Here’s a look at recent tax-related happenings on the Hill, which includes a budget agreement to fund the government, discussion on a retroactive deal on the “big three” tax legislative priorities, and negotiations on a top-line spending figure for fiscal year 2024.
In the News
A budget agreement was reached to fund the federal government on Sunday, January 7, coming in at $1.59 trillion ($886 billion for defense and $704 billion for non-defense spending). This deal arrives shortly before the first of two “due dates” of the current continuing resolution implemented by House Speaker Mike Johnson (R-LA). While the agreement has been announced, lawmakers still need to effectuate the deal into law by the January 19 due date to avoid shutdowns to key programs affecting, for example, veterans and the FDA.
To afford this budget, two key items may be rescinded: 1) coronavirus emergency spending and 2) IRS additional funding. The Inflation Reduction Act of 2022 (the IRA) introduced a highly controversial $80 billion in funding for the IRS to focus on enforcement, modernizing technology, IRS agents, and customer service (for more, see our article, “Inflation Reduction Act: IRS $80 Billion Spending Plan”). This newly announced deal would rescind $20 billion of this funding in 2024, which comes after the already $14 billion cut to IRS funding in November 2023 (a compromise reached to provide aid to Israel at the time). The implications of this cut could be multifaceted. With fewer resources—both of staff and technology—the IRS may not “catch” errors or bad actors, which could ultimately cost the country revenue. In the near term, we are left with questions about the implications this change may have on the processing and compliance needs of the upcoming tax season.
The irony of the deal is that it is somewhat similar to the agreement between President Joe Biden and former House Speaker Kevin McCarthy last year, which ultimately spurred McCarthy’s ejection from the speakership. Among the debate are topics like border security, support dollars for Israel and Ukraine, and other politically charged social initiatives. Even so, with this top-line framework agreed on, appropriations bills will need to be hastily negotiated in the coming weeks, which may include other considerations important to taxpayers. FORVIS will continue to monitor the negotiations and provide updates as available.
Lately on the Hill
Legislators on both sides of the aisle are ringing in the new year with substantive discussions around a retroactive application of the “big three” tax legislative priorities concerning Section 174 research and experimental expenditure deductions, 100% bonus depreciation, and interest expense deductions under §163(j). Considering that the 2023 tax year filing season is about to get underway, time is of the essence to get a retroactive deal done. Democrats continue their push for an expanded child tax credit to be included in the tax package. The combination of all tax incentives would balloon the package to nearly $100 billion, which negotiators will have to figure out how to pay for to garner more Republican support. The first opportunity to pass such legislation may come by January 19, when the first wave of government funding expires. Any legislation passed is expected to sunset in 2025, along with numerous tax-related provisions introduced by the Tax Cuts and Jobs Act of 2017.
Leaders of the House and Senate also are negotiating a “top-line” spending figure for fiscal year 2024, targeting $772 billion in non-defense discretionary spending mirroring the Fiscal Responsibility Act of 2023. In an effort to gather support from his party, Johnson is investigating ways to implement spending reductions, possibly involving rescinding COVID relief and accelerating IRS funding cuts.
The Joint Committee on Taxation released its explanation of tax legislation (widely known as the “Bluebook”) enacted during the 117th Congress spanning January 2021 to January 2023. The Bluebook provides recommendations for technical corrections and explains Congressional intent for eight different acts, including significant tax legislation such as the American Rescue Plan Act of 2021 and the Consolidated Appropriations Act, 2023. Prominent provisions of these acts include corporate AMT, clean energy incentives, and the stock buyback excise tax. The legislative history and explanation of congressional intent of the legislation provide the IRS, judicial courts, tax practitioners, and taxpayers insight into the intended application of the provisions established therein.
In a letter to IRS Commissioner Daniel Werfel, Republican members of the House Ways and Means Committee admonished the commissioner for not implementing the Form 1099-K reporting threshold, which was reduced from $20,000 and more than 200 transactions to $600. The letter sardonically states, “To be clear, we did not vote for, nor do we support, the lowering of the Form 1099-K threshold. However, we have serious concerns with the IRS’s actions that have continually ignored the clear letter of the law, and now your agency appears to be writing an entirely new policy without the authority to do so. The legislation that our Democrat colleagues passed on a party line vote very clearly states that the Form 1099-K threshold was set at $600 for tax year 2022 and onward. The enacted law did not give the IRS room to delay or change this threshold.”
- A U.S. district court rejected the plaintiff’s attempt to substantiate material participation in several businesses to avoid the net investment tax. The plaintiff failed to “submit reliable evidence establishing the amount of time [he] actually spent on his activities for those companies”; rather, the plaintiff relied on non-contemporaneous employment agreements, scarce board meeting minutes, and testimony from himself, family, and friends. The ruling states, “As for [the plaintiff’s] own testimony about the number of hours he participated in the three entities, it is simply too vague and conclusory to satisfy the ‘reasonable means’ requirement. Although [the plaintiff] provides a superficial summary of activities he participated in for each company during 2014 and 2015, he provides few details about how many hours he spent participating in any of those activities. [The plaintiff] also concedes that he has no documents to substantiate his claimed hours, nor did he retain any notes, logs, calendars, appointment books, phone records, emails or anything else to provide a basis for his method of calculating or reconstructing his claimed hours of participation in any of the three companies. Such vague testimony constitutes the type of ‘post-event ballpark guesstimates’ based solely on a taxpayer's “judgment and experience as to how much time the activities must have taken” and are insufficient as a matter of law.” (James Senty et al. v. United States)
- In a summary opinion, the Tax Court ruled that the petitioner’s assertion of entitlement to claimed deductions for various expenses related to his businesses and rental properties did not meet the burden of proof requisites. Inclusive in the ruling, the petitioner did not maintain contemporaneous records for car and truck expenses; adequate records for meals expenses; could not identify otherwise depreciable properties’ bases, useful lives, or accumulated depreciation; and in one instance, did not operate a business with a profit objective resulting in hobby loss treatment. (Polete v. Commissioner, T.C. Summary Opinion 2023-35 (December 18, 2023))
Other Important Developments
- The Financial Crimes Enforcement Network (FinCEN) announced that it is now accepting beneficial ownership information (BOI) reports using its online filing system. Companies required to file that were created or registered to do business prior to January 1, 2024 have until January 1, 2025 to file, and those created or registered to do business on or after January 1, 2024 have 90 days to file after receiving notice that the company’s creation or registration is effective.
- Notice 2024-16 announces the IRS’ intent to issue proposed regulations concerning basis treatment where a domestic corporation acquires stock of a controlled foreign corporation (CFC) in liquidation or asset reorganization. For covered inbound transactions, the acquiring corporation’s adjusted stock basis of the acquired CFC is determined as if the transferor’s basis in the CFC were adjusted basis to a certain extent.
- Proposed regulations (REG-121010-17) would update worthless debt standards under current regulations under §1.166-2 for regulated financial companies and members of regulated financial groups that hold debt instruments. The regulations seek to address the “tension” between competing incentives of the regulated companies and the regulators themselves. Companies have the incentive to not write off worthless debt prematurely to preserve regulatory capital requirements while the regulators seek to ensure that capital is not overstated. The regulations determine when a debt instrument is conclusively worthless for income tax purposes.
- The IRS has issued Notice 2024-12 to clarify and modify guidance provided by Notice 2023-63 concerning the treatment of specified research or experimental expenditures under §174. Updates to the guidance include treatment of costs performed under contract by providing “excluded product rights,” eliminating the requirement to rely on all rules described in Sections 3 through 9 of Notice 2023-63 if they have relied on any of the rules, and clarifying the obsoletion of Section 5 of Revenue Procedure (Rev. Proc.) 2000-50 concerning computer software development costs as only pertaining to expenditures paid in taxable years beginning after December 31, 2021.
- In conjunction with Notice 2024-12, the IRS also released Rev. Proc. 2024-9 modifying Sections 7 and 9 of Rev. Proc. 2023-24 (concerning method changes) to conform with guidance provided under Notices 2023-63 and 2024-12 (concerning §174 capitalization of research and experimental expenditures).
- The IRS in IR-2023-250 provided relief in parts of Tennessee affected by natural disasters as various deadlines have been postponed to June 17, 2024. Individuals and businesses residing in Davidson, Dickson, Montgomery, and Sumner counties qualify for relief for deadlines that occurred between December 9, 2023 and June 17, 2024. The relief includes filing deadlines for income tax returns and payments, IRA contributions, partnership and S corporation returns, corporation and fiduciary returns, and tax-exempt organization returns, among others.
- Recipients of ineligible Employee Retention Credits (ERCs) and resulting refunds have now been provided an opportunity to avoid potential penalties, interest, and litigation by participating in the Voluntary Disclosure Program as provided by the IRS in Announcement 2024-3. The announcement details participant eligibility requirements, terms of the program, and the procedures to file Form 15434, Application for Employee Retention Credit (ERC) Voluntary Disclosure Program, which must be completed on or before March 22, 2024. The IRS also issued news release IR-2023-247and FAQs providing additional information.
- FinCEN issued a final rule in RIN 1506-AB59 governing access by authorized recipients to BOI. The rule seeks to ensure that only authorized recipients have access to BOI, that BOI is only used for specified purposes, and that authorized recipients only share BOI by secure means and for the specified purposes of the Corporate Transparency Act.
- Notice 2024-2 provides guidance for miscellaneous changes under the Secure 2.0 Act of 2022 in question-and-answer form. The guidance is not intended to be comprehensive, but rather to assist initial implementation of the provisions.
- The IRS announced in IR-2023-244 relief for eligible taxpayers subject to failure to pay penalties for taxable years 2020 and 2021. Due to the COVID-19 pandemic, the IRS ceased sending notices to those owing back taxes in February 2022. The IRS will soon resume collection efforts for these overdue taxes. The IRS reasons that since taxpayers have not heard from the IRS since the notices were suspended, they may be surprised to find they owe the taxes with years of failure to pay penalties and interest. Notice 2024-7 details how the relief will be applied and who is eligible. Eligible taxpayers include those assessed 2020 or 2021 income tax less than $100,000, who were liable for the additional failure to pay tax, and received an initial balance due notice on or before December 7, 2023. Eligible returns include Forms 1040, 1120, 1041, and 990-T. While the notice does relieve taxpayers of the failure to pay a penalty, it does not relieve any amount of accrued interest for those years. The failure to pay penalties will resume on April 1, 2024.
- Internal Revenue Bulletin 2024-1 has been published containing the following:
- Revenue procedure for letter rulings and information letters. (Rev. Proc. 2024-1)
- Revenue procedure for technical advice memoranda. (Rev. Proc. 2024-2)
- Revenue procedure providing areas and matters of the Internal Revenue Code on which the IRS will not issue letter rulings of determination letters. (Rev. Proc. 2024-3 and 2024-7)
- Revenue procedure relating to the types of advice the IRS provides. (Rev. Proc. 2024-4)
- Revenue procedure for issuing determination letters on tax-exempt status and other related matters. (Rev. Proc. 2024-5)
- Internal Revenue Bulletin 2023-52 has been published containing the following:
- Revenue procedure with specifications for private printing of Forms W-2c and W-3c. (Rev. Proc. 2023-39)
- Notice establishing the 2023 Required Amendments List applicable to qualified individually designed plans under §401(a) and §403(b). (Notice 2023-79)
- Revocation of §501(c)(3) organizations. (Announcement 2023-35)
- Notice announcing the IRS’ intent to issue proposed regulations to address the relationship between the foreign tax credit and dual consolidated loss rules to the pending Global Anti-Base Erosion (GloBE) Model Rules, also known as Pillar Two. (Notice 2023-80)
- Proposed regulations relating to energy credits for the taxable year placed in service and clarifies increased energy credits available of prevailing wage and apprenticeship requirements are met. (REG-132569-17)
- Revenue procedure containing discount factors for the 2023 accident year. (Rev. Proc. 2023-41)
- Internal Revenue Bulletin 2023-51 has been published containing the following:
- Notice extending 1099-K reporting threshold transition period for calendar year 2023. The threshold remains $20,000 and 200 transactions. (Notice 2023-74)
- Revenue procedure specifying adequate disclosure to reduce an understatement of income tax under §6662(d) and preparer penalties under §6694(a). (Rev. Proc. 2023-40)
- Proposed regulations related to long-term, part-time employee 401(k) plans pertaining to rules set forth in the SECURE and SECURE 2.0 Acts. (REG-104194-23)
- Revenue procedure to “combine, conform, clarify, and update” existing rules for qualified and §403(b) pre-approved retirement plans. (Rev. Proc. 2023-37)
- Revenue procedure under §30D(d)(3) related to information reporting on vehicles eligible for a clean vehicle credit as required of qualified manufacturers. (Rev. Proc. 2023-38)
- Revenue ruling establishing the base period T-bill rate for the period ending September 30, 2023. (Rev. Rul. 2023-23)
- Revenue procedure updating foreign countries with information exchange agreements and automatic exchange relationships. (Rev. Proc. 2023-36)
Continued Coverage of the Inflation Reduction Act (IRA)
- The IRS announced in IR-2024-02 an extension of time to submit time-of-sale reports for dealers and sellers of clean vehicles. Participants now have until January 19 to submit the required reports for qualifying vehicles sold between January 1 and January 16.
- Notice 2024-13 announces the IRS’ intent to issue proposed regulations with respect to the §25C credit for energy-efficient home improvements. The notice requests comments of the associated product identification number (PIN) requirements for property placed in service after December 31, 2024 and details the PIN assignment system under consideration.
- As provided in Notice 2024-9, the IRS intends to propose regulations to implement exceptions to elective payment phaseouts under §§45, 45Y, 48, and 48E for applicable entities. The notice also provides transitional procedures to claim the phaseout exception for electing taxpayers that begin construction before January 1, 2025 that do not meet the domestic content requirement.
- FAQs related to new, previously owned, and qualified commercial clean vehicle credits have been updated with the release of FS-2023-29. Two questions and answers were added dealing with foreign entity of concern requirements, including ineligibility if battery components are manufactured by a foreign entity of concern and the required attestation of compliance with the foreign entity of concern requirements.
- The IRS has released an online tool for qualifying businesses, tax-exempt organizations, or entities such as state, local, and tribal governments to register for elective payment and transfer options for clean energy credits under the IRA and CHIPS Act. For these qualifying entities to receive the credits through elective payment or transfer election, they must be registered and include their registration numbers on the entity’s tax return. Elective payment and the transfer election are ways for these entities to receive the credit even if they do not have tax liabilities to offset with the credit. Registration should be made after placing qualified property into service but no earlier than the beginning of the tax period when the entity earns the credit and at least 120 days before the due date (including extensions) of the return reporting the credits.
- The IRS issued proposed regulations REG-117631-23 under §§45V and 48 relating to credits for clean hydrogen production and investment. The proposed regulations define credit eligibility, amount of the credit, procedures for determining lifecycle greenhouse gas emissions rates, procedures for verification of qualified clean hydrogen production, rules for determining the placed-in-service date for an existing facility modified to produce qualifying hydrogen, and procedures for electing to treat qualified property as property for purposes of the §48 credit.
- Notice 2024-5 provides a safe harbor under §45W concerning the credit for qualified commercial clean vehicles. The safe harbor pertains to the incremental cost standard for calculation of the credit for eligible vehicles placed into service in 2024, allowing reliance on the U.S. Department of Energy’s analysis on incremental costs. The IRS will allow $7,000 as the incremental cost for compact plug-in hybrid electric vehicles (PHEVs) and $7,500 for street vehicles with a gross vehicle weight rating (GVWR) of less than 14,000 pounds. The notice also requests comments regarding additional types or classes of vehicles that should be included in this safe harbor in the future.
This newsletter features developing content that is subject to change at any time. It does not constitute legal or tax advice. Consult your professional advisors prior to acting on the information set forth herein.