Programming Note: Taxation & Representation will return on Sept. 11, following the August congressional recess.
Legislative Lowdown
Schumer Files Cloture on Wyden-Smith Tax Package: On July 29, Senate Majority Leader Chuck Schumer (D-NY) filed cloture on the Tax Relief for American Families and Workers Act (H.R. 7024), a tax package negotiated by Senate Finance Committee Chairman Ron Wyden (D-OR) and House Ways and Means Committee Chairman Jason Smith (R-MO). The package will be scheduled for a procedural vote on Aug. 1.
The bill includes numerous tax incentives for individuals and businesses, including the restoration of the research and development (R&D) amortization deduction, accelerated bonus depreciation, and the business interest limitation deduction provisions from the Tax Cuts and Jobs Act of 2017 (Pub. L. 115-97) that began expiring after 2021:
- R&D Amortization: Through 2021, businesses were permitted to deduct immediately certain research and development (R&D) costs under section 174. Beginning in 2022, businesses had to amortize R&D expenditures over five years. The package provision would delay the amortization date in which taxpayers must deduct R&D expenditures through tax year 2025.
- Accelerated Bonus Depreciation: Through 2022, businesses were able to claim 100% bonus depreciation under section 168(k) for eligible property placed in service during the taxable year. Starting in 2023, the bonus-depreciation allowance decreased to 80%, the first 20% annual stepdown until bonus depreciation expires for equipment placed in service after 2026. The package provision would extend full bonus depreciation for property placed in service in tax years 2023, 2024 and 2025, retaining a 20% bonus depreciation rate for property placed in service in 2026, and phasing out in 2027.
- Business Interest Deduction Limitation: Through 2021, the deduction for net business interest expense under 163(j) was limited to a maximum of 30% of a taxpayer’s earnings before interest, taxes, depreciation and amortization (EBITDA). In 2022, the provision was narrowed to allow the 30% deduction based on only earnings before interest and taxes (EBIT)—no longer taking into account depreciation or amortization for purposes of the calculation. The package provision would extend the application of EBITDA through tax year 2025.
For individuals and families, the bill includes an expansion of the child tax credit (CTC) as well as its tethering to inflation for tax years 2024 and 2025. Other provisions of the package concern Taiwan double tax relief, disaster tax relief, tax credits for affordable housing, the sunsetting of the Employee Retention Tax Credit, and in increase in the reporting threshold for Forms 1099-NEC and 1099-MISC. For more information on the bill, please see the Jan. 17 issue of Taxation and Representation.
The legislation overwhelmingly passed the House in January but faced opposition from Senate Republicans, including Finance Committee Ranking Member Mike Crapo (R-ID), who claimed that the CTC “lookback” provision in the package may disincentivize work. Given that the concerns of Senate Republicans have not been addressed, Thursday’s procedural vote is likely to fail. The procedural vote is part of an effort by Democratic leadership to help vulnerable Senate Democratic nominees who have advocated for the bill, such as Sens. Sherrod Brown (D-OH) and Jon Tester (D-MT).
Harris Pledges to Follow Biden’s Tax Pledge as Her Tax Policy Priorities Take Shape: On July 26, a spokesperson for Vice President Kamala Harris’ 2024 presidential election campaign stated that, if elected, she would not raise taxes on individuals making under $400,000 per year. This is the first indication that Harris would follow President Biden’s pledge, which has heavily influenced his economic policies throughout his tenure. It is also a departure from her 2020 campaign position, which set the limit at $100,000.
Harris, like Biden, also has pledged to raise tax revenue by increasing tax burdens on wealthy taxpayers and corporations, as part of a broad appeal to working-class voters.
Harris’s meteoric rise to the top of the Democratic ticket after President Biden announced his withdrawal from the race on July 21 has left Democratic lawmakers jockeying for Harris to champion their causes, including in the tax policy space. Many, including tax writers on the Senate Finance Committee and House Ways and Means Committee, have urged Harris to carry Biden’s tax priorities forward and resist making changes that may alienate voters. Others, including Finance Committee Chairman Ron Wyden (D-OR), have urged Harris to emphasize that former President Trump “wants to give tax breaks to billionaires and the powerful,” as opposed to the Democrats’ approach at a “tax code that … gives everybody a chance to get ahead.” Sen. Michael Bennet (D-CO), a champion of the child tax credit, has urged Harris to push for its permanent expansion, and Rep. Jimmy Panetta (D-CA), a housing advocate, has expressed interest in Harris pushing for affordable housing tax incentives. As Harris’ presidential campaign develops, her stances on tax policy will become increasingly important as lawmakers also prepare to address the looming expiration of key Tax Cuts and Jobs Act provisions in 2025.
Appropriations Update: House Delays Consideration of FSGG Appropriations Bill as Senate Committee Tees Up Consideration this Week: On July 23, House leadership canceled floor consideration of three of four fiscal year (FY) 2025 Appropriations bills, including the Financial Services-General Government bill that funds the Treasury Department and Internal Revenue Service (IRS). All three bills were pulled over intraparty conflict and concerns that the bills would not pass, as certain factions of the House Republican Conference expressed opposition to riders and funding mechanisms in each of the bills. With the House ending its legislative session early, the FSGG bill will not be considered until September at the earliest. The current version of the FY 2025 House FSGG bill would provide the IRS with about $10.1 billion, a $2.35 billion reduction in funding from the IRS’s FY 2024 funding level, with a $2 billion cut in enforcement and $350 million cut from operations support. The amount of funding allocated for taxpayer service operations would remain unchanged from FY 2024 levels.
The Senate Appropriations Committee will meet on Aug. 1 to mark up four of its appropriations bills, including their version of the FSGG bill. The Senate bill is at odds with the House version and would leave IRS funding unchanged at $12.3 billion, in line with the president’s budget request.
Senate Continues Confirmation of Tax Court Nominees: On Feb. 25, the Senate confirmed Kashi Way by a 79-16 vote to be a judge on the U.S. Tax Court for a 15-year term, followed by the confirmation of Adam B. Landy on July 29 by a 73-13 vote. Another nominee, Rose E. Jenkins, who was reported favorably by the Senate Finance Committee at the same time as Way and Landy, is expected to receive a confirmation vote soon.
Three more Tax Court nominees—Jeffrey S. Arbeit, Benjamin A. Guider III and Cathy Fung—were favorably reported by the Senate Finance Committee on July 25, with Arbeit and Guider receiving unanimous recommendation by committee members, while Fung was recommended by a 19-8 margin. Their nominations, however, might not be considered by the Senate until after it returns in September.
Tax Worldview
G20 Countries Issue Declaration to Work Together on Taxation of Ultra-High-Net-Worth Individuals: On July 26, the finance ministers of the Group of 20 (G20) issued a joint communique titled “The Rio de Janeiro G20 Ministerial Declaration on International Tax Cooperation” in which the ministers committed to develop a global plan to tax ultra-high-net-worth individuals. The declaration does not detail specific language as to the approach to ensure the effective taxation of such individuals, but it indicates that a cooperative effort by the G20 countries “could involve exchanging best practices, encouraging debates around tax principles, and devising anti-avoidance mechanisms, including addressing potentially harmful tax practices.” The joint communique did not address whether such negotiations would be conducted through the United Nations or the Organisation for Economic Co-operation and Development (OECD), both of which continue to compete for primacy in this issue area. While Brazilian Finance Minister Fernando Haddad said that this declaration is merely the start of “a broader process that will require the participation of academia, scholars, and international organizations,” other officials acknowledged the difficulty of implementing such an agreement. With the release of the declaration, OECD Secretary-General Mathias Cormann issued a statement expressing support for the efforts of the Brazilian G20 presidency.
1111 Constitution Avenue
House Republicans Introduce Bill Blocking Direct File: On July 23, Reps. Adrian Smith (R-NE) and Chuck Edwards (R-NC) introduced the IRS Overreach Prevention Act (H.R. 9109), which would prevent the Internal Revenue Service (IRS) from continuing to conduct the Direct File program or creating another free, public electronic tax return-filing service. The Direct File program, which was piloted this past tax-filing season, allowed eligible taxpayers to prepare and file tax returns directly with the IRS through a government-operated tax-filing platform. Though the agency announced at the conclusion of the 2024 tax-filing season that it would seek to make permanent and expand the program in 2025, Republican lawmakers and the tax-preparation industry have repeatedly criticized the program, claiming that the program is costly and duplicative of the array of free tax-filing options already available. They also have questioned whether the Treasury Department and the IRS have the statutory authority to run the program. After the bill’s introduction, the American Coalition for Taxpayer Rights, a coalition of tax-preparation companies and financial institutions, released a statement praising the bill, stating that the results of the pilot program show that “Americans are not interested in the federal government completing their taxes.” Upon introduction, the bill was cosponsored by seven other House Republicans, including House Ways and Means Committee Members Reps. Kevin Hern (R-OK), Carol Miller (R-WV), Greg Steube (R-FL) and Claudia Tenney (R-NY).
New Jersey and Pennsylvania to Join Direct File in 2025: On July 24, a spokesperson for the New Jersey Department of the Treasury announced that New Jersey would join the IRS Direct File program in 2025, and a U.S. Treasury Department press release on July 30 noted that Pennsylvania will also join Direct File, joining Oregon and the 12 other states that piloted the program in 2024. As New Jersey and Pennsylvania both levy a state income tax, taxpayers will be redirected to a state-operated system to file their state tax returns after completing their federal tax return using Direct File. Responding to the announcement, Treasury Secretary Janet Yellen said that the program will be available to 1 million New Jersey residents and 1.5 million Pennsylvania residents, and that it will “save … taxpayers time and money and help ensure they receive the tax benefits for which they are eligible.”
At a Glance
IRS Announces Progress on Several Digitization Initiatives: On July 25, the Internal Revenue Service (IRS) announced several points of progress with regard to ongoing digital transformation efforts using Inflation Reduction Act (Pub. L. 117-169) funds. Improvements the IRS highlighted included new features in the Individual Online Account, with the ability for taxpayers to retrieve all tax-related information, such as return and audit statuses and lien information, from one source. In addition, the IRS reported improvements to the Business Tax Account, the ability to file certain amended returns electronically, the expansion of mobile adaptive forms and the redesign of taxpayer notices.
IRS Provides Initial Guidance for Section 45Q Credit: On July 24, the Internal Revenue Service (IRS) issued Notice 2024-60 concerning the Section 45Q Carbon Oxide Sequestration Credit, which was amended as part of the Inflation Reduction Act. The notice details procedural steps that taxpayers must take to obtain a lifecycle greenhouse gas emissions analysis required to claim the credit for the utilization of carbon oxide. Under the 2021 final regulations, taxpayers must obtain preapproval of their lifecycle analysis from the Department of Energy before filing a return claiming the credit.
Biden Nominates David Johnson as TIGTA Inspector General: On July 23, President Biden nominated David Samuel Johnson to serve as the inspector general for the Treasury Inspector General for Tax Administration (TIGTA), the watchdog organization for the Internal Revenue Service and other Treasury Department offices. He would succeed J. Russell George, who passed away in January. Johnson currently works in the Inspector General’s office at the Department of Veterans Affairs.
IRS Corrects Regulations Concerning Partnership-Related Basis Adjustment Transactions: On July 24, the Internal Revenue Service (IRS) published a minor correction to the June 18 notice of proposed rulemaking concerning partnership basis-shifting transactions. The original regulations “identify certain partnership related party basis adjustment transactions and substantially similar transactions as transactions of interest, a type of reportable transaction.” Notwithstanding the corrections, opposition to the proposal continues to mount, with practitioners stressing that the proposal’s lack of statutory authority makes it particularly vulnerable to legal challenge, especially after the Supreme Court’s Loper Bright decision eliminated any deference to the IRS’s position under the now-defunct Chevron doctrine.
Hearings and Events
House Ways and Means Committee
The House Ways and Means Committee has no tax hearings scheduled for this week.
Senate Finance Committee
On July 30, the Senate Finance Committee held a hearing titled “Tax Tools for Local Economic Development.”
Other
On Aug. 1, the Senate Appropriations Committee will hold a markup of several Fiscal Year 2025 appropriations bills, including the Financial Services and General Government Appropriations Act.