Legislative Lowdown
Budget Update: Johnson and Schumer Reach Deal on Overall Spending, Accelerate IRS Funding Rescission. On Jan. 7, House Speaker Mike Johnson (R-LA) and Senate Majority Leader Chuck Schumer (D-NY) announced an agreement on the top-line budget numbers for the federal appropriations process. The deal adheres to the limits established by the Fiscal Responsibility Act (Pub. L. 118-5), allowing for $886 billion in defense spending and $704 billion in baseline non-defense discretionary spending. Additionally, the agreement provides for a further $69 billion in non-defense spending through various budgetary offsets, including a clawback of $6.1 billion in unspent COVID-19 aid.
Speaker Johnson also announced that the deal rescinds $20 billion of the $80 billion in supplemental Internal Revenue Service (IRS) funding in the Inflation Reduction Act (Pub. L. 117-169) in Fiscal Year (FY) 2024. Lawmakers had previously agreed to evenly divide this IRS rescission across the FY2024 and FY2025 budgets. Last Friday, Office of Management and Budget Director Shalanda Young noted that the Biden administration had “already worked with IRS to make sure [the clawback] does not impact their current efforts.” Nonetheless, she asserted that the White House would be unwilling to compromise on further IRS funding clawbacks in FY2025 if lawmakers impose the entire rescission this year.
Some Republicans, including members of the conservative House Freedom Caucus, have criticized the deal, asserting that it lacks sufficient spending cuts. Per the current funding deal enacted before Thanksgiving, four appropriations areas are funded until Jan. 19: Agriculture, Energy-Water (E&W), Military Construction-Veterans Affairs (MilCon-VA), and Transportation-HUD (THUD). Other appropriations areas, including funding for the Treasury Department, are provided until Feb. 2.
Tax Bill Update: Package Deal Remains Contentious. According to sources familiar with negotiations, House Ways and Means Committee Chair Jason Smith (R-MO) and Senate Finance Committee Chair Ron Wyden (D-OR) have reached a framework for a tax package that would restore three expired business tax provisions from the Tax Cuts and Jobs Act (Pub. L. 115-97), along with a partial expansion of the Child Tax Credit and potential incentives for low-income housing.
The procedural path for advancing the package remains uncertain, given the recent deal on FY2024 appropriations and the focus on passing government-funding extensions. The Republican conference has also expressed strong interest in advancing border-security policy during a visit to a border facility in Eagle Pass, Texas, over the last week. Further, the potential tax package, may prove contentious to Republican deficit hawks—although reports suggest the package may be offset by limits on future claims of the Employee Retention Tax Credit and possible other revenue raisers.
The IRS announcement that the 2024 tax-filing season will open on Jan. 29 puts additional pressure on Congress to pass the tax package as soon as possible to avoid complicating the filing season. Enactment of the bill before the start of filing season could help prevent taxpayers from having to delay filing or amend their return should the package’s provisions result in a more favorable child tax credit.
Democratic Lawmakers Urge Treasury and IRS to Expand 30C Tax Credit Eligibility. On Dec. 15, a group of Senate Democrats led by Sen. Alex Padilla (D-CA) sent a letter to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel, urging them to issue final guidance for the Section 30C Alternative Fuel Vehicle Refueling Property Credit that would expand the credit’s eligibility to more recipients. The value of the credit was increased significantly through the Inflation Reduction Act (Pub. L. 117-169), but the law limits the credit to only charging and refueling infrastructure placed in rural or low-income areas.
The letter requests that federal regulators define eligible rural areas in the “most inclusive manner possible,” suggesting that projects placed in service within census tracts comprised of at least 10% of census blocks should qualify for the credit. In addition, the letter requests that the credit be provided on a “per single item basis” that would allow each port at a refueling property to be considered an individual project for purposes of the tax credit. The Senators also ask that the Treasury Department adopt a temporary safe harbor provision for taxpayers that have already installed infrastructure and have “acted in good faith” to comply with the restrictions imposed by Section 30C.
In an accompanying press release, Sen. Padilla claimed that implementing these recommendations would allow 32 million additional taxpayers to be able to claim the credit, including added benefits for rural residents and racial minorities. He also said that these recommendations would aid in the Biden administration’s goal of installing 500,000 chargers by 2030. The letter was co-signed by 12 other Senate Democrats and Independents.
Senate to Consider IRS and Tax Court Nominees in 2024. Several nominations for key positions within the IRS and the U.S. Tax Court are on the Senate’s agenda in 2024. In November, Biden administration nominee for IRS chief counsel, Marjorie Rollinson, was voted out of the Senate Finance Committee but is still awaiting a vote on the Senate floor. Furthermore, the Biden administration has not put forward any nominees to replace vacancies on the U.S. Tax Court, which have doubled to six since 2022.
Ways and Means Republicans Reiterate Support for Small Captive Insurance Companies. On Dec. 6, Rep. Beth Van Duyne (R-TX), leading seven other Republicans on the House Ways and Means Committee, wrote a letter to IRS Commissioner Daniel Werfel urging the agency to reconsider guidance they put forward in April relating to the disclosure of micro-captive transactions. The letter states that the guidance disadvantages small insurance companies because it “dissuade[s] new entrants into the… market and drive[s] out those already involved in the industry by alleging systematic and undefined abuses.” The letter asks the IRS and Treasury Department to support beneficial tax treatment for small captive insurance and to work with Congress and stakeholders in developing updated guidance.
Ways and Means Republicans Request Werfel’s Testimony over 1099-K Reporting Threshold Rules. On Dec. 21, all Republicans on the Ways and Means Committee wrote a letter to IRS Commissioner Daniel Werfel, demanding his testimony regarding the agency’s apparent unilateral reinterpretation of a provision in the American Rescue Plan Act (Pub. L. 117-2) with respect to the lowered 1099-K reporting threshold. They alleged that the agency’s Nov. 21 delay of the updated reporting threshold is a “blatant disregard for the separation of powers and our nation’s constitutional order.” Notwithstanding concerns about the IRS’s delay, the letter states that the agency is not prepared to implement the law, as it could result in over 44 million taxpayers receiving a 1099-K form, per an estimate from the Government Accountability Office. The letter advocates for a return to the previous 1099-K reporting threshold of $20,000, with a 200-transaction minimum.
Sen. Warren Criticizes Intuit for Claiming Research Deduction. On Jan. 3, Sens. Elizabeth Warren (D-MA), Bernie Sanders (I-VT) and Richard Blumenthal (D-CT), along with Rep. Katie Porter (D-CA), wrote a letter to Intuit CEO Sasan Goodarzi, criticizing the company for opposing the Direct File program and allegedly “lying about Direct File’s impact on racial inequality in tax administration.” The letter focuses on Intuit claiming the federal research and development tax credit. Specifically, the lawmakers note that “with the money that the federal government used to subsidize Intuit’s research, the IRS could have offered free, online tax filing to millions of Americans, saving taxpayers the cost and risk of putting their data in the hands of the private tax preparation industry.” The letter asks Intuit to respond to various questions concerning how much they claimed as research expenditures eligible for the tax credits.
Tax Worldview
US-Chile Tax Treaty Enters into Force. On Dec. 19, the United States informed Chile that President Biden had signed the bilateral tax treaty between the two countries, formally entering the agreement into force. The U.S. Senate approved the treay in June, and Chile’s senate approved it in November. The agreement is significant, as Chile is only one of two South American countries with U.S. tax treaties, and it is one of the world’s largest lithium producers. The latter is a critical motivation for the United States, as the cross-border investment into Chilean lithium may aid in the production of clean-energy technologies in the United States.
Treasury Deputy Assistant Secretary Michael Plowgian Announces Departure. On Dec. 15, Treasury Deputy Assistant Secretary for International Affairs Michael Plowgian announced that he would be officially leaving the Treasury Department at the end of 2023. Plowgian has served as the Treasury Department’s top negotiator with the Organisation for Economic Co-operation and Development (OECD) throughout the development of the two-pillar international tax agreement that continues to be subject to negotiation. Scott Levine, a partner at Jones Day and adjunct professor at Georgetown University Law Center, will replace Plowgian.
Energy Boost
Treasury Issues Guidance on Section 45V Clean Hydrogen Credit. On Dec. 22, the Treasury Department and IRS issued a Notice of Proposed Rulemaking concerning the Section 45V Clean Hydrogen Production Credit, established by the Inflation Reduction Act (Pub. L. 117-169). The credit and the proposed regulations are intended to incentivize the production of hydrogen. Prior to the issuance of the guidance, major advocacy campaigns targeted the Treasury Department and the Biden administration as to whether the credit should only apply to hydrogen producers that source hydrogen from renewable sources of energy or whether the credit should be broadly applied to encourage more hydrogen production facilities to be built.
The proposed regulations initially side with proponents of more stringent restrictions on the credit, as they limit eligibility of the credit to those sources of electricity needed to produce the hydrogen that can be counted in the facility’s emissions calculation, which is determined under the Department of Energy’s Argonne National Laboratory’s model for calculating “lifecycle greenhouse gas emissions.” For example, starting in 2028, qualifying plants must match the hydrogen produced from electrolyzers, units that split water into its hydrogen and oxygen component parts, on an hourly basis to electricity from newly built clean-energy sources.
The proposed regulations request public comment on a range of issues relating to the proposed incrementality requirement and temporal and regional limitations with respect to clean electricity, as well as the application of these requirements to existing low-emissions power producers such as nuclear and hydropower. Public comment is also requested on the use of renewable natural gas in the hydrogen-production process and approaches for ensuring that emission-reduction standards are met.
The proposed regulations are open for public comment through Feb. 21, 2024. The IRS has set a hearing on the proposed rules for 10 a.m. on March 25.
Treasury Issues Guidance on Section 45X Advanced Manufacturing Production Credit. On Dec. 14, the Treasury Department and IRS issued a notice of proposed rulemaking concerning the Section 45X Advanced Manufacturing Production Credit, which was established by the Inflation Reduction Act (Pub. L. 117-169). The credit and the proposed regulations are intended to incentivize domestic production of clean energy components and critical minerals and to promote domestic manufacturing and critical-mineral production by U.S. companies.
The notice provides definitions of key terms and confirms credit amounts for various clean-energy, battery and critical-mineral components, while clarifying various circumstances in which the credit may be claimed. In particular, the proposed regulations define the term “produced by the taxpayer” for primary and secondary production. The rulemaking also contains anti-fraud and abuse provisions, including prohibitions against the credit being claimed for projects that do not go into productive use, and to prevent a component from qualifying for the credit more than once.
The guidance received mixed reactions from lawmakers, with most Democrats supporting the increased investment in clean-energy and domestic manufacturing technology, while many Republicans remain wary that the guidance will allow Chinese manufacturers to create projects in the United States and qualify for the credit. Senate Finance Committee Chair Ron Wyden (D-OR) said that the credit “provides the certainty businesses need to fully unleash and revolutionize job creating investments in American manufacturing for solar, wind, batteries, and critical minerals,” leading to environmental and economic benefits. Rep. Carol Miller (R-WV) criticized the guidance, saying that its “weak guardrails … continue to give China an advantage over American manufacturers, effectively killing American jobs and stifling innovation.” In response, she and Sen. Marco Rubio (R-FL) introduced the Protecting American Advanced Manufacturing Act (H.R. 6762), which would prevent companies operated by “foreign entities of concern,” including China, from qualifying for the Section 45X credit.
The proposed regulations are open for public comment through Feb. 13, 2024. The IRS has set a hearing on the proposed rules for 10 a.m. on Feb. 22.
Treasury Issues Guidance on Section 40B SAF Credits. On Dec. 15, the Treasury Department and IRS released Notice 2024-6 concerning the sustainable aviation fuel (SAF) credits under Sections 40B and 6426(k), sections created and modified by the Inflation Reduction Act (Pub. L. 117-169). The credit, with a base value of $1.25 per gallon of sustainable aviation fuel, requires the fuel to have a lifecycle greenhouse gas (GHG) emissions reduction of at least 50% compared to standard fuel. For fuels with a GHG reduction over 50%, the credit increases by an additional cent for each percent that the rate exceeds 50%; thus, the maximum credit allowable is $1.75 per gallon.
The guidance provides safe-harbor rules based on the Renewable Fuel Standard program and states that the safe harbors can be used to calculate the emissions reduction percentage for the purposes of the SAF credit. The notice also says that Greenhouse gases, regulated emissions, and energy use in transportation (GREET)-based models, such as Argonne National Laboratory’s model, do not currently satisfy statutory requirements for the SAF credit. However, the notice provides that the Department of Energy is currently working on modifying the GREET model to comply with the credit’s statutory requirements.
Responding to the release of the notice, Senate Finance Committee Chair Ron Wyden (D-OR) praised the announcement, saying that the credit would “tackle one of the hardest-to-decarbonize sectors and… reward American fuel producers and farmers for taking concrete steps to reduce carbon emissions.”
Treasury Issues Additional Guidance on Commercial Clean Vehicle Credit. On Dec. 20, the Treasury Department and IRS issued Notice 2024-05, relating to the qualification of commercial vehicles placed into service in 2024 under Section 45W of the Commercial Clean Vehicle Credit, established by the Inflation Reduction Act (Pub. L. 117-169).
The guidance provides a safe harbor based on the Department of Energy’s analysis of incremental costs, which finds that the incremental cost of all street electric vehicles that have a gross vehicle weight rating of less than 14,000 pounds will be greater than $7,500 in calendar year 2024. As a result, the IRS will not limit the available credit amount for street electric vehicles that have a gross vehicle weight rating of less than 14,000 pounds. The notice also asks for comments regarding classes or types of vehicles that should be encompassed in the safe harbor rules in the future.
“Foreign Entity of Concern” EV Battery Rules Take Effect. Beginning on Jan. 1, 2024, electric vehicle (EV) manufacturers producing vehicles qualifying for federal tax credits must ensure that their batteries do not contain any components sourced from certain foreign entities designated as “foreign entities of concern,” which proposed rulemaking REG-118492-23 defines as a company with 25% or more ownership by a ”covered nation,” such as China. The rule limits the number of EVs currently on the market that would be eligible for the credit. As of this writing, models qualifying for the credit are limited to 12 models from seven car manufacturers, according to the IRS’ list of qualifying vehicles.
1111 Constitution Ave.
IRS to Provide Tax Relief to Certain Taxpayers Affected by Pandemic Disruptions in Notifications. On Dec. 19, the IRS announced that they would provide tax penalty relief to roughly 4.7 million individuals, businesses and tax-exempt organizations who were not sent automated collection reminder notices during the pandemic, and thus may not have been adequately informed that they have to pay back taxes or other penalties. The amount of penalty relief is estimated to be $1 billion. This announcement comes in the midst of the IRS’s announcement that they would resume tax collection notices for tax years 2020 and 2021, lifting a suspension in November that had been in place since February 2022.
IRS Undergoes Leadership Reorganization. On Dec. 13, the IRS announced that they would be implementing a new leadership structure, in line with the agency’s Strategic Operating Plan. Notably, the IRS will reduce the number of deputy commissioners from two to one, filled by Douglas O’Donnell. In addition, there will be four IRS chief positions, filled by Kenneth Corbin (chief, taxpayer service), Heather Maloy (chief taxpayer compliance officer), Rajiv Uppal (chief information officer) and Melanie Krause (chief operating officer).
At a Glance
IRS Plans to Issue Proposed Regulations on Foreign Trust Transactions in 2024. At a conference on Dec. 14, Senior Counsel in the IRS Office of Associate Chief Counsel Lara Banjanin said that the IRS would seek to issue proposed regulations on transactions between U.S. individuals and foreign trusts in 2024. The regulations would clarify information reporting requirements on foreign trusts and potential exemptions to the requirements.
Treasury, IRS Issue Additional Interim Guidance on CAMT. On Dec. 15, the Treasury Department and IRS issued Notice 2024-10, providing additional interim guidance regarding the application of the new corporate alternative minimum tax (CAMT) under the Inflation Reduction Act (Pub. L. 117-169). The notice outlines rules pertaining to the application of the CAMT to shareholders that receive dividends from a controlled foreign corporation (CFC). The notice also modifies and clarifies the interim guidance provided in Notice 2023-64 regarding the application of the CAMT to an affiliated group of corporations filing a consolidated return. The notice indicates that these rules, along with the prior guidance, will be included in the proposed regulations implementing the CAMT, which are expected early this year.
IRS Announces Final Rules on Safe Harbor Exceptions for Incorrect Returns. On Dec. 18, the IRS released final rules on safe harbor rules designed to protect taxpayers who erroneously filed incorrect information returns or payee statements. The rules state that erroneous returns and statements will be treated as correct for certain penalty purposes if the errors are de minimis in dollar amount. The final regulations also list circumstances in which payees may elect not to have safe harbor rules apply, update definitions and references, and clarify the safe harbor exception with regard to the reporting of basis of securities by brokers.
IRS Releases “Grab Bag” SECURE 2.0 Guidance. On Dec. 20, the IRS released Notice 2024-2, a list of questions and answers pertaining to SECURE 2.0 Act retirement plan guidance. Topics include automatic enrollment for new plans, tax credits for small employer pension plan startup costs and other financial incentives. The notice also includes guidance on when merged 401(k) plans should be treated as exempt from the law’s requirement that workers must automatically be enrolled into the company’s 401(k) plan. The same guidance applies to 403(b) nonprofit plans.
FASB Enhances Guidance on Company Disclosure Requirements. On Dec. 14, the Financial Accounting Standards Board (FASB) issued guidance that details new information that corporations will have to include in financial statements, finalizing the proposal released last year. The accounting guidance details that companies must disclose state and local taxes, foreign tax effects, any effect from recent changes in tax laws, the effects of cross-border tax laws, tax credits, any changes in valuation allowances, nontaxable or nondeductible items and shifts in unrecognized tax benefits.
FinCEN Issues Final Rules on Accessing Other Companies’ Beneficial Ownership Information. On Dec. 21, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a final rule delineating the processes in which law enforcement authorities would be able to access the beneficial ownership information of corporations, that FinCEN will begin collecting on Jan. 1. The rule gives federal, state, local and tribal law-enforcement authorities the right to review the information, subject to an explanation by federal agencies regarding the basis for needing such information. Other requesters would have to obtain court orders or access the information via a government or law enforcement authority. Financial institutions will also be permitted to access the information, but only for customer due diligence purposes.
IRS Unveils ERTC Voluntary Disclosure Program. On Dec. 21, the IRS unveiled a Voluntary Disclosure Program for taxpayers who filed the Employee Retention Tax Credit (ERTC) in error and want to pay it back. As an incentive to pay back erroneously filed ERTC claims, the IRS stated that the disclosure program would only require that taxpayers pay back 80% of the claim they received. Taxpayers must apply to the program by March 22. This action comes in the midst of the IRS’s moratorium on processing outstanding ERTC claims due to concerns of fraud and abuse. The IRS noted in its press release that it will decide whether to extend the moratorium in early 2024.
IRS Opens IRA/CHIPS Pre-Filing Credit Portal. On Dec. 22, the IRS announced that qualifying entities are now able to register on the IRA/CHIPS Pre-filing Registration Tool, in order to take advantage of the elective payment and transferability mechanisms of certain credits in the Inflation Reduction Act (IRA, Pub. L. 117-169) and the Creating Helpful Incentives to Produce Semiconductors Act (CHIPS, Pub. L. 117-167). Taxpayers may use the portal to receive a registration number, which may then be used on the return. Interested entities should pre-register “no earlier than the beginning of the tax year” that they intend to use the credit and should register for the election “as soon as reasonably practicable” during the tax year.
Hearings and Events
House Ways and Means Committee
The House Ways and Means Committee has no tax hearings scheduled for this week.
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.
Other
On Jan. 11, the Senate Energy and Natural Resources Committee will hold a hearing titled ”Examining Federal Electric Vehicle Incentives Including the Federal Government's Role in Fostering Reliable and Resilient Electric Vehicle Supply Chains.”
On Jan. 10 and 11, the D.C. Bar will be hosting the 2024 D.C. Bar Tax Conference, which will cover a range of tax-policy topics.