This week (August 29 - September 2)

Congress out: The House and Senate are out of session until September 6.

Last week (August 22-26)

Clinton small business tax proposal: On August 23, Democratic presidential nominee Hillary Clinton unveiled a package of tax and non-tax small business proposals that calls for: allowing small businesses to immediately expense up to $1 million in new investments; expanding and making permanent the New Markets Tax Credit; and a new standard deduction for small businesses. "Hillary will ask her Treasury Department to bring together small business owners and leading experts to design this new standard deduction, including its limits and parameters, which existing expenses could voluntarily be replaced, and measures to prevent gaming and abuse — all to advance the goal of making it far easier for small businesses to file their taxes," a campaign document stated. She also proposed allowing small businesses with gross receipts under $1 million to take advantage of "checkbook accounting," and simplifying accounting and tax filing for small businesses with $25 million or less in gross receipts by allowing them to choose the "cash accounting" method.

Republican letters on Section 385 regulations: On August 22, House Ways and Means Committee Republicans sent a second letter to Treasury Secretary Jack Lew regarding proposed Section 385 regulations, saying it is not clear that Treasury has identified solutions to problems with the regulations, and that other areas of concern have not been adequately addressed. The members previously sent Lew a letter on June 28, then discussed their concerns with Treasury's policy team during a Joint Committee on Taxation (JCT) briefing on July 6. The new letter stated it is not clear that specific solutions have been identified to "appropriately and fully resolve" issues that Treasury committed to addressing, including:

— providing an exclusion for cash pooling arrangements;
— providing exceptions for broader cash management practices including currency and interest-rate hedging;
— eliminating any adverse impact on S corporation and REIT status;
— providing exceptions for equity compensation;
— extending the consolidated group exception to industries such as insurance for which consolidation is restricted; and
— providing exceptions for regulated industries that are subject to capital and debt requirements.

The letter said areas of concern that Treasury did not adequately address during the discussion include:

— the treatment of longer-term cash and financial management arrangements and transactions;
— the implications for foreign-to-foreign transactions;
— the effect on transactions involving partnerships and disregarded entities; and
— the compliance burden of the documentation requirements.

Also on August 22, Senate Finance Committee Chairman Orrin Hatch (R-UT) called on Treasury Secretary Lew to re-issue the proposed regulations in proposed form. "I ask you to re-propose the regulations not because I wish for there to not be any section 385 regulations," Hatch wrote. "Rather, I am seeking to ensure that, should the Treasury Department issue regulations under IRC section 385, the Department does so in a thoughtful, prudent, and legal manner." Hatch said he is concerned that Treasury is moving at an unprecedented pace, is attempting to regulate a complex area on a short timeline, and is acting contrary to statutory and Executive Order requirements.

Separately, on August 24 seven Finance Committee Republicans — Dean Heller (R-NV), Mike Crapo (R-ID), Pat Roberts (R-KS), John Cornyn (R-TX), John Thune (R-SD), Johnny Isakson (R-GA), and Tim Scott (R-SC) — wrote a follow-up to their July 1 letter expressing concern over whether Treasury will be able to respond to concerns about unintended consequences in the final regulations. The letter asked for an explanation, before the rules are finalized, of how certain reforms will be addressed, including:

— ensuring that S corporations do not lose their S corporation tax status by virtue of having their debt re-characterized as equity and are not penalized for their domestic-to-domestic transactions;
— ensuring that non-tax motivated cash management techniques, such as cash pooling or revolving credit arrangements, are exempted; and
— exempting foreign-to-foreign transactions from the scope of the proposed regulations.

Treasury State aid white paper: On August 24, the Treasury Department released a white paper outlining the Department's concerns with the European Commission's State aid investigations of whether certain transfer pricing rulings given by Member States to particular taxpayers may have violated the EU's restriction on State aid. It also provides additional detail to support a February 11 letter from Secretary Lew to the Commission. A blog post by Deputy Assistant Secretary for International Tax Affairs Robert Stack said the implications of the investigations for the United States include that the settlement payments ultimately could be determined to give rise to creditable foreign taxes, meaning US taxpayers could wind up eventually footing the bill for State aid recoveries in the form of foreign tax credits that would offset the US tax bills of the companies. Stack said the white paper: highlights that the Commission's approach is new and was unforeseeable by the relevant companies and EU Member States; emphasizes that the Commission should not seek to impose recoveries under this new approach in a retroactive manner because it sets a bad precedent for tax policymakers around the world; explains that the Commission's approach undermines U.S. tax treaties and international transfer pricing guidelines already accepted broadly in the global tax community, and undermines the work done as part of the BEPS project. The white paper said Treasury continues to consider potential responses should the Commission continue its present course. "A strongly preferred and mutually beneficial outcome would be a return to the system and practice of international tax cooperation that has long fostered cross-border investment between the United States and EU Member States," it said.

CBO update: In "An Update to the Budget and Economic Outlook: 2016 to 2026" released August 23, the Congressional Budget Office (CBO) estimated that the FY 2016 deficit will total $590 billion, $152 billion higher than the FY 2015 deficit and $56 billion higher than CBO's previous estimate in March because revenues are now expected to be lower than earlier anticipated. In particular, income tax payments by corporations, net of refunds, are expected to decrease by $44 billion (or 13%) in 2016, which CBO said could be due in part to the retroactive extension of bonus depreciation in late 2015 and resulting smaller payments of estimated taxes in 2016. Still, the drop in 2016 is greater than can be explained by current data on business activity and specific reasons will become clearer as detailed information from corporate income tax returns about taxable profits becomes available, CBO said. This will be the first increase in the year-to-year annual budget deficit since 2009, and it is projected to push federal debt held by the public to almost 77% of GDP at the end of 2016 — about 3 percentage points higher than last year's amount and the highest ratio since 1950, CBO said. As CBO projected in July, federal debt held by the public is projected to rise to nearly 86% of GDP in 2026. CBO said the cumulative deficit for the 10-year period through 2026 ($8.57 trillion) is smaller than projected in March ($9.28 trillion), primarily because of lower projected interest rates and therefore lower outlays for interest payments on federal debt. "Nevertheless, by 2026, the deficit is projected to be considerably larger relative to gross domestic product (GDP) than its average over the past 50 years," the report said, adding that the budget deficit is generally on an upward trend over the next decade, reaching 4.6% of GDP in 2026.

Quote of the Week

"After nearly a decade of Obama-Clinton economics, the country needs a debate about how to revive growth and raise incomes. The corporate-tax proposals show that whatever Mr. Trump's risks as President, the main risk from Mrs. Clinton is four more years of the same dismal economic performance." — Wall Street Journal editorial, August 22

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