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This week (October 5-9)

Congress: The Senate is scheduled to be in session to consider nominations. The House will be out, but members will be on notice for any coronavirus deal. An October 2 leadership announcement said, "Members are advised that no additional votes are expected in the House this week. Members are further advised that as conversations surrounding additional coronavirus relief legislation continue, it is possible that the House will meet during the month of October."

BEPS 2.0: Regarding the BEPS 2.0 two-part proposal (on new profit allocation and nexus rules and a global minimum tax), revised drafts are expected to be presented during an Inclusive Framework meeting October 8-9, before being considered by G-20 finance ministers during their October 14 meeting. Negotiations on a part of a proposed global tax overhaul are taking longer than expected, so it's unlikely countries will find consensus by the end of 2020 as originally planned, Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, said October 1 during a virtual event organized by the Indonesian government and the OECD, Tax Notes reported.

Last week (September 28-October 2)

Coronavirus relief: The news of President Trump testing positive for COVID-19 has created even more uncertainty around activities in Washington and the election. The Senate is currently scheduled to remain in session next week, and while most House members are leaving Washington, they are on notice that they may be brought back to vote on any potential COVID-related relief deal that materializes. Negotiations between House Speaker Nancy Pelosi (D-CA) and Treasury Secretary Steven Mnuchin on a bipartisan coronavirus agreement were kickstarted this week after more than seven weeks of gridlock. "I'm optimistic, I'm always optimistic," Speaker Pelosi said on MSNBC October 2. "We always have to find a path, that is our responsibility to do so, and I believe that we will." The Administration has thus far committed to $1.62 trillion in relief, including $250 billion for state and local governments — the latest House Democratic bill includes $436 billion — and a $400 unemployment benefit add-on retroactive to September 12 and lasting through the end of the year. Tax provisions have emerged as a sticking point in recent days. At several points October 1, Speaker Pelosi criticized the unwillingness of the Administration to agree to expansions of the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) and juxtaposed that relief with the CARES Act net operating loss (NOL) and excess business loss provisions, which Democrats propose to roll back. The Speaker said she was waiting to see whether the Administration would "come back with a proposal" for CTC and EITC expansions — HEROES Act changes include making the CTC fully refundable for 2020 and expanding the eligibility and amount of the EITC for those with no qualifying children — and suggested on Bloomberg TV that "the debate on the other tax" — presumably referring to the NOL and excess business loss relief — "is our leverage … " The so-called "refundables" CTC and EITC provisions were sought by Democrats in 2019 but could not be agreed to in a year-end bill that addressed the tax extenders and repeal of Affordable Care Act (ACA) taxes. Wide-scale airline furloughs announced this week were blamed on a lack of federal relief, and Speaker Pelosi said October 2 that relief for the airlines will be provided one way or another. She called for airlines to delay the moves, saying Congress will enact "stand-alone legislation or achieve this as part of a comprehensive negotiated relief bill, extending for another six months the Payroll Support Program." A big question is how the Republican-controlled Senate would react to a potential negotiated deal, given that some Republican Senators have been resistant to an additional large relief bill. Majority Leader Mitch McConnell (R-KY) this week continued to dismiss the $2 trillion-plus House approach, but some GOP Senators in competitive races like Thom Tillis (R-NC) and Susan Collins (R-ME) called for Congress to stay in session until additional relief is enacted.

Updated HEROES Act: In a bid to formalize the Democratic position and appease House members who wanted to go on record in support of additional relief before the election, the House October 1 approved by a largely party-line 214-207 vote (18 Democrats voted 'no,' no Republicans voted in favor) an updated version of the HEROES Act coronavirus relief bill, trimmed to a net cost of $2.2 trillion. Some Democrats weren't happy that the vote was held instead of focusing on a deal. Tax provisions in the updated HEROES Act include:

• making the CTC fully refundable for 2020;
• expanding the eligibility and the amount of the EITC for taxpayers with no qualifying children;
• making the child and dependent care tax credit ("CDCTC") fully refundable for 2020 and increasing the maximum credit rate to 50%;
• reversal of the CARES Act excess business loss relief;
• limiting net operating loss (NOL) carrybacks permitted by the CARES Act so that losses arising in 2018, 2019 and 2020 cannot be carried back prior to 2018 plus disallowance for companies that do not meet requirements for executive compensation, dividends, and stock buybacks;
• an increase in wages reimbursed through the Employee Retention Tax Credit from 50% to 80%, and in the limit on wages taken into account per employee from $10,000 for the year to $15,000 per quarter (limited to $45,000 for the calendar year);
• $1,200 ($2,400 for joint filers) Economic Impact Payments; and
• elimination of the limitation on the deduction for state and local taxes for the 2020 taxable year.

Presidential Debate: During the first presidential debate in Cleveland September 29, Democratic presidential nominee Joe Biden promised to eliminate the "Trump tax cuts," or at least a significant number of them, and to raise the corporate tax rate to 28%. "It shouldn't be 21%," he said. Biden said "manufacturing went in the hole" under President Trump, even before the pandemic, while the President countered that it was Democrats who gave up on manufacturing. On the economic stakes of the election generally, President Trump said, "When the stock market goes up, that means jobs. It also means 401(k)s." He told Biden, "If you got in, if you ever became president with your ideas, you want to terminate my taxes, I'll tell you what, you'll lose — half of the companies that are poured in here will leave, and plenty of the companies that are already here, they'll leave for other places." On climate change, Biden said his plan for energy efficiency would create jobs: "We're going to build an economy that, in fact, is going to provide for the ability … to take 4 million buildings and make sure that they, in fact, are weatherized … We can get to net zero in terms of energy production by 2035. Not only not costing people jobs, creating jobs, creating millions of good paying jobs." President Trump countered that, "You're talking about the Green New Deal," and said Democrats "want to rip down buildings and rebuild the buildings" under a plan that, with such an exorbitant cost, it "will destroy our country."

Trump tax agenda: The Wall Street Journal September 29 published an article on the potential tax agenda under a second Trump term, saying the manner in which Congress passed the Tax Cuts & Jobs Act (TCJA), with the scheduled expiration of individual provisions and phase outs and other changes on the corporate side, "forces lawmakers to revisit it, and those deadlines will shape the years ahead." The report cited EY's Ray Beeman as saying lawmakers "kind of have a built-in tax policy agenda … with all the provisions that are sunsetting and sunrising." House Ways & Means Committee Ranking Member Kevin Brady (R-TX) is cited as saying permanence in the tax code is "more important than ever" given the uncertainty of the pandemic.

Real estate tax: A New York Times editorial criticized the tax system's benefits to commercial real estate investors — including depreciation, and using past losses to offset income, to defer income and to avoid reporting some kinds of income — and called for increased IRS enforcement funding. The comment was rooted in a report by the paper on President Trump's taxes, which prompted statements from House Ways and Means Committee Chairman Richard Neal (D-MA) and Senate Finance Committee Ranking Member Ron Wyden (D-OR). House Ways and Means Committee Ranking Member Brady and the top Republican on the Oversight Subcommittee Mike Kelly (R-PA) sent letters to the IRS and DOJ asking them to launch investigations into the unauthorized disclosure of the President's private tax information.

Election notes: Speaker Pelosi wrote to Democratic members September 27 stressing the importance of winning state delegations in the event that neither President Trump nor Joe Biden get 270 electoral votes and a decision on the ultimate winner of the Presidential election must be decided by the House, Politico reported. "The Constitution says that a candidate must receive a majority of the state delegations to win," Speaker Pelosi wrote, according to the report. "We must achieve that majority of delegations or keep the Republicans from doing so." The determination if one of the tickets has received a majority of 270 or more electoral votes is slated to occur January 6, 2021, after a new Congress is sworn in. As the Congressional Research Service has observed, "The House votes by state: each state delegation votes internally to decide for whom the state's vote shall be cast." An October 1 Washington Post analysis said: "Republicans have the delegation majority in 26 states, Democrats have 22 states, while Pennsylvania and Michigan are essentially tied. But, as Pelosi (D-Calif.) noted in a memo to her caucus Sunday, the new Congress sworn in the first week of January would cast those votes early next year ahead of the scheduled Jan. 20 inauguration."

FTC regulations: On September 29, the Treasury Department released final regulations (T.D. 9922) and proposed regulations (REG-101657-20) on a variety of implementation issues relating to the foreign tax credit, and allocating and apportioning deductions. The Final Regulations generally follow proposed regulations published on December 2, 2019, but make certain changes. Highlights of the Final Regulations include provisions that:

• Allocate and apportion foreign income taxes to gross income under Treas. Reg. Section 1.861-20, including for purposes of categorizing taxes to separate IRC Section 904(d) categories, by:
• Allocating taxes on foreign income items with no corresponding US income item
• Identifying an exclusive list of "base differences" (for which a foreign tax credit under IRC Section 960 is effectively denied) that no longer includes foreign law distributions treated as a return of basis for US federal income tax purposes
• Describing the treatment of (regarded) distributions
• Retain mandatory sales-based apportionment of R&E expense to all gross intangible income related to the relevant product SIC code, specifically excluding GILTI, subpart F inclusions and dividends
• Provide that exclusive apportionment of R&E expense does not apply for purposes of computing foreign-derived intangible income (FDII)
• Clarify that stewardship expenses are allocated to domestic and foreign dividends, GILTI, and subpart F inclusions, and apportioned based on the value of the domestic and foreign stock
• Add an election under IRC Section 905(c) to account for certain foreign tax redeterminations of a CFC for pre-2018 tax years as if they occurred in the CFC's last tax year beginning before January 1, 2018
• Reduce hybrid deduction accounts under IRC Section 245A(e) by reason of certain subpart F income and GILTI, and provide guidance on the treatment of certain stock as a financing transaction under the conduit financing rules of Treas. Reg. Section 1.881-3

Notable provisions of the Proposed Regulations would:

• Fundamentally overhaul the creditability requirements of a foreign income tax under IRC Sections 901 and 903 by requiring jurisdictional nexus for the tax to be creditable (without considering the location of customers or users as a significant factor)
• Introduce new rules under Treas. Reg. Section 1.861-20 for allocating and apportioning foreign income taxes imposed on (i) dispositions of stock and partnership interests, and (ii) disregarded payments made between "taxable units" that generally would categorize foreign taxes based on the income of the payor making the disregarded payment
• Disallow foreign tax credits and deny deductions under IRC Section 245A(d) for foreign income taxes attributable to any dividend for which a deduction under IRC Section 245A would be allowed
• Add an election to capitalize and amortize R&E and advertising expenditures for purposes of apportioning interest expense under Treas. Reg. Section 1.861-9
• Treat, for purposes of computing the IRC Section 250 FDII deduction, services as electronically supplied services if the value of the service to the end user is derived primarily from the service's automation or electronic delivery, as opposed to human effort (e.g., legal, accounting, medical, or teaching services)
• Repropose rules relating to financials services groups, entities and income
• Provide specials rules for financial services branches

EY Tax Alert 2020-9050 provides details.

Sourcing rules: On September 29, the Treasury Department released final regulations (TD 9921) for determining the source of income from sales of inventory produced within the United States and sold outside the United States or vice versa. The Final Regulations also include rules for determining whether foreign-source income is effectively connected with the conduct of a US trade or business. Additional rules address the sourcing of a nonresident's income from certain sales of personal property that are attributable to an office maintained in the United States. The Final Regulations generally follow the proposed regulations issued on December 30, 2019 (REG-100956-19), with certain changes. In particular, the Final Regulations:

• Require taxpayers electing to use the books-and-records method for apportioning gross income between sales and production activities under Treas. Reg. Section 1.865-3(d) to use that method for 48 months unless the IRS consents to the election's revocation
• Clarify that the adjusted basis of production assets (used to source income when production occurs both within and outside the United States) is determined by averaging the assets' bases at the beginning and end of the year, unless a change occurred during the year that would materially distort the calculation
• Modify the rules for determining whether a taxpayer's activities constitute production activity by referring to the rules for foreign base company sales income in Treas. Reg. Section 1.954-3(a)(4), but without applying the "substantial contribution" rules
• Do not expand the rules for determining the location of production activity to include activities or assets of related parties or unrelated agents
• Modify the anti-abuse rule in Treas. Reg. Section 1.863-3(c), and add an example illustrating that the rule may apply to certain acquisitions of domestic production assets by related partnerships (or their subsidiaries) if the acquisition has a principal purpose of reducing Treas. Reg. Section 1.863-3 tax liability by treating inventory sales income as subject to IRC Section 862(a)(6) rather than IRC Section 863(b)

EY Tax Alert 2020-2357 has details.

Meals & entertainment regulations: The IRS September 30 issued final regulations on the business expense deduction for meals and entertainment following changes made by the TCJA. The 2017 TCJA generally eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation. However, taxpayers may still deduct business expenses related to food and beverages if certain requirements are met. The final regulations address the disallowance of the deduction for expenditures related to entertainment, amusement or recreation activities, including the applicability of certain exceptions to this disallowance. They also provide guidance to determine whether an activity is considered entertainment. The final regulations also address the limitation on the deduction of food and beverage expenses.

Withholding regulations: On October 1, IRS released final regulations that provide guidance for employers concerning income tax withholding from employees' wages.

ABLE Accounts: On October 1, Treasury and IRS released final regulations on programs under the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE Act), which provides rules under which States or State agencies or instrumentalities may establish and maintain a Federal tax-favored savings program for eligible individuals with a disability who are the owners and designated beneficiaries of accounts to which contributions may be made to meet qualified disability expenses.

Regulations watch: Under review by the Office of Management and Budget Office of Information and Regulatory Affairs (OIRA) is a final rule on Consolidated Net Operating Losses [TCJA].

Below is a timeline for guidance projects released by the IRS related to the TCJA.

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