May 28, 2024 This Week in Tax Policy for May 24 This week (May 27-31) Congress: Both chambers are out of session this week for the Memorial Day recess. This Week in Tax Policy won’t be published while Congress is away. Last Week (May 20-24) 2025 tax cliff: Efforts in Washington to prepare for the 2025 tax cliff of Tax Cuts & Jobs Act (TCJA) expirations continue to escalate. Senate Finance Committee Republicans met May 22 to discuss establishing working groups on extending and improving expiring TCJA provisions — “very much setting the table,” according to Senator Bill Cassidy (R-LA), invoking an oft-used analogy for preparing Washington for major legislative events like the tax cliff. The Bloomberg Daily Tax Report (DTR) subsequently reported Finance Ranking Member Mike Crapo (R-ID) as saying the groups will cover every aspect of the expiring tax breaks to prepare for next year’s negotiations and that senators will work on understanding the issues, the options available, and how to approach the expiration. Punchbowl News reported that the groups cover:
The effort somewhat mirrors the 10 tax teams announced by House Ways & Means Committee Republicans on April 24 and is expected to get up and running in the coming weeks. There is precedent for establishing such study groups in anticipation of an opportunity to reform the tax code, though prior efforts have been bipartisan rather than the Republican-only groups set up now. Both tax-writing committees established bipartisan tax reform working groups in the years preceding the 2017 TCJA: 2013 for the House, 2015 for the Senate. Additionally, House Majority Leader Steve Scalise (R-LA), echoing Ways & Means Committee Chairman Jason Smith’s (R-MO) prior comments that he would aim to act early in the next Congress on expiring tax provisions, said tax could be a first-100-days issue if Republicans were to sweep in the 2024 elections and end up with control of the White House and Congress. It’s worth noting that any budget reconciliation bill that would carry proposals relating to the expiring TCJA provisions would have to be proceeded by a budget resolution passed by both chambers that would provide instructions to the tax committees to write the actual legislation, including parameters for how much revenue such a reconciliation bill could lose over the 10-year period. That issue of how much if any such a bill could add to the deficit will likely be subject to considerable debate in early 2025. Looking ahead to 2025 has been a main theme of recent tax events in Washington — including the American Bar Association Tax Section conference, a U.S. Chamber of Congress briefing, and the Tax Council Policy Institute (TCPI) Symposium — and the most recent example was a Tax Foundation half-day meeting May 23. Former House Ways & Means Committee Chairman Kevin Brady (R-TX), who ushered in the TCJA during his tenure, said lawmakers should be wary of increasing the corporate tax rate — which doesn’t expire but is already part of the conversation about paying for the extension of temporary individual, corporate, and passthrough provisions — because that could open the door to more inversions and because the corporate rate is among the most, if not the most, pro-growth provisions in the Code. He also said lawmakers should be prepared to present a bill that is revenue neutral or close to it in light of debt and deficit concerns. Field hearing: One of the Ways & Means tax teams was spotlighted by Chairman Jason Smith (R-MO) during the May 20 Tax Subcommittee Field Hearing in Erie, PA on “Creating More Opportunity and Prosperity in the American Rust Belt.” Chairman Smith said the Community Development team, chaired by Tax Subcommittee Chairman Mike Kelly (R-PA), will focus on “how we can encourage and incentivize more Main Street investment, expand housing opportunities, and support small communities so they can grow and meet the needs of families where they live and work.” The hearing largely focused on Opportunity Zone investment benefits, targeted toward economically distressed communities, and the TCJA pre-cliffs that switched to IRC Section 174 5-year amortization from R&D expensing, a less favorable calculation for 163(j) interest deductibility, and a gradual phasedown of 100% bonus depreciation. Four witnesses spoke about Opportunity Zones and the fifth about the R&D issue. Rep. Ron Estes (R-KS) said since the switch from R&D expensing to five-year amortization, companies have been found to spend far less on R&D. Three-quarters of R&D spending is on wages and salaries, he said, making it a jobs issue. Disaster relief: On an adjacent issue to the hearing, the House May 21 passed the Federal Disaster Tax Relief Act (H.R. 5863) by a vote of 382-7 (the bill was considered under the “suspension of the rules” process, requiring a two-thirds majority vote for passage). The bill had been folded into the Tax Relief for American Families and Workers Act (H.R. 7024) addressing the IRC Sections 174 and 163(j), and bonus depreciation issues, along with Child Tax Credit (CTC) changes and legislation incorporating tax treaty benefits with Taiwan into the Internal Revenue Code. H.R. 7024 is stalled in the Senate over numerous stated Republican objections, and the disaster bill isn’t likely to be broken off for a separate vote there, especially after Senate Finance Committee Chairman Ron Wyden (D-OR) put a hold on it. “The reason why is that there are key Democratic priorities: for example, we couple the Child Tax Credit and R&D. It would go all asunder if they were to pull something out,” Wyden said in Politico Morning Tax. “I’m not going to reward Senate Republican stalling.” The report said of the broader bill, “There still haven’t been any signs that Senate Majority Leader Chuck Schumer will bring up the Wyden-Smith tax plan for a vote, after he previously said he would only do so if he felt confident it would pass.” As a policy matter, the disaster relief bill would allow losses from federally declared disasters occurring from January 1, 2020, through the date of enactment to be deducted from income taxes without itemizing and without a reduction based on adjusted gross income, and exclude compensation for losses from some wildfire disasters and the East Palestine, Ohio, train derailment from gross income. The path to House passage of the bill is remarkable from a political standpoint because Rep. Greg Steube (R-FL), who was compelled to aggressively pursue consideration after the broader package stalled in the Senate by an airport encounter with a constituent, as recounted in a Wall Street Journal article, forced a House vote through a discharge petition around Republican leadership and with support from Democrats. Child savings accounts: The May 21 Senate Finance Committee hearing, “Child Savings Accounts and Other Tax-Advantaged Accounts Benefiting American Children,” largely focused on Senator Bob Casey’s (D-PA) 401Kids Savings Act (S. 3716) to create children’s savings accounts (CSAs) for post-secondary education, starting a business, buying a house, or retirement security, that would be built on state 529 college savings platforms. Senator Casey’s questioning during the hearing focused on how such accounts would aid lower- and middle-income children. Some witnesses praised the expanded use of 529 accounts envisioned by the Casey bill. Chairman Wyden said of such accounts, “The idea behind them is, on day one a newborn child automatically gets an account with some seed money that grows over time. Later on, with enough contributions, they’re able to use it in a way that will help them live out their own American dream, whether it’s getting an education, buying a home, starting a business.” Ahead of the 2025 tax cliff, some Republicans focused on the importance of extending TCJA expiring provisions. Senator John Thune (R-SD) said Congress should be focused on making the TCJA permanent. Senator Steve Daines (R-MT) suggested Biden housing incentives as proposed in the FY2025 Budget and State of the Union address, which included a new tax credit for first-time homebuyers and people who sell their starter homes are detrimental. The staff of the Joint Committee on Taxation’s (JCT) report in conjunction with the hearing, “Present Law and Data Relating to Tax-Preferred Accounts for Education and Other Purposes” (JCX-25-24) is available here. JCT overview: The JCT staff has provided a broad overview of the current Federal tax system’s: (1) income tax on individuals, estates, trusts, and corporations; (2) payroll taxes; (3) estate, gift, and generation-skipping transfer taxes; and (4) excise taxes on selected goods and services. “Overview of the Federal Tax System as in Effect for 2024” is available here. Supply chains: House Ways & Means Committee members Nicole Malliotakis (R-NY), Bill Pascrell (D-NJ), and others introduced the Supply Chain Security and Growth Act (H.R. 8504), which would leverage Investment Tax Credits (ITCs) to facilitate a rapid movement of critical US supply chains to Puerto Rico. Global tax: A May 21 story in the Bloomberg Daily Tax Report (DTR) said, “US multinational companies are … dissolving their overseas holding companies and reshoring ownership of their subsidiaries to delay paying the new 15% global minimum tax,” effectively eliminating intermediate holding companies so that their subsidiaries are directly under the US. By doing so, the companies are avoiding the global minimum tax imposed through Income Inclusion Rules in the jurisdiction in which the holding company is located and would only be subject to local country Qualified Domestic Minimum Top-up taxes (QDMTTs) when those subsidiaries are located in low taxed jurisdictions. The story cited practitioners as saying US companies are seeking to “move ownership of their foreign subsidiaries to the US, which has yet to sign up to the global minimum tax.” Doing so could delay imposition of those local top-up taxes to the extent QDMTTs are being delayed until 2025, or the Undertaxed Profit Rule (UTPR), which would not take effect until 2025. It also said minimum tax compliance costs will be substantial, as companies will have to track and manage parts of a business to ensure each is following the law and provide additional details to authorities and investors. “Many companies, as they work through their modeling, are discovering that many aren’t going to be looking at a significant increase in tax liability in any one jurisdiction, but the compliance burden is going to be very, very high,” said Jose Murillo, Ernst & Young partner and national tax department leader. A follow-on story on compliance hurdles said, “In order to pay their global minimum tax bill in a timely manner, large companies need to build new systems to synthesize thousands of pieces of new data and track the differences between countries’ local laws applying the levy.” Further, “Companies must also keep track of the differences in the way countries apply Pillar Two rules. Barbara Angus, global tax policy leader at EY, said countries will have to translate these rules into their own languages and feed in their own legal history and culture. Some countries are making reference to the rules in their domestic law, others are copying them word-for-word, she said.” Wealth tax: The Wall Street Journal reported Treasury Secretary Janet Yellen, ahead of a G7 finance ministers meeting, as rejecting other countries’ proposals for a global wealth tax on billionaires akin to the proposed global corporate minimum tax, with the aim of preventing the shifting of wealth into countries where tax can be avoided. “We believe in progressive taxation. But the notion of some common global arrangement for taxing billionaires with proceeds redistributed in some way — we’re not supportive of a process to try to achieve that. That’s something we can’t sign on to,” she said. Energy tax: Treasury, IRS, and the Department of Energy (DOE) announced May 22 that the DOE Qualified Advanced Energy Project Credit Program Applicant Portal (48C Portal) is now open for any interested applicants to register for a new round of allocations. “Interested applicants, including small-, medium- and large-sized manufacturers, must submit their concept papers by Friday, June 21 at 5 p.m., using the 48C Portal. DOE will accept full applications only on projects where concept papers were submitted prior to the June 21 deadline,” according to a release. An EY Alert, “IRS creates new elective safe harbor using default percentages for determining domestic content bonus for energy credits for certain applicable project components,” is available here. IRA guidance tracker: This list describes select IRS guidance related to the Inflation Reduction Act (IRA). CAMT
Stock buyback excise tax
Domestic Content Bonus
EVs
Sustainable Aviation Fuel
Transferability
Direct pay
Alternative Fuel Vehicle Refueling Property Credit
45V clean hydrogen credit
45X Advanced Manufacturing Production Credit
Low-income Communities Bonus Credit
Advanced Energy Project Credit
48 ITC
45L Energy Efficient Home Credit
Wage and apprenticeship
Energy Community Bonus Credit
45J Nuclear Credit
CHIPS Act 48D Advanced Manufacturing Investment Credit
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