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June 23, 2024
2024-1241

This Week in Tax Policy for June 21

This week (June 24-28)

Congress: The Senate is now out until July 8. The House is back this week before a recess the week of Independence Day.

The House Ways & Means Committee has scheduled a hearing on "Strengthening Child Welfare and Protecting America's Children" for Wednesday, June 26 at 10 a.m.; and a Health Subcommittee hearing on "Improving Value-Based Care for Patients and Providers" for June 26 at 3 p.m.

Last week (June 17-21)

2025: While many months away until legislation begins to be drafted, there are differences clearly emerging between Democrats and Republicans about how to address automatic tax increases built into the TCJA that will take place in 2026 with Congressional action, and differences even among Republicans over the need for revenue raisers to offset the cost of extending those TCJA tax cuts. This week, there were additional comments suggesting Democrats want to reconsider the broader tax system, not just expiring provisions; and that House Republicans, who are more open to revenue offsets than GOP Senators, recognize that 2025 is different than 2017 in terms of enacting a large tax cut package without fully paying for it. There is broad agreement that how the 2025 debate plays out depends on who controls the House, Senate, and White House after this year's elections, with the expectation that, if either party sweeps in the elections, they could use budget reconciliation to enact a bill meeting their goals. In divided government, there is a lot of gray area regarding the makeup of a tax package that can pass Congress and be signed by the President.

Senate Finance Committee Democrats held a private meeting on Thursday, June 20, to discuss their approach to tax issues ahead of the 2025 cliff, and Senator Elizabeth Warren (D-MA) continues to call for tax increases beyond just letting TCJA provisions expire for those with income over $400,000. Senator Warren said during a June 17 speech: "The 2025 tax fight will create a huge opportunity to break with decades of tax-cutting political orthodoxy and reshape the tax code to reflect our nation's values by raising taxes on the wealthy … Next year, we must raise taxes on giant corporations and billionaires. But let's be crystal clear: if Democrats take the coward's way out and sign our names to a half-baked deal that lets the wealthy off the hook, it will be a huge failure … " In a Bloomberg Daily Tax Report (DTR) story about the Senate Finance Democrats' meeting, Chairman Ron Wyden (D-OR) said he was struck by members' commitment to raising taxes on the wealthiest Americans and companies. In addition to Senator Warren, other Democrats suggested the 2025 tax cliff demands consideration of the tax system as a whole, not just expiring provisions. "The main goal here is this can't just be a debate about the 2017 tax cuts," Sen. Mark Warner (D-Va.) said. "This is going to be Tax Armageddon. It's time to suit up."

The House was out this week, but a June 21 Roll Call story said Republicans on the Ways and Means Committee admit fully extending the TCJA provisions isn't a foregone conclusion, recognizing that changing politics and growing debt mean that 2025 is different than 2017. Rep. Randy Feenstra (R-IA) said of a full extension of the TCJA, "I would call it Tax Cuts and Jobs Act 2.0. What worked? What didn't work? What changes can be made?" Rep. Blake D. Moore (R-UT), vice chair of the global competitiveness tax team, said, "No one understands it more than us that 2017 politics versus 2025 politics, they're not in the same spot." Further, "I don't think it's, 'Let's just make TCJA permanent.' A lot of that would be the plan, but we're not going to be in the same situation," Moore said, adding that the debt is higher and majorities are slimmer than they were in 2017. Rep. Kevin Hern (R-OK), who chairs the influential Republican Study Committee and the Ways and Means Republican global competitiveness tax team, said, "The Trump tax cuts, they worked perfectly at the time," but, "We have to look at what's right for today, just as we did 10 years ago. And economic times are different."

CBO: The fiscal picture was painted as more dire by the Congressional Budget Office (CBO), which projected the deficit for FY2024 grew significantly from the $1.6 trillion projected in February to $1.9 trillion in "An Update to the Budget and Economic Outlook: 2024 to 2034." The cumulative 2025–2034 deficit is $2.1 trillion larger than projected in February, CBO said, with the largest contributor being recently enacted legislation, including emergency supplemental appropriations that provided $95 billion for aid to Ukraine, Israel, and the Indo-Pacific region. CBO also said debt swells from 2024 to 2034 due to higher interest costs and mandatory spending, and debt held by the public rises from 99% of GDP this year to 122%, or $50.7 trillion, in 2034. Preceding the end-of-2025 TCJA tax cliff is the expiration of the suspension of the debt limit (enacted in the June 2023 Fiscal Responsibility Act) on January 1, 2025. Extraordinary measures would be expected to put the must-act date into the second quarter of 2025, and beyond the tax season, according to some outside estimates.

The increased CBO projections make legislative action to address the debt limit more politically difficult, though the dynamics of that debate, like the tax cliff, won't be clear until after the outcome of the elections — i.e., who controls the House, Senate, and White House — are known. The Washington Post reported: "The debt is a bipartisan problem: Spending shot up under both President Biden and then-President Donald Trump. And Trump's 2017 tax cuts, the ones that are set to expire next year, added nearly $2 trillion to the existing debt, according to a nonpartisan estimate. Trump has proposed extending all of those cuts, which could add trillions more to the debt, and Biden also wants to keep the lower rates for people who earn less than $400,000, as well as new social spending paid for by allowing some of the tax cuts to expire." Punchbowl News said of the TCJA expirations, "with a nearly $2 trillion annual deficit — and potentially much higher as Medicare and other mandatory spending costs rise — how can Republicans significantly reduce the revenue coming into federal coffers without worsening the deficit picture? Especially when they're pushing for more spending on national defense, border security and veterans' programs."

Corporate rate: There continues to be a focus on the corporate rate — which doesn't expire at the end of 2025 like individual and pass-through provisions but is already part of the discussion about how to pay for the extensions — and Republicans aren't unified against an increase as they have been in the past. A June 18 Politico story: "'There's a bubbling-up concern that we should not be doing the bidding of corporate America,' said Rep. Chip Roy (R-Texas), who says he'd consider kicking the corporate rate up to 25 percent if it means being able to extend breaks for individuals and small businesses. 'I'd like to see corporations getting with the program and saving America, instead of just looking at their bottom line.'" Other Republicans were cited as being satisfied with the 21% rate, despite former President Trump's call to reduce the corporate rate to 20%. A story in the June 18 Wall Street Journal (WSJ), "Corporate Tax Rate Spurs Political Fight with More Than $1 Trillion at Stake," said, "The corporate tax is one of the few ways the U.S. can, indirectly, tax foreign investors in U.S. securities and nonprofits with large tax-free endowments. But the shareholder base also includes pension funds, 401(k) accounts and some middle-income households. Biden and Democrats play down effects on those groups. They also don't count corporate tax increases as violating the president's pledge to protect households making under $400,000 from tax hikes." The story noted that Republicans have touted the corporate rate reduction and international tax changes in the TCJA as being successful, including in staving off inversions. Ways & Means Ranking Member Richard Neal (D-MA) was cited as still supporting the 26.5% rate proposed in the 2021 Build Back Better Act that his side of the Committee, then in control, produced before it was whittled down to the narrower Inflation Reduction Act in 2022.

2024 tax bill: Asked following the Senate Democratic luncheon June 18 whether it is too late for the Senate to take up the House-passed Tax Relief for American Families and Workers Act (H.R. 7024) that would expand the Child Tax Credit, address the TCJA pre-cliffs on IRC Section 174 five-year R&D amortization, 163(j) interest deductibility, and bonus depreciation, and more, Senate Majority Leader Chuck Schumer (D-NY) said: "Look, as you know, I supported it the minute it was announced. I think it's a good bill. I was very proud that I pushed hard and got into the bill the low-income housing tax credit (LIHTC) — near and dear to me, very important to my state — and I'm currently working with Chairman Wyden to try and get something done. It's not dead." The DTR report on the Finance Democrats meeting cited members as not wanting to lose sight of trying to get the bill done over a multitude of Republican objections. "Sen. Sherrod Brown (D-Ohio) said he wants to start with getting the bipartisan tax bill passed. Sen. Maria Cantwell (D-Wash.) also emphasized that she wants the low-income housing tax credit to take precedence this Congress. 'We're going to continue to make it a priority until it gets done.'"

SCOTUS: In Moore v. United States, which could have had ramifications for the prospects for wealth tax proposals and the tax code overall, the Supreme Court June 20 held 7-2 that the TCJA mandatory repatriation tax does not exceed Congress's constitutional authority. The taxpayer argued the transition tax under IRC Section 965 violates the Constitution's Apportionment Clause and the Due Process Clause of the Fifth Amendment because it was a direct tax on unrealized income. The majority declined to rule whether realization is a constitutional requirement of an income tax but held that Congress may attribute a business entity's realized and undistributed income to the shareholders or partners of that entity. In doing so, it emphasized that its holding "applies when Congress treats the entity as a pass-through."

Partnerships: On June 17, Treasury and IRS announced a new regulatory initiative, part of a multi-stage effort to "stop large, complex partnerships from using opaque business structures to inflate tax deductions and avoid taxes," focused on partnership basis shifting transactions in which a single business that operates through related parties "enters into a set of transactions that manipulate partnership tax rules to maximize tax deductions and minimize tax liability."

"The proposals attack a technique known as basis shifting among related parties, where partnerships that share common ownership move tax basis from assets that can't be depreciated — like stock and land — to assets such as equipment that can generate depreciation deductions. Sometimes, officials said, businesses repeatedly depreciate the same asset," said the June 18 WSJ. "The Treasury Department and Internal Revenue Service said Monday that taxpayers must begin disclosing such transactions to the government. The administration also will soon issue formal rules designed to restrict the practice … "

"I've been urging stronger enforcement among large partnerships for years, and thanks to Democrats passing the Inflation Reduction Act, the IRS now has additional resources to put into this difficult work," Senate Finance Chairman Wyden said. "I'm also continuing to develop my proposal to reform the rules on partnerships because today those rules allow the wealthiest individuals and most profitable corporations to decide when, and whether, to pay taxes at all."

Global tax: On June 17, the OECD/G20 Inclusive Framework released two new documents on the Pillar One Amount B approach for transfer pricing for certain baseline marketing and distribution transactions:

  1. a statement on the definitions of qualifying jurisdictions within the meaning of sections 5.2 and 5.3 of the Amount B guidance; and
  2. a statement on the definition of covered jurisdictions within scope of the political commitment on Amount B.

The OECD/G20 also released two new documents on the Pillar Two global minimum tax rules:

  1. the fourth tranche of Administrative Guidance, containing guidance on allocation of current and deferred taxes, the DTL recapture rule, divergence between GloBE and accounting carrying values, and treatment of securitization vehicles; and
  2. a Q&A document covering how jurisdictions will verify their qualified status under the GloBE rules.

The package of administrative guidance, among other things, sets out simplified procedures that will allow MNE Groups to aggregate various categories of deferred tax liabilities for determining whether they have reversed within five years and therefore do not need to be recaptured. The administrative guidance also clarifies the methodology used to determine deferred tax assets and liabilities for GloBE purposes and further guidance on the allocation of cross-border current and deferred taxes and the profits and taxes on certain flow-through tax structures. Also, the guidance provides specific rules on the treatment of securitization vehicles under a jurisdiction's domestic minimum top-up tax that will prevent these vehicles giving rise to volatile outcomes under the GloBE Rules.

An EY Tax Alert, "OECD/G20 Inclusive Framework releases documents on Pillar One Amount B and Pillar Two," is available here.

Energy tax: The IRS June 18 issued final regulations (TD 9998) regarding the prevailing wage and registered apprenticeship requirements under the Inflation Reduction Act (IRA) that generally afford an increased credit of five times the base incentive. "Through the final rules we're releasing today, we're providing employers and workers with more clarity such as on what's required for recordkeeping, and we're incentivizing employers to adopt worker-centric practices like project labor agreements," Treasury Secretary Janet Yellen said in a Bloomberg DTR report.

IRA guidance tracker: This list describes select IRS guidance related to the Inflation Reduction Act (IRA).

CAMT

  • April 15, 2024 — Notice 2024-33 waived the penalty for a corporation's failure to pay estimated tax CAMT payments due on or before April 15, 2024, or May 15, 2024
  • December 15, 2023 — Notice 2024-10 included rules for determining the adjusted financial statement income (AFSI) of a U.S. Shareholder when a controlled foreign corporation (CFC) pays a dividend to the US shareholder or another CFC
  • September 12, 2023 — Notice 2023-64 included rules for consolidated groups and foreign corporations
  • June 7, 2023 — Notice 2023-42 granted penalty relief for corporations that do not pay estimated tax in connection with the CAMT
  • February 17, 2023 — Notice 2023-20 provided interim CAMT guidance for insurance companies
  • December 27, 2022 — Notice 2023-7 addressed issues regarding IRC subchapters C and K, "troubled corporations," groups of corporations that file consolidated returns, depreciation of IRC Section 168 property, and the treatment of federal income tax credits under the CAMT

Stock buyback excise tax

  • April 9, 2024 - Proposed regulations (REG-115710-22) that, among other things, would impose the excise tax on many ordinary course intercompany funding transactions, including distributions, between US subsidiaries and a foreign parent unless the taxpayer can assert the transactions did not have a principal purpose of funding a stock buyback by the foreign parent

Domestic Content Bonus

  • May 16, 2024 — Notice 2024-41 expands list of Applicable Projects to include hydropower

EVs

  • May 3, 2024 — Final rules (TD 9995) on clean vehicle credits under IRC Sections 25E and 30D, transfer of credits, critical minerals and battery components, and foreign entities of concern

Sustainable Aviation Fuel

  • April 30, 2024 — Notice 2024-37 provides guidance and safe harbors using the 40BSAF-GREET 2024 model

Transferability

  • April 25, 2024 — Final regulations (TD 9993) describing rules and definitions for the transfer of eligible credits in a taxable year, including specific rules for partnerships and S corporations

Direct pay

  • March 5, 2024 — Final regulations (TD 9988) include rules for the elective payment of credit amounts, including definitions and special rules applicable to partnerships and S corporations and regarding repayment of excessive payments

Alternative Fuel Vehicle Refueling Property Credit

  • January 19, 2024 — Notice 2024-20 provides guidance on eligible census tracts

45V clean hydrogen credit

  • December 22, 2023 — Proposed regulations (REG-117631-23) include definitions of key terms in the statute, including lifecycle greenhouse gas emissions, qualified clean hydrogen, and qualified clean hydrogen production facility

45X Advanced Manufacturing Production Credit

  • December 14, 2023 — Proposed regulations (REG-107423-23) clarifying definitions and confirm credit amounts for eligible components, including solar and wind energy components, inverters

45Y, 48E clean electricity credits

  • May 29, 2024 - Proposed regulations (REG-119283-23) on greenhouse gas emission rates

45Z Clean Fuel Production Credit

  • May 31, 2024 — Notice 2024-49 on registration requirements

Low-income Communities Bonus Credit

  • August 10, 2023 — Final regulations (TD 9979) and Revenue Procedure 2023-27 provide guidance necessary to implement the Program, including, in relevant part, information an applicant must submit, the application review process, and the manner of obtaining an allocation

Advanced Energy Project Credit

  • February 13, 2023 — Notice 2023-18, first allocation round (Round 1), which began on May 31, 2023, $4 billion of qualifying advanced energy project credits
  • April 29, 2024 — Notice 2024-36 for owners of clean energy manufacturing and recycling projects, greenhouse gas emission reduction projects and critical material projects, announcing the second round of credit allocations for the program to allocate the remaining $6 billion credits
  • May 22 — IR-2024-144 announced that the DOE Qualified Advanced Energy Project Credit Program Applicant Portal (48C Portal) is open for any applicants to register for a new round of allocations

48 ITC

  • November 17, 2023 — Proposed regulations (REG-132569-17) update types of energy property eligible for the energy credit, requirements and rules generally applicable to energy property

45L Energy Efficient Home Credit

  • September 27, 2023 - Notice 2023-65 addresses: person eligible for the credit, determining the applicable credit amount, energy saving, certification and substantiation requirements

Wage and apprenticeship

  • June 18, 2024 — Final regulations (TD 9998) providing employers and workers with more clarity on what's required for recordkeeping, and employers information to adopt worker-centric practices like project labor agreements

Energy Community Bonus Credit

  • June 15, 2023 — Notice 2023-45, guidance for purposes of the production tax credit (PTC) under IRC Sections 45 and 45Y and the investment tax credit (ITC) under IRC Sections 48 and 48E for electricity facilities
  • June 7, 2024 — Notice 2024-48 publishes lists of information that taxpayers may use to determine whether they meet certain requirements under the Statistical Area Category or the Coal Closure Category as described for purposes of qualifying for energy community bonus credit amounts or rates under IRC Sections 45, 45Y, 48, and 48E

45J Nuclear Credit

  • March 9, 2023 — Notice 2023-24 provides guidance for computing credit, amount of unutilized NMCL, apply for and allocating unutilized NMCL, and transfer to "eligible project partner"

CHIPS Act 48D Advanced Manufacturing Investment Credit

  • March 21, 2023 — Proposed regulations (REG-120653-22) address the eligibility requirements, including defining what constitutes an eligible taxpayer, qualified property and an advanced manufacturing facility
  • March 5, 2024 — Final regulations (TD 9989) on direct pay
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Contact Information

For additional information concerning this Alert, please contact:

Washington Council Ernst & Young