June 16, 2023
What to expect in Washington (June 16)
Senate Majority Leader Chuck Schumer (D-NY) June 15 filed cloture on Treaties Calendar #1 (112-8), the Tax Convention with Chile. A spokesman for Minority Leader Mitch McConnell (R-KY) said the plan is for the measure to be on the floor next week. The US-Chile tax treaty made it out of committee but not onto the floor in the last Congress, and the Foreign Relations Committee approved it again June 1 after Republican concerns about potential double taxation relating to foreign tax credits were addressed through some new language. Senator Rand Paul (R-KY), who has blocked tax treaties over privacy concerns, voted against the treaty, and it isn't clear what may be required to work past an objection. In 2019, votes on amendments were required to clear the Spain treaty. The Bloomberg Daily Tax Report said, "The resolution could be passed by the end of next week, but a vote could be delayed until the following week if [Sen. Paul] — a longtime tax-treaty foe — seeks to slow the vote and run out the clock on the 30 hours of required debate."
Congress - The Senate has adjourned for the weekend, and will return for business at 3:00 p.m. on Tuesday, June 20. The Finance Committee has scheduled a hearing on "Cattle Supply Chains and Deforestation of the Amazon" for Thursday, June 22 (10 a.m.). The Taiwan Tax Agreement Act (S. 1457) is back on the schedule for a Wednesday, June 21 Foreign Relations business meeting, after consideration was scuttled from a June 8 meeting over privacy concerns from Senator Paul. The House is also in next week, but the agenda hasn't been announced. On Thursday, June 22 (10 a.m.), the House Budget Committee holds a hearing on "Reigniting American Growth and Prosperity: Incentivizing Economic Excellence Through Tax and Trade."
Tax — A June 15 Semafor article on the three tax bills approved by the Ways and Means Committee June 13 asked, "What to make of the Republicans' big tax bill?" The article said the three-bill package, collectively the American Families and Jobs Act, "offers a look at the party's next priorities on its signature economic issue, and plants a flag ahead of 2025, when sunsetting pieces of the Trump tax cuts will set the stage for a potentially historic showdown over how to rejigger the IRS code. And some lawmakers suggest that the bill may be the first volley in negotiations for a bipartisan tax deal as soon as this year." The TCJA "pre-cliffs" relating to expensing of R&D costs, interest deduction limitations under IRC Section 163(j), and 100% expensing, remain caught in a partisan impasse over a Child Tax Credit (CTC) expansion sought by Democrats. "Senate Finance Chair Ron Wyden told Semafor that he wanted to revive the R&D credit, but suggested Democrats would drive a hard bargain. 'We're going to insist on an approach that is proportional, that working families and kids get a fair shake aligned with what's being done on the business side … '"
Advancing the bills through the House — they wouldn't be expected to be approved as-is given opposition by Democrats controlling the Senate and White House to rolling back energy credits and approving business tax provisions without something more on the CTC — is complicated by the conservative Freedom Caucus' spending concerns following the debt limit deal, which they expressed by employing the rare tactic of opposing the "rule" required to bring bills to the floor. While the floor is back in business, lingering spending concerns among conservatives in the chamber Republicans control by a narrow margin — currently 222 Republicans to 212 Democrats, with one vacancy in a previously Democratic-held seat — have prompted concerns over a potential government shutdown when funding expires September 30. The controversy has already started as House GOP appropriators, at the urging of the Freedom Caucus, said they will mark up appropriations bills at FY2022 levels, which Democrats say is a violation of the debt limit agreement.
The New York Times reported June 15, "After narrowly avoiding a federal default, the Republican-controlled House and the Democratic-led Senate are now on a collision course over spending that could result in a government shutdown this year and automatic spending cuts in early 2025 with severe consequences for the Pentagon and an array of domestic programs. Far-right Republicans whose votes will be needed to keep the government funded are demanding cuts that go far deeper than what President Biden and Speaker Kevin McCarthy agreed to in the bipartisan compromise they reached last month to suspend the debt ceiling, but such reductions are all but certain to be nonstarters in the Senate. The looming stalemate threatens to further complicate a process that was already going to be extraordinarily difficult, as top members of Congress try for the first time in years to pass individual spending bills … "
Energy tax — On Wednesday, June 14, IRS released proposed regulations (REG-101610-23) on the Inflation Reduction Act's (IRA) tax credit transferability provision allowing transfer of all or a portion of an eligible credit to unrelated taxpayers for cash payments, who can claim the transferred credits on their tax return. Eleven credits are eligible: alternative fuel vehicle refueling (Section 30C), renewable electricity production (Section 45), carbon oxide sequestration (Section 45Q), nuclear power production (Section 45U), clean hydrogen production (Section 45V), advanced manufacturing production (Section 45X), clean electricity production (Section 45Y), clean fuel production (Section 45Z), energy (Section 48), advanced energy projects (Section 48C), and clean electricity investment (Section 48E). Reuters reported, "Businesses can also choose direct pay, but only for the advanced manufacturing, carbon capture and storage and clean hydrogen credits, Treasury said." Treasury said, "Entities without sufficient tax liability were previously unable to realize the full value of credits, which raised costs and created challenges for financing projects."
Another set of proposed regulations (REG-101607-23) addresses the IRA provision that allows entities like tax-exempt organizations, State and local governments, and rural electric cooperatives to treat certain credits as a payment against federal income tax liabilities, rather than as a nonrefundable credit. (The payment will first offset any tax liability of the entity and any excess will be refundable.) Applicable credits are the same as for transferability, with the addition of the credit for commercial vehicles (Section 45W). "Direct pay is a game-changer for our ability to spread the benefits of clean energy to every community in America," said John Podesta, Senior Advisor to the President for Clean Energy Innovation and Implementation. "This provision of the Inflation Reduction Act will make it easier for local governments, Tribes, territories, nonprofits, schools, houses of worship and more to invest in clean energy … "
It has been widely noted that, until now, tax equity financing was the primary means of monetizing unused tax credits. Regarding the practical use of the provisions, the Wall Street Journal reported: "Many companies that generate clean energy don't make enough profit to use all of the tax credits they could claim. So under the new rules, which are part of last year's [IRA], a utility-scale solar installation could sell its tax credits to a tech company that had no involvement in the project but was looking for a lower tax bill. A school district, meanwhile, could get a direct cash payment in place of tax credits for buying electric vehicles."
The IRS also released temporary regulations on information and registration requirements for an elective payment election under the IRA and the CHIPS Act, to treat the amount of certain tax credits as a payment of Federal income tax, and other requirements; and proposed regulations on the elective payment election of the advanced manufacturing investment credit under the CHIPS Act. The Bloomberg Daily Tax Report said, "The proposed regulations for semiconductor chips offer guidance on how to elect a direct pay option, and also lay out the treatment of S corporations and partnerships under the US tax code's Section 48 (D), which was added as a result of the CHIPS Act."
Continuing the release of energy tax credit guidance, on June 15 Treasury said, "Following initial guidance on the energy community bonus for the clean energy Investment Tax Credit (ITC) and Production Tax Credit (PTC) released in April, Treasury and the IRS provided updates on eligibility for the bonus based on updated local unemployment rate data and technical clarifications."
Cryptocurrency — Regarding cryptocurrency reporting requirements enacted under the 2021 infrastructure law, Politico reported June 15: "The crypto world has been bracing for a tax crackdown from the Treasury Department for more than a year-and-a-half, ever since Congress approved new rules aimed at making it easier for the IRS to determine how much money people make trading virtual currencies. Since then: crickets. Though the IRS considers crypto a major source of tax avoidance, not even a first draft of the regulations needed to fill in the details of the new transaction-reporting requirements has been released … "
Banking - On Thursday, Senate Banking Committee Chairman Sherrod Brown (D-OH) announced that he had reached agreement with Ranking Member Tim Scott (R-SC) on a bill clawing back compensation from executives of failed banks. The Banking Committee plans to vote on the bill next Wednesday (June 21) before Congress departs for the July Fourth recess. It would be the first markup of legislation the committee has held since the Trump administration. "Americans have watched executives take their money, run banks into the ground, and get away with it too many times before," Brown said. "It's time for CEOs to face consequences for their actions, just like everyone else." Notably the bill, offered in the wake of the high-profile failures of Silicon Valley Bank and Signature bank earlier this year, differs from another bipartisan bank clawback bill (S. 1045) that Sen. Elizabeth Warren (D-MA) has introduced with Josh Hawley (R-MO), which has the support of J.D. Vance (R-OH) and some other Republicans on the Banking Committee. Politico described the Brown-Scott bill as narrower in scope than the Warren bill.
A summary distributed by the committee said the Recovering Executive Compensation Obtained from Unaccountable Practices (RECOUP) Act would:
Today, June 16, is the EY Webcast, "Tax in a time of transition: Legislative, economic, regulatory and IRS developments," at 12:00 p.m. ET. Register.