Welcome to 2020! Although we have enjoyed the time off, we have been itching to get back into the swing of things. Since you have not seen Taxation & Representation in your inbox since the previous decade, we thought it was about time we celebrated the New Year and decade with a special edition. Below, you will find a summary of the biggest tax developments in 2019 and a preview of what may be in store for 2020, for Congress, the IRS and Treasury Department, and the presidential candidates.
2019 in Review—Congress
Under a divided government, enacting legislation is always an uphill battle. However, despite political differences and the ongoing impeachment investigation, Congress made significant progress on its policy agenda.
On the tax front, 2019 was not a banner year—however, lawmakers were able to get two tax bills over the finish line: the Taxpayer First Act (P.L.116-25) and a year-end tax package (P.L.116-97) that included tax extenders and retirement security legislation. A recap of both is included below.
Taxpayer First Act
Broadly, the Taxpayer First Act will redesign and modernize the Internal Revenue Service (IRS). Included in the legislation were requirements for the IRS to:
- Improve its appeals process.
- Make enforcement and investigation processes more transparent and accessible to taxpayers.
- Update and add additional services for taxpayers.
- Modernize technology and allow for the e-filing of several forms.
- Give the National Taxpayer Advocate more power to impact the IRS’s agenda and effect change.
For a summary of the Taxpayer First Act from the Brownstein Tax Team, click here.
Despite widespread bipartisan support, the road to enactment was not without controversy. After the Taxpayer First Act first passed the House in April, the Free File Program was embroiled in scandal. Reports surfaced that Free File participants were manipulating their search algorithms to hide the program from qualifying taxpayers, instead directing them to paid versions of the software. Since the Taxpayer First Act originally contained a provision that would permanently codify the Free File Program into law, this gave some senators pause. Ultimately, a new version of the bill was introduced without the Free File provision.
After the change was made, the House again voted to approve the new version 417-3 in June. The Senate subsequently approved the bill three days later before President Trump signed the bill into law in July.
The Free File Program’s Memorandum of Understanding (MOU) with the IRS was recently amended to make the program more accessible and to remove a clause that prohibited the IRS from developing its own tax preparation software. In response, Senate Finance Committee Ranking Member Ron Wyden (D-OR) urged the IRS to establish an agency-operated free online filing system for taxpayers.
Year-End Tax Package
In the final legislative week before the holiday district work period, lawmakers were able to reach agreement on a number of outstanding tax priorities through a year-end appropriations package—the Further Consolidated Appropriations Act (P.L.116-94). Below is a high-level overview of the provisions within the law.
- Extenders. The package extended a number of temporary tax benefits related to green energy and employment.
- Retirement. The package contains the SECURE Act, which includes provisions designed to encourage taxpayers to better prepare for retirement. Click here for a full summary of the law.
- Health Care. The bill repealed the Medical Device Tax, the Health Insurance Tax and the Cadillac Tax—all of which were enacted under the Affordable Care Act.
- Changes to the TCJA. The package corrects three drafting errors in the Tax Cuts and Jobs Act (P.L.115-97) through the Rural Coop, the Church Parking Tax and the Kiddie Tax fixes.
- Disaster Relief. The package includes special disaster-related rules for victims of Hurricanes Michael, Florence and Maria.
Not included in the bill, however, were the larger package of technical corrections, including the Qualified Improvement Property provision and the expansion of a number of refundable tax credits, such as the Earned Income Tax Credit and the Child Tax Credit.
For a full analysis of the year-end tax package, click here.
House Legislation Awaiting Senate Action
While only two tax bills became law last year, lawmakers—primarily in the House—were busy advancing tax legislation. Here is a brief look at some of the measures that have not yet become law, but that have passed the House.
- The Restoring Tax Fairness for States and Localities Act (H.R.5377), which would raise the $10,000 state and local tax (SALT) deduction cap to $20,000 for married couples in 2019 and fully repeal the provision for 2020 and 2021. In 2022, the cap would return to $10,000. As a revenue offset, the bill would lower the income threshold for the top marginal tax bracket and also permanently increase the rate on those falling within that bracket from 37% to 39.6%. The bill passed the House on Dec. 19.
- The Rehabilitation for Multiemployer Pensions (MEP) Act (H.R.397), which would, among other things, create a Pension Rehabilitation Trust Fund and establish a Pension Rehabilitation Administration within the Department of the Treasury to make loans to multiemployer defined benefit plans. The bill passed the House on July 27.
- The Promoting Respect for Individuals’ Dignity and Equality Act (PRIDE) Act (H.R.3299), which would permit legally married same-sex couples to amend their filing status for income tax returns outside the statute of limitations and clarify that all provisions shall apply to legally married same-sex couples in the same manner as other married couples. The bill passed the House on July 24.
These bills are unlikely to see movement in the Republican-controlled Senate before the end of this year.
New Year, New Tax Priorities: 2020—Congressional Look Ahead
New Year, new priorities for the House and Senate tax writing committees. Generally presidential election years are viewed as “off years” for passing major legislation. On the tax front, there seems to be little appetite to pass major legislation.
House Ways and Means Committee
Below is a list of items that the House Ways and Means Committee may work on in 2020.
- Green Energy. Topping the list for House Ways and Means Committee Democrats is further work on the Growing Renewable Energy and Efficiency Now (GREEN) Act discussion draft. While the year-end tax package included some of the green energy extenders championed by Democrats, several notable provisions originally included in the GREEN Act were excluded, such as tax incentives related to electric vehicles (EV), which would have provided credits to owners and manufacturers of EVs. Additionally, not included were extensions of offshore wind facility credits, the solar tax credit and a requirement that the Department of the Treasury create a greenhouse gas reporting program.
On Dec. 10, committee Democrats announced they plan to markup a green energy tax break bill before April. In addition to EV, solar, wind and geothermal provisions, the bill is likely to include a workforce title. The bill may pass the House, but it is not expected to go very far in the Republican-controlled Senate. Of note, Senate Democrats have their own green energy tax legislation.
- Infrastructure Tax Package. During a Jan. 8 priority-setting meeting, committee Democrats also identified an infrastructure package as a top focus for 2020. Although the House Transportation and Infrastructure Committee has jurisdiction over infrastructure, there are several issues that are entirely within the jurisdiction of the Ways and Means Committee. Lawmakers are expected to consider tax credits and bonds, as well as other proposals.
House Ways and Means Committee Chair Richard Neal (D-MA) has taken a collaborative approach to infrastructure in the past and has engaged actively with Treasury Secretary Mnuchin on the details.
- Refundable Tax Credits. A priority of both Speaker Nancy Pelosi (D-CA) and Neal, refundable tax credits will again be a top priority for the Democratic leaders. The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) will be of particular interest, as indicated by the Democrats’ push to expand these benefits during year-end negotiations.
Ways and Means Democrats, who met on Jan. 8, decided that 2020 will look more or less like 2019. In pushing for an extension of the refundable tax credits, Democrats plan to employ the same negotiation tactic as last year—namely, trade a fix to the Qualified Improvement Property (QIP) provision for the expansion to refundable credits. Neal is pushing for a floor vote this year, but the chances of this passing the Senate are low. In fact, Senate Finance Committee Chair Chuck Grassley (R-IA) has already explicitly told reporters that he does not think the exchange is feasible.
In June, the Ways and Means Committee passed the Economic Mobility Act (H.R.3300), which would expand the EITC, CTC and the Child and Dependent Care Tax Credit (CDCTC). Click here for our complete overview of the bill.
- Technical Corrections. Since Republicans passed the Tax Cuts and Jobs Act (TCJA, P.L.115-97) in December 2017, they have sought to fix a number of technical mistakes included in the bill. The technical correction with the broadest support among both parties is the QIP fix, which would allow businesses to immediately write off interior improvements. Democrats, none of whom voted for the bill in 2017, have thus far been reluctant to support the Republicans’ call for technical corrections.
- Tax Cuts. 2.0. Advancing legislative goals in the House minority is generally a dead-end. Regardless, House Ways and Means Republicans will likely pursue Tax Cuts 2.0 at the behest of the administration. In September, Treasury Secretary Steven Mnuchin confirmed that the Trump administration would be seeking another round of tax cuts, dubbed Tax Cuts 2.0, in 2020. In addition to providing additional tax relief for the middle class and small- and medium-sized businesses, Mnuchin explained that the effort would include technical corrections to the TCJA. Committee Ranking Member Kevin Brady (R-TX), is expected to release information on the plan early this year.
Senate Finance Committee
The new year brings a new face to the Senate Finance Committee. Sen. Ben Sasse (R-NE) will be replacing outgoing Sen. Johnny Isakson (R-GA), who retired due to health concerns. Below are a few items that may be on the docket.
- USMCA. Following the House’s passage of the United States-Mexico-Canada Agreement (USMCA) in late December, the Senate Finance Committee approved the agreement on Jan. 7. In addition to the Finance Committee; the Senate Environment and Public Works; Commerce; Budget; Appropriations; Foreign Relations and Health, Education, Labor and Pensions (HELP) Committees have jurisdiction over the agreement. Five committees plan to markup the bill this week. However, due to the impending impeachment trial, the timeline for a vote on USMCA is subject to change.
- Technical Corrections. Prior to the holiday district work period, Sen. Pat Toomey (R-PA) requested unanimous consent to pass the Restoring Investment in Improvements Act (S.803), which would amend the QIP technical error passed under the TCJA. Due to objections, Toomey did not succeed. This could indicate potential movement on QIP in 2020. However, it is unclear whether either party is willing to make the necessary concessions to get technical connections past the finish line in both houses.
- Tax Treaties. Outside the Senate Finance Committee, the Senate Foreign Relations Committee could consider bilateral tax treaty agreements with Hungary, Poland and Chile. These three treaties were not considered with four others—Spain, Luxembourg, Switzerland and Japan—that were approved in 2019 due to concerns raised by the Department of the Treasury regarding the interaction between these treaties and the base erosion and anti-abuse tax provision enacted under the Tax Cuts and Jobs Act (P.L.115-97). Senate Foreign Relations Committee Chair Jim Risch (R-ID) has said committee staff continues to negotiate with the Treasury Department, indicating these treaties may be a priority for the new year. In fact, before the holiday break, Risch said the committee is “trying to move these as quickly as we can,” adding that he would “be back at it right after the first of the year, even though we’ve got impeachment.”
- Wealth Tax. On both the campaign trail and in Congress, Democrats continue to focus on the unequal distribution of wealth. One notable proposal is Senate Finance Committee Ranking Member Ron Wyden’s (D-OR) mark-to-market regime, the framework of which he unveiled last year. While the Republican-controlled Senate Finance Committee will not take up the proposal, if Democrats regain control of the Senate or the White House following the 2020 elections, Wyden’s proposal could lay the groundwork for a legislative play next session.
- Refundable Tax Credits. Like their House counterparts, Senate Democrats have indicated that expanding refundable tax credits are a top priority. Wyden said in December that “we’re going to do everything we can in these negotiations going on to begin to get some equity in the scale between folks at the top and folks of modest means.” Democrats would like to see a deal on technical corrections in exchange for refundables. So far, this has been a non-starter with Senate Republicans, including Grassley.
- Free File Program. Following allegations that companies participating in the Free File Program were intentionally hiding the free service from qualifying taxpayers, on Dec. 30, the Internal Revenue Service (IRS) released an addendum to the memorandum of understanding between the agency and Free File, Inc. The addendum made several changes to the original MOU, including allowing the IRS to participate in developing its own tax preparation software. Responding to the addendum, Wyden praised the decision to remove the IRS prohibition from entering the tax return software marketplace. In a statement, Wyden said the “new agreement also takes a step toward a free public program, which I have long pushed. It’s now crystal clear that the IRS has the authority to develop a direct file program. The next step is providing the resources to get it done.” Wyden will likely lead the Democratic push to provide additional funding for the agency to start its own tax preparation software.
International Tax Developments
The Internal Revenue Service (IRS) and the Department of the Treasury are engaged with the Organization for Economic Cooperation and Development (OECD) and the broader international community as countries continue to pursue an update their digital tax policies. Many European countries argue that the current international tax regime was designed for the 20th century, which has resulted in large multinational entities, especially those with a dominant online presence, to employing creative tax planning strategies and parking their intellectual property in low-tax jurisdictions.
The OECD Base Erosion and Profit Shifting project, a collaboration of over 135 countries, is currently the largest international effort to pursue a unified approach to tax rules for the digital age. In October, the OECD released a draft proposal under Pillar One—the “Unified Approach”—detailing how countries should approach the taxation of multinational companies in an increasingly digitalized global economy. The proposed principles would require companies to pay taxes based on the location where customers utilize services or purchase products, rather than where profits or headquarters are located. Subsequently, in November, the organization released Pillar Two—the “Global Anti-Base Erosion” or “GloBE” proposal—which attempted to establish an international tax regime to address the profit shifting of multinational corporations seeking to minimize their tax burden.
Ideally, the OECD would like to issue a proposal at the G20 in mid-2020. However, in the absence of collective action from the international community, countries around the world have been proposing their own unilateral taxes—many of which have targeted large technology companies based primarily in the U.S. Most notably, France has implemented a digital services tax (DST), which imposes a 3% levy on companies generating €750 million ($845) million globally and €25 million ($28 million) in France. The U.S. has responded by threatening to impose a 100% tariff on French goods and services. In addition to France, other U.S. allies—such as Canada and Great Britain—have floated similar ideas and will be pursuing legislation in 2020.
Treasury Secretary Steven Mnuchin, who has suggested the inclusion of a safe-harbor regime, said in December he plans on meeting with French Finance Minister Bruno Le Maire and the OECD to discuss next steps. Negotiations will continue during the first half of the new year, and the OECD—in its effort to build a unified approach—will need the support of the U.S. if it is to be successful.
Regulatory Outlook and Review: What to Look for in 2020
The Internal Revenue Service (IRS) is in for yet another busy year with two new directives from Congress—the Taxpayer First Act (P.L.116-25) and the Setting Every Community Up for Retirement Enhancement (SECURE) Act (P.L.116-94)—and outstanding issues related to the Tax Cuts and Jobs Act (TCJA, P.L.115-97).
Alongside Treasury Secretary Steven Mnuchin and IRS Commissioner Charles Rettig, leading the regulatory effort will be Paul Ray, the Trump administration’s newly confirmed Administrator at the Office of Information and Regulatory Affairs (OIRA). Ray, who was nominated by President Trump to replace Naomi Rao, was confirmed by the Senate on Jan. 9, 2020 along a 50-44 party-line vote. OIRA, which sits within the Office of Management and Budget, is responsible for reviewing regulatory actions before they are finalized. Consequently, Ray will play a significant role in 2020 as the Trump administration continues its deregulatory effort and pumps out guidance related to the TCJA, the Taxpayer First Act and the SECURE Act.
Tax Cuts and Jobs Act
The IRS and Treasury Department’s 2020 goal is to complete all guidance related to the implementation of the Tax Cuts and Jobs Act. To meet this objective, about 100 guidance items would need to be issued by the end of the year.
According to the IRS’s October Priority Guidance Plan—which outlined forthcoming regulatory guidance the agency intends to prioritize until June 30, 2020—the IRS is in position to release final regulations on a handful of TCJA provisions, but is still at the proposed regulations stage for a much greater proportion of the law.
Below is an overview of the IRS’s and Treasury’s 2020 regulatory agenda:
In 2019, Treasury and IRS issued several regulations related to the TCJA’s international provisions, including:
- final regulations on the transition tax imposed on accumulated offshore earnings and profits;
- proposed regulations on Foreign-Derived Intangible Income (FDII);
- final guidance on Global Intangible Low-Tax Income (GILTI); and
- final regulations on the Base Erosion and Anti-abuse Tax (BEAT) and Foreign Tax Credits (FTC)
A number of international provisions are set to be finalized this year, including final regulations on the following:
- Sec. 951A GILTI high-tax exclusion;
- BEAT and FTC;
- Sec. 250 FDII rules, particularly in relation to documentation requirements;
- Sec. 245A on the participation exemption system for foreign source income; and
- Passive Foreign Investment Companies (PFIC) that would allow foreign insurance companies to avoid being classified as PFICs.
- The IRS most recently issued proposed regulations related to GILTI in September 2019, FDII in March 2019 and BEAT in December 2018.
- In September 2019, the IRS released both final and proposed regulations related to 100% bonus depreciation under §168(k). The regulations not yet finalized contained guidance on property that is ineligible for the deduction and a method of determining whether or not the property was previously used, among other issues.
Also expected is more guidance on the following:
- Sec. 163(j) related to corporate write-offs of debt interest payments;
- Sec. 172 Net Operating Loss (NOL) deduction;
- Sec. 1061 relating to carried interest, specifically closing a workaround that would allow hedge fund managers to avoid paying higher taxes on their investments;
- Sec. 4960 on the excise tax on executive compensation for nonprofits (the so-called “coach tax”); and
- Sec. 512(a)(6) on the calculation of unrelated business income for nonprofits separately for each trades or businesses (siloing rules).
In every election year, the talking points from the campaign trail inform the policy landscape. With the Iowa caucuses less than a month away, the 2020 election will quickly influence the congressional agenda. Both parties will continue to release draft legislation to highlight their values and preview their priorities for 2021.
On the tax front, Democratic proposals have focused on wealth taxes and rollbacks of the Tax Cuts and Jobs Act (TCJA, P.L.115-97) to pay for various social programs, including universal healthcare, free college education, student loan debt forgiveness and subsidized childcare.
Topping the list of Democratic tax proposals are different forms of a wealth taxes. While some candidates, like Former Vice President Joe Biden and South Bend Mayor Pete Buttigieg push higher income taxes, others like Sens. Elizabeth Warren (D-MA) and Bernie Sanders (I-VT) are in favor of annual taxes on wealth. Democratic candidates, particularly those that make it to Super Tuesday, will start to flesh out their plans.
On the Republican side, the administration will likely release plans for Tax Cuts 2.0—an expansion of the individual tax cuts that were in the TCJA. This will set up a fight on whether or not to roll back the rate cut on high-income earners implemented by the TCJA, which is set to expire at the end of 2025.
The corporate tax front has gotten less attention from the 2020 Democratic candidates. Some, like Buttigieg, seem to be in favor of reversing the TCJA’s reduction in the corporate income tax rate. Others, like Biden and Warren, have taken a more nuanced approach. Biden has supported raising the corporate tax rate, but keeping the rate lower than pre-TCJA. Warren supports the imposition of a 7% tax on corporate profits above $100 million, as well as a 35% tax on corporations’ foreign earnings, from each country where the earnings are attributable.
For more information on the 2020 Democratic candidates’ tax platforms, click here.