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The Senate yesterday, and then the House just after midnight, cleared a $2.5 trillion increase in the Federal debt limit, taking the issue off the table until after the 2022 midterm elections. A main issue keeping the Senate in session between now and Christmas is potential consideration of the Build Back Better Act (H.R. 5376) budget reconciliation bill next week. That would require the conclusion of the “Byrd bath” tests of reconciliation compliance, the support of Senator Joe Manchin (D-WV) – who has yet to back the bill and has been talking with President Biden – and an agreement on state and local tax (SALT) deduction cap relief.

Senate Finance Committee (SFC) Chairman Ron Wyden (D-OR) said Monday there were “more than 20 additional areas that we’re going over with the parliamentarian” to determine adherence to the reconciliation rules, Roll Call reported. SFC Ranking Member Mike Crapo (R-ID) said in a Bloomberg report December 14 he expected there to be more than 30 challenges from Republicans, including to the additional EV bonus credit for vehicles manufactured in unionized shops, and that the process could go beyond Christmas. Some issues, including the potential addition of an income threshold to the House-passed SALT deduction cap relief, haven’t been resolved.

Majority Leader Chuck Schumer (D-NY) said following the regular Tuesday policy lunches that “there are good discussions going on … The president’s been speaking with Senator Manchin and I look forward to hearing about further progress… We’re doing all the things we have to do to get it in play.” He released a 2022 schedule that has the Senate returning on January 3, a week earlier than the House. Punchbowl reported Senate Majority Whip Dick Durbin (D-IL) as saying it will be a “challenge” but “not impossible” to get the BBB done by Christmas and he supports moving toward the floor with a vote to proceed to the BBB before the votes are locked down as a way to force Sen. Manchin to commit to voting for the bill.

Roll Call reported December 14, “Senate Democrats on Tuesday softened their optimism that their party’s sweeping safety net and climate spending and tax package will pass before Christmas, citing uncertainty about whether [Sen. Manchin] is ready to support it and procedural steps that are far from complete. ‘It’s a tough timeline,’ Michigan Sen. Debbie Stabenow, a member of Democratic leadership, said. ‘So we’re still pushing forward. We have a lot of agreement. But, you know, if this is not done in the next two weeks, we’ll come back in January and get it done.”

“It seems to me there’s just not a whole lot of time between now and Christmas, but the majority leader continues to say he wants this bill on the floor before Christmas. We’ll see…” GOP leader Mitch McConnell (R-KY) said December 14. “Seems to me, Senator Manchin can determine the timing here. If he thinks it's not ready and he’s not ready to go, then I assume this’ll be brought up some other time.”

Senator Manchin has continued to voice concerns over inflation and the 10-year cost of temporary provisions if they are extended. “Everyone has to choose basically what we can sustain,” he said Monday, Politico reported. Axios reported that the issue of funding some programs for one year and others for 10 years is a sticking point between Senator Manchin and President Biden. “The impasse all but guarantees the Senate will delay a vote on the $1.75 trillion spending package until next year,” the report suggested.

SALT – CNN reported regarding SALT negotiations focused on an income threshold, “For weeks, Sanders and Democratic Sen. Bob Menendez of New Jersey have tried to find a middle ground, but sources say they remain at an impasse, with some Democrats looking to allow families making more than $600,000 [ineligible] for the deduction while others, like Sanders, have been arguing that number is far too high. Sanders had offered Democrats a provision that would allow couples making up to $400,000 to be eligible.”

IRC Section 163(n) – The SFC released an updated BBBA title on Saturday with changes including, for purposes of the new IRC Section 163(n) interest deduction limitation, permitting an international financial reporting group’s (IFRG) common parent to elect to compute its allocable share by reference to the aggregate adjusted bases of assets (except stock or partnership interests held in other group members), rather than using EBITDA.

Bloomberg reported December 14 that the change “softens a proposal to limit interest deductions for multinational companies that have too much of their global interest in the U.S. But the bill doesn’t change a separate tightening of interest-deduction limits slated to kick in next month that is broader and, for some companies, harsher. Companies can currently deduct interest of up to 30% of their adjusted income. But starting January 1, the definition of what makes up adjusted income will change under a provision in the 2017 tax-overhaul law.” The TCJA’s IRC Section 163(j) 30% of adjusted taxable income limitation on the deduction of interest expense is calculated taking into account depreciation and amortization after 2021.

An EY ITTS Alert on the SFC changes to the bill released over the weekend is available here.

Nominations – Aside from the BBBA, the Senate is also confronting a backlog of nominees and an urgency to complete them because nominations pending when the Senate adjourns sine die at the end of a session generally must be returned to the President, absent an agreement to keep them status quo. “In addition to finishing our legislative priorities, we also have to work through a number of nominations that have been held up through Republican obstruction…” Schumer said. “The backlog now stands, because of Republican obstruction, at 158 nominees, a majority of which are held [up] by only a small handful of Republicans. Democrats are working to clear as much of the backlog, if possible, by consent. If we cannot make much progress, we may need to stay and hold votes on nominees this weekend and next week until we do.”

Global tax – A Wall Street Journal editorial, “Yellen and the Global Tax Stall,” said “negotiators are falling behind on a ‘commentary’ document of several hundred pages to be released alongside the model legislation” for Pillar Two, regarding the global minimum tax. “That commentary now isn’t expected until January or February, making it unlikely the global minimum tax would take effect anywhere by 2023 as the OECD hopes,” the editorial said. “The European Union’s 27 members are especially prone to delay. Brussels will soon release a draft directive instructing those 27 governments how to implement the OECD’s minimum tax, and it faces a tough slog.”

Friday, December 17 (12:00 p.m.) is the EY Webcast, “Tax in the time of COVID-19: update on legislative, economic, regulatory and IRS developments.” Register.

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