggest that the anticipated guidance will come with an extended comment period with final rules projected to be delayed until after the 2024 election.
Wyden Introduces Bipartisan Middle-Income Housing Tax Credit. Senate Finance Committee Chair Ron Wyden (D-OR), along with Sen. Dan Sullivan (R-AK) and Reps. Jimmy Panetta (D-CA) and Mike Carey (R-OH), introduced the Workforce Housing Tax Credit Act on Dec. 7. The credit is intended to incentivize the construction and rehabilitation of affordable housing for middle-income families, and is part of Sen. Wyden’s larger push to pass a housing bill. The credit would be similar to the Low Income Housing Tax Credit in that state housing finance agencies would allocate tax credits to developers, but would apply to building units in which at least 60% of the building’s residents have incomes that are at most 100% of the area median income. The credit would be valued at 50% of the cost of the building for new constructions, and 20% of the cost of the credit for rehabilitated constructions. The credit would be estimated to finance about 350,000 affordable rental homes.
Tax Worldview
Treasury Issues Anticipated Foreign Tax Credits Guidance, Extends Temporary Relief from 2021 Final Rules
The Treasury Department and Internal Revenue Service (IRS) issued anticipated guidance on Dec. 11 regarding the application of the U.S. foreign tax credit rules to the new global minimum tax regime under Pillar Two of the Organisation for Economic Cooperation and Development’s (OECD) “Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules,” which a number of countries are bringing into effect starting next year. The notice of proposed rulemaking provides that qualified domestic minimum top-up taxes, a key feature of the Pillar Two 15% global minimum tax, generally will be eligible for U.S. foreign tax credits, while taxes imposed on U.S. companies’ income inclusion rules adopted by foreign countries generally would not. The notice, however, proposes a number of conditions and exceptions that may apply depending on the specific structure of the foreign tax.
The notice does not address the application of the U.S. foreign tax credit rules to the undertaxed profits rule (UTPR) under Pillar Two, which foreign governments are expected to implement starting in 2025 as a backstop to ensure that multinational companies are paying the 15% minimum tax on their global income. The Treasury Department and IRS, according to the notice, are continuing to examine the UTPR and related issues and are expected to provide additional guidance in the future, likely making taxes paid under a UTPR ineligible for U.S. foreign tax credits.
The Dec. 11 notice also extends the temporary relief from the December 2021 final foreign tax credit regulations provided in IRS Notice 2023-55, allowing taxpayers to continue using the previous, more business-friendly rules indefinitely while the agency considers possible changes.
1111 Constitution Avenue
IRS Begins Sending ERTC Disallowance Letters. On Dec. 6, the IRS announced that they would begin an initial round of sending upwards of 20,000 letters informing taxpayers that their Employee Retention Tax Credit (ERTC) claims have been denied. This initial wave of disallowance letters concerns applications that had one of two problems: either 1) the entity claiming the credit did not exist during the eligibility period, or 2) the entity did not have any paid employees during the eligibility period.
The press release also noted that taxpayers who have realized that they may have submitted ineligible ERTC claims forms may be able to withdraw them through an IRS initiative. These actions come in the midst of the IRS’s moratorium on processing outstanding ERTC claims due to concerns of fraud and abuse. The moratorium will last through at least the end of the year, and is pending a potential extension by the IRS into 2024.
At a Glance
House Lawmakers Introduce Bill Taxing Greenhouse Gas Emissions. On Dec. 7, Reps. Brian Fitzpatrick (R-PA) and Salud Carbajal (D-CA) introduced the MARKET CHOICE Act, which would replace the gas tax with a tax on greenhouse gas emissions, for the purposes of funding American infrastructure projects. It would also establish a National Climate Commission, which would examine federal emissions reduction programs for review. The bill was previously introduced in the 117th Congress.
House Lawmakers Introduce Bill Creating Investment Tax Credit for Hydropower Projects. On Dec. 7, Reps. Annie Kuster (D-NH), Adrian Smith (R-NE), Suzan DelBene (D-WA), Claudia Tenney (R-NY), Brian Fitzpatrick (R-PA) and Kim Schrier (D-WA) introduced the Maintaining and Enhancing Hydroelectricity and River Restoration Act. The bill would establish a new Internal Revenue Code section, section 48F, which would create a 30% investment tax credit for projects that improve hydroelectric facilities in various capacities. The credit would apply through the end of 2031.
OECD Forum Endorses Framework Tackling Tax Fraud. From Dec. 5 to Dec. 7, the Sixth OECD Forum on Tax and Crime was held in Rome. The statement of outcomes published after the event revealed the organization’s interest in creating an “in-person confidential network of law enforcement authorities involved in tax crimes” that would meet annually, concurrently with the Task Force on Tax Crimes and other Financial Crimes (TFTC) meeting. In addition, participating jurisdictions emphasized implementation of the OECD’s Crypto-Asset Reporting Framework issued in 2022, in order to help minimize the impact that virtual assets have on facilitating crime.
IRS Independent Office of Appeals Releases FY 2024 Focus Guide. On Dec. 8, the IRS Independent Office of Appeals released a Focus Guide detailing its priorities and goals for fiscal year (FY) 2024, which emphasizes improving taxpayer service. Methods in which the office plans to work towards this goal includes improved hiring and new employee development initiatives, implementation and increased awareness of alternative dispute resolution programs and continued modernization of tax processing, including ongoing paperless process initiatives.
Biden Administration Regulatory Priorities Focus on IRA Incentives. On Dec. 6, the Biden administration released its tax-focused regulatory agenda, amending the Priority Guidance Plan that the IRS released at the end of September. The agenda added three new energy proposed rules: an advanced manufacturing production credit, transfer provisions for the clean vehicle credit and an energy-efficient commercial buildings deduction. Other non-energy regulatory priorities include a project on supplemental regulations under Section 1446(f), clarifications of “basket contract” transactions and guidance on regulations that are expected to be released at year-end.
Brownstein Bookshelf
- The Institute on Taxation and Economic Policy, a liberal thinktank, released a report demonstrating that only 0.08% of American taxpayers were subject to the estate tax in 2019, the most recent year for which data are available. This is a historic low, disregarding when the tax was briefly repealed in 2010. According to the report, this is because the estate tax exemption has risen with inflation, from $1 million in 2002 to $11.4 million in 2019. The exemption is expected to rise to $14.02 million in 2025 before the expiration of Tax Cuts and Jobs Act’s provisions would revert back to Obama-era levels.
Hearings and Events
House Ways and Means Committee
On Wednesday, the House Ways and Means Subcommittee on Oversight will hold a hearing titled “Growth of the Tax-Exempt Sector and the Impact on the American Political Landscape.”
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.
Other
On Tuesday, the House Education and Workforce Committee held a markup of several bills, including H.R. 6585, the Bipartisan Workforce Pell Act, which contains a provision that would prohibit students at any institution that is subject to the endowment excise tax from accessing federal student loans.
On Wednesday, the House Foreign Affairs Committee will hold a markup of several bills, including H.R. 6416, which would “impose certain tax penalties in connection with the invasion of Ukraine."