November 19, 2023
Americas Tax Policy: This Week in Tax Policy for November 17
This week (November 20-24)
Congress: The House and Senate are out of session.
The Ways & Means Social Security Subcommittee is set to hold a field hearing on "Social Security's Disservice to Public Servants: How the Windfall Elimination Provision and Government Pension Offset Mistreat Government Workers," on Monday, November 20 at 2 p.m.
A public IRS hearing on proposed regulations on Increased Credit or Deduction Amounts for Satisfying Certain Prevailing Wage and Registered Apprenticeship Requirements is scheduled for Tuesday, November 21 at 10 a.m.
This Week in Tax Policy will not be published the week of Thanksgiving.
Last week (November 13-17)
The big picture: With the 87-11 Senate passage of the House continuing resolution (CR) November 15 and the President's signature November 16, government funding has been extended through January 19 for some appropriations bills — Military Construction-VA, Agriculture, Transportation-HUD, and Energy & Water appropriations — and the remainder through February 2. Ten Senate Republicans voted against the bill, in addition to one Democrat, Senator Michael Bennet (D-CO), who protested the absence of Ukraine funding. The November 14 House vote on the Further Continuing Appropriations and Other Extensions Act, 2024 (H.R. 6363) was 336-95, with 127 Republicans joining 209 Democrats in supporting the bill. Ninety-three Republicans voted 'no.' The focus is now on how a long-term deal on spending can be reached and what else will happen in Congress between now and the January-February deadlines.
The House has approved seven of the 12 annual appropriations bills. Conservatives there haven't threatened the speakership of Mike Johnson (R-LA) over passing a CR with Democratic support, which they oppose. They did, however, scuttle floor consideration of two regular-order appropriations bills, the Labor-HHS-Education and Commerce-Justice-Science, in protest before leaving for Thanksgiving and ending a 10-week stretch in session after having given up a planned October break amid the Speaker elections. Freedom Caucus Chair Scott Perry (R-PA) said, "We're done with the failure theater here in Congress — we're not just going to pass bills that don't address the problems that Americans face." Last week, the Transportation-HUD bill was stalled over Amtrak funding and the Financial Services & General Government appropriations bill (which funds the Treasury Department and IRS) was pulled over funds for a new FBI headquarters and reproductive rights issues, which earlier kept the Agriculture-FDA bill from passing.
More generally, conservatives have called for spending to be reduced to FY2022 levels, and that is reflected in House appropriations bills along with controversial policy riders. Senators of both parties support holding FY2024 appropriations bills to FY2023 spending levels, as the debt limit bill prescribed, and the Senate has passed only three of the dozen spending bills, as a single minibus. Politico reported that it is unclear whether Speaker Johnson would push for the more than $100 billion in spending reductions at FY2022 levels relative to the Fiscal Responsibility Act (FRA) deal to set FY2024 spending at FY2023 levels. Johnson's predecessor, Kevin McCarthy (R-CA), walked away from that agreement and towards the spending cuts sought by conservatives, at least as a negotiating tactic, and while his tenure in the leadership position was in constant peril due to the single-member motion to vacate rule. Relative to the FRA, "House Republicans … are intent on slashing tens of billions of dollars from that total, plus throwing in a lot of culture war provisions on climate change, transgender policy and other issues into appropriations bills. This guarantees the bills aren't going anywhere, but House GOP lawmakers — pushed by hardline conservatives — keep trying," Punchbowl News said November 15. "Plus, the Senate is laboring to pass a huge national-security funding package that will include provisions conservatives hate — Ukraine aid, for example — as well as border-security changes that won't go far enough for a lot of House Republicans."
One motivating factor to find a bipartisan deal on full-year spending bills is the FRA provision under which there will be temporary caps at 99% of current funding levels (FY2023) if all 12 appropriations bills are not passed by January 1 of either 2024 or 2025, respectively (with the technical sequester enforcement mechanism related to the funding reduction taking effect on April 30).
Tax bill prospects: The CR included health provisions and a farm bill extension (through September 30, 2024), but not a tax package. There won't be a must-pass year-end appropriations bill, to which such tax packages are typically appended, and it remains to be seen whether tax provisions can be added to spending bills to follow in January or February, or other legislation in between now and then. Federal Aviation Administration (FAA) authorization and taxes expire December 31, under the prior CR, and it's unclear how they will be addressed. Additionally, Section 702 of the Foreign Intelligence Surveillance Act (FISA) will expire at the end of December, and after the CR vote November 15 the Senate voted to go to conference with the House on the National Defense Authorization Act (H.R. 2670).
Lawmakers said shutdown risks being put off for two months would allow Congress time to negotiate outstanding issues like the national security supplemental and, perhaps, tax legislation. Central to a business tax package are TCJA pre-cliffs that relate to the five-year amortization for R&D expenses rather than expensing under IRC Section 174 and the IRC Section 163(j) interest deduction limitation based on EBIT rather than EBITDA, both of which took effect in 2022; and 100% expensing, which is phased down after 2022. Achieving some parity between the cost of addressing those provisions and an expansion of the child tax credit (CTC) backed by Democrats is seen as key to a deal. "We got a lot more time on our hands, don't we?" Ways and Means member Kevin Hern, R-Okla., said November 13, as reported by Tax Notes. "We should be doing some tax package work." The story said: "Hern said that with a dollar-for-dollar match in child tax credit expansion as advocated by Senate Democrats, the package is set to cost nearly $100 billion. The CR could set up spending bills as viable vehicles, but other options are being explored, Hern said. 'There's a lot of moving parts to this right now,' Hern said. 'I always believe there's hope [for the end of the year] until there's not.'" Ways & Means Ranking Member Richard Neal (D-MA) was cited as saying there haven't been any discussions about offsets for such a package and "there's a distinction between conversations and engagement" regarding tax legislation, and there hasn't been any engagement thus far.
In a November 16 Bloomberg Daily Tax Report (DTR) story on prospects for a tax package, Ways & Means member Rep. Ron Estes (R-KS) "cited legislation like the Federal Aviation Authorization, which contains tax provisions, as potential vehicles … Most observers were more pessimistic, though, calling the end of the year the final chance for getting a bill done until after the 2024 election. Following the election, Congress will need to address many of the 2017 GOP tax law provisions set to expire after 2025. 'If we don't get it done this year, we may not get it done before '25,' said [Rep. Hern]. 'There's no mechanism to get it done next year in an election year.'"
Carried interest: Senate Finance Committee Chair Ron Wyden (D-(OR) and others November 16 announced The Ending the Carried Interest Loophole Act to prevent re-characterization of income by requiring fund managers to recognize their annual compensation, which would then be taxed at ordinary income rates.
DAFs: Treasury and the IRS have released long-awaited proposed regulations (REG-142338-07) regarding excise taxes on (1) sponsoring organizations making taxable contributions from a donor advised fund (DAF) and (2) certain fund managers making these distributions. The proposed regulations generally would apply to certain charitable organizations, including community foundations and other sponsoring organizations of one or more DAFs, and to other persons involved with the DAFs, including donors, donor-advisors, related persons and certain fund managers.
FTCs: In a November 9 letter made public this week, Reps. Hern, Brad Schneider (D-IL), and other members mostly from the Ways & Means Committee said regarding IRS officials' comments about extending the Notice 2023-55 temporary relief for taxpayers in determining whether a foreign tax is eligible for a foreign tax credit: "We kindly request that guidance in alignment with those public statements be issued as soon as possible to extend the current relief period for at least one additional year." In the July Notice, Treasury/IRS announced that taxpayers could apply former regulations' more permissive standards for determining whether a tax was a creditable net income tax under IRC Section 901, and the current IRC Section 903 "in lieu of" tax rules without regard to the attribution requirement for tax years ending on or before December 31, 2023. IRS is considering extending the period in which taxpayers can rely on old foreign tax credit rules. "This further extension is necessary considering fiscal year taxpayers are already or will soon start filing fiscal year 2024 quarterly financial statements and will need to comply with 2022 FTC final regulations in the absence of additional relief," the eight members wrote. "Extending the relief period for at least one year will give taxpayers necessary assurance and Treasury enough time to analyze thoroughly the issues related to the 2022 FTC final regulations."
IRC Section 987: An EY Tax Alert, "Proposed regulations on qualified business units include simplified elections for determining IRC Section 987 gain or loss, but restrict the recognition of losses," is available here.
IRC Section 48 regulations: The IRS November 17 issued proposed regulations (REG-132569-17) relating to the energy credit under IRC Section 48. "In connection with the Inflation Reduction Act of 2022, the proposed regulations would: update the types of energy property eligible for the energy credit, including additional types of energy property added by that law; clarify the application of new credit transfer rules to the energy credit recapture rules applicable to failures to satisfy the prevailing wage requirements, including notification requirements for eligible taxpayers; and include qualified interconnection costs in the basis of some lower-output energy properties," IRS said. "The proposed regulations would also provide additional requirements and rules generally applicable to energy property, such as rules regarding: functionally interdependent components; property that is an integral part of an energy property; application of an '80/20 Rule' to retrofitted energy property; dual use property; separate ownership of components of an energy property; property that could be eligible for multiple Federal income tax credits; and the election to treat qualified facilities eligible for the renewable electricity production credit instead as property eligible for the energy credit." A Treasury release said the Notice of Proposed Rulemaking (NPRM) includes proposed rules around the eligibility of standalone battery storage for the ITC, "a critical provision in the Inflation Reduction Act to help support the development of utility-scale, long-duration energy storage, which is vital to ensuring reliability as utilities transition to renewable sources like wind and solar."
IRA guidance tracker: This table describes select IRS guidance related to the Inflation Reduction Act.