This year’s Bluebook does not introduce new guidance, but it does provide explanations from the staff of the Joint Committee on Taxation, offering insight into Congress’ thoughts on various acts enacted in the 117th Congress. As a part of these explanations, the document includes recommendations for technical corrections in a variety of areas.
Considering the body of the Bluebook is largely a summary of previously implemented guidance, this article focuses on some insights from FORVIS to supplement these summaries. Further, the article examines the technical corrections outlined to highlight new clarifications or potential future updates from Congress.
FORVIS Insights of Select Bluebook Topics
Extension of Employee Retention Credit & Termination of ERC for Employers Subject to Closure Due to COVID-19
As a practical reminder, taxpayers must amend or file an Administrative Adjustment Request (AAR) for their federal income tax return if claiming an Employee Retention Credit (ERC). Taxpayers must disallow their wage expense to the extent of receiving a credit related to those wages. Said simply—there should be no “double dipping” of benefits. Further, it is important not to wait to file these amended returns until, for example, the ERC funds are received. This lag may cause the IRS to assess penalties and interest if, for example, a return that was impacted by the wage expense disallowance is picked for audit (and, as a result, an underpayment of tax is calculated and assessed).
In the past year, the IRS has issued a slew of warnings pursuing “ERC mills” that have claimed incorrect credits. In fact, the IRS announced a moratorium on processing ERC claims until at least 2024. In late 2023, the IRS announced a withdrawal process and repayment process for ERC claims as well. FORVIS is prepared to help eligible taxpayers with claiming the ERC, analyzing whether a claim is correct, and aid in withdrawing a current claim if appropriate.
With the current mix of legislative priorities, questions around whether lawmakers would change rules surrounding ERC as a revenue-raising tactic have surfaced. If changes were to be implemented, they may present themselves in the first quarter of 2024.
Information Reporting for Brokers & Digital Assets
In August 2023, the IRS released proposed regulations detailing the future reporting requirements for digital asset brokers under sections 6045, 6045A, and 6050I. Section 6045(a) requires brokers to file annual information returns (likely on a form 1099 specific to digital assets). These annual information returns will be furnished to both the IRS and customers.
Corporate Alternative Minimum Tax (CAMT)
The corporate AMT should be considered not only when preparing annual tax returns, but also when structuring entities and calculating estimated payments. As mentioned previously, aggregation rules may apply to certain entities, which could affect AMT applicability. Considering the provision applies to taxable years beginning after December 31, 2022, many of the first tax returns subject to this provision will be filed shortly.
Excise Tax on Repurchase of Corporate Stock
Repurchases by covered corporations occurring after December 31, 2022 are subject to this excise tax, which will eventually be reported on Form 720 by attaching Form 7208 once per taxable year. This normally will occur in the first full quarter after the close of the taxpayer’s taxable year. However, following Announcement 2023-18, the requirement for reporting excise tax on repurchases of corporate stock has been delayed until regulations are issued on the topic. As a reminder, the de minimis exception discussed above is $1 million of repurchases during the taxable year. For further details on the excise tax, see our articles, “Excise Tax on Repurchase of Corporate Stock” and “Treasury & IRS Issue Interim Guidance on New Stock Buyback Excise Tax.”
Increase in Research Credit Against Payroll Tax for Small Businesses
As discussed in the FORVIS Tax Planning Guide, recent cases related to the research and development (R&D) credit emphasize the need for proper documentation when claiming the credit. These cases include Little Sandy Coal Company, Inc. v. Commissioner of Internal Revenue, Leonard L. Grigsby et al. v. The United States, and Betz v. Commissioner. Reach out to a professional at FORVIS for more on what information should be kept and recorded to support a pursued R&D credit.
Technical Corrections
In the effort to further provide clarity and interpretation to the rules discussed within the Bluebook, the potential need for certain technical corrections to clarify congressional intent or simply provide clarity are outlined in the footnotes of the text. These potential technical corrections, below, may be given the clarifications described:
- Corporate alternative minimum tax
Normally, a partner only takes into account their distributive share of the adjusted financial statement income (AFSI) of the partnership. Therefore, the partner’s AFSI is adjusted accordingly. However, the Bluebook explains that this adjustment should not be considered when “determining whether a corporation is an applicable corporation when a partnership is controlled by one or more corporations and the partnership and corporations are treated as a single employer under Section 52.” A technical correction possibly is required to reflect congressional intent.
This rule implies that the partner may, in certain situations, have to take into account the full AFSI of the controlled partnership when performing the $1 billion average annual AFSI test, even though they own only a portion of the partnership. In short—it is not limited to their distributive share. That being said, the Bluebook acknowledges that a technical correction may be needed for clarity that the distributive share adjustment is regarded for defining an applicable corporation when a partnership is not controlled.
The Bluebook also clarifies that a technical correction may be needed regarding which groups are included in the aggregation rules under §52 when determining the $1 billion annual AFSI test pursuant to the special rule that applies to member corporations of a multinational group with a foreign parent. The groups included are “all members controlled by or controlling the taxpayer; the domicile of the ultimate parent is not relevant.”
- Related to clean energy credits
- Definition of Coastal Waters: For the purpose of the election to pursue the investment tax credit (§48) instead of the production tax credit (§45), the Bluebook defines coastal waters as those that “include the waters of the Great Lakes, the territorial seas, the exclusive economic zone, and the outer continental shelf, but only if such waters are treated as within the United States or a possession of the United States for the purposes of Section 45(e)(1).” A technical correction could be needed to provide clarity to the term.
- Section 50 Election: The Bluebook discusses the modification to allow public utilities “to elect to not normalize energy credits resulting from energy storage technology unless prohibited.” However, the footnote explains further that a similar rule also applies for the clean electricity investment credit under §13702 but that a technical correction to reflect congressional interest may be required.
- Carbon Sequestration: In the effort to define a qualified facility for the §45Q credit, certain requirements are in place for an electricity generating facility (as opposed to a direct air capture facility) associated with electric generating units. The potential technical correction to reflect congressional intent speaks specifically to “where construction of the carbon capture equipment begins either before or not more than one year after the applicable electric generating unit is originally placed in service.” If this is the case, then the baseline carbon dioxide production used as a qualifier for the facility “is the designed annual carbon oxide production, by mass, as determined based on an assumed capacity factor of 60 percent.”
- Section 25E—Previously Owned Clean Vehicle Credit: The potential technical correction would clarify congressional intent that there would not be allowed a credit for “second” transfers of used vehicles, even if the “first” transfer was not qualified under this section. For example, Vehicle A was originally purchased and used by Buyer 1, who then sold it to Buyer 2 (although Buyer 2 was not a qualified buyer). Accordingly, Buyer 2 did not claim the §25E credit. Buyer 2 then sold the vehicle to Buyer 3, a qualified buyer. The clarification indicates that Buyer 3 is not eligible for the §25E credit, given their purchase was the second transfer of the vehicle.
- Section 45W—Qualified Commercial Clean Vehicle Credit: The Bluebook indicates congressional intent was for the credit to apply for those “new” qualified commercial clean vehicles originally placed in service by the taxpayer. Therefore, used vehicles would not qualify for this credit, but a technical correction may be required to accomplish this.
- Section 45X—Advanced Manufacturing Production Credit: A technical correction may be required to reflect congressional intent that the credit fully sunsets after December 31, 2032 for all eligible components.
- Section 48E—Clean Electricity Investment Credit:
- The potential technical correction would clarify that the §50(b)(2) limitation would not apply to this credit. This section states, “Property used for lodging. No credit shall be determined under this subpart with respect to any property which is used predominantly to furnish lodging or in connection with the furnishing of lodging.” Therefore, for example, eligible property like solar panels installed on hotels could qualify for the §48E credit.
- While the domestic content bonus credit applies for this credit (in the same manner taxpayers are accustomed to with the §48 credit), the percentage manufactured in the U.S. is different, and a technical correction may be needed to reflect congressional intent. With respect to manufactured products, the percentages that apply to this credit are:
- “In the case of a facility the construction of which begins before January 1, 2025, 40 percent,
- In the case of a facility the construction of which begins after December 31, 2024, and before January 1, 2026, 45 percent,
- In the case of a facility the construction of which begins after December 31, 2025, and before January 1, 2027, 50 percent, and
- In the case of a facility, the construction of which begins after December 31, 2026, 55 percent.”
- Section 45Z—Clean Fuel Production Credit: In relation to the prevailing wage and apprenticeship requirement that may be needed for the “five times bonus credit,” a special rule applies for §45Z and facilities that are placed in service before January 1, 2025. The unique rules for these facilities are as follows. The Bluebook recommends a technical correction for this special rule to also apply to the apprenticeship requirement portion of the “five times bonus credit.”
- Prevailing wage requirements do not need to be met for the construction of the facility.
- Prevailing wage requirements only apply to the alteration or repair of the qualified facility for taxable years beginning after December 31, 2024.
- Elective Payment Election
- The Direct Pay election can be made among others by both exempt entities and entities that are a “state or political subdivision thereof.” The Bluebook indicates that there may need to be more clarification via a technical correction of the definition of a “state or political subdivision” to indicate this is meant to include state agencies and instrumentalities, e.g., tax-exempt state universities, state hospitals, and community action agencies.
- The Bluebook specifies that while a taxable, aka “non-list,” entity can elect for direct pay concerning §45V, §45Q, and §45X credits, only one of these elections can be made per taxpayer. A technical correction could be required to clarify congressional intent of the election. Note that this election can only be made for the election year and “each of the four succeeding taxable years ending before 1/1/33.”
- Excessive payments are defined as payments that are “the excess of the amount of the direct payment over the amount of the credit which would otherwise be allowable for the taxable year.” The result of an excessive payment is a tax increase, as determined by the Secretary, but the potential technical correction would clarify the timing of this tax increase. Even if the tax increase is due to an excessive payment in a previous year, the tax increase would apply for the year that the Secretary’s determination is made, i.e., when they determine an excessive payment exists.
Other potential technical corrections are included in the Bluebook for those provisions that apply to individual taxpayers, but these topics fall outside the scope of this article. Please see the Bluebook document for more information.