Legislative Lowdown
Yellen Discusses IRA Credits, Global Minimum Tax and More Before Ways and Means Committee: On April 30, Treasury Secretary Janet Yellen appeared before the House Ways and Means Committee to discuss President Biden’s Fiscal Year 2025 Budget Request. As is typical of budget hearings, Yellen used the hearing to discuss the administration’s broader tax agenda, including ongoing Treasury Department efforts to finalize various energy-tax provisions in the Inflation Reduction Act (IRA, Pub. L. 117-169), and negotiations with the Organisation for Economic Co-operation and Development (OECD) on the ongoing two-pillar global tax agreement. She also fielded a range of questions on issues of interest to House tax writers.
Republicans on the committee, including Ways and Means Committee Chairman Jason Smith (R-MO), focused on the administration’s position with respect to extending key tax provisions of the Tax Cuts and Jobs Act (TCJA, Pub. L. 115-97) set to expire next year, including individual tax rates, the increased individual standard deduction and expanded child tax credit. Several Republicans questioned Yellen regarding President Biden’s statement on social media indicating his intent to let the individual provisions expire despite their impact on low- and middle-income earners. In response, Yellen reaffirmed that the president has pledged to not raise taxes on individuals earning less than $400,000 per year. Democrats, including Ranking Member Richard Neal (D-MA), praised the Biden administration’s economic policies for restoring economic productivity through the various pandemic-relief bills that Democrats enacted in the last Congress while defending against Republican criticisms of the Inflation Reduction Act (IRA). Yellen said that rulemakings on IRA credits continue to be finalized, and stricter foreign-entity-of-concern rules with respect to imported electric-vehicle components will start to take effect this year.
Another major topic of discussion was the ongoing negotiations on the OECD’s two-pillar tax agreement, which includes a global minimum-tax regime that will significantly affect U.S. multinational corporations. Republicans contended that widespread enactment of the Pillar Two minimum tax by foreign governments will lead to the loss of U.S. tax revenues, citing a recent assessment by the Joint Committee on Taxation (JCT). Yellen responded that the JCT’s findings represented an “extreme negative case” and further analysis indicates that the agreement would most likely result in positive tax revenues for the United States. Republicans also expressed concerns that the U.S. credit for research and development (R&D) would be devalued under the agreement and place U.S. multinationals at a competitive disadvantage. Yellen responded that the Treasury Department continues to negotiate with the OECD with regard to the U.S. R&D credit and has achieved favorable tax treatment for other U.S. tax credits under the Pillar Two regime.
1111 Constitution Avenue
IRS Issues Final Rules on Sections 25E and 30D Vehicle Credits: On May 3, the Treasury Department and Internal Revenue Service (IRS) released final regulations concerning critical mineral and battery component requirements for the Section 30D Clean Vehicle Credit, as well as transferability guidance with respect to the Section 25E Credit for Previously Owned Clean Vehicles and the Section 30D Clean Vehicle Credit, both of which were enacted as part of the Inflation Reduction Act (IRA, Pub. L. 117-169). The Section 30D credit allows automakers to claim a credit of up to $7,500 per new clean vehicle, with $3,750 awarded for vehicles meeting applicable critical minerals requirements and $3,750 awarded for vehicles meeting battery component requirements. The Section 25E credit allows for purchasers of previously owned clean vehicles to receive a credit up to $4,000 if the sale price of the vehicle was $25,000 or less, subject to income limitations and vehicle eligibility requirements.
Importantly, the regulations finalized rules determining whether battery components and other critical minerals in vehicle batteries comply with foreign-entity-of-concern (FEOC) requirements, with the final rules providing formal definitions, imposing a due-diligence requirement, and describing methods of determining, reporting and reviewing FEOC compliance.
The final rules advantage automakers, as the Treasury Department opted for looser regulations with respect to FEOC requirements. In its requirements governing non-traceable battery materials, the final rules include graphite as non-traceable, subjecting it to looser FEOC requirements. The final regulations also retain the December 2023 proposed rules that allow a two-year phase-in period for minerals with a FEOC designation, which, in turn, suspends enforcement of the FEOC rules until at least 2027. As a result, automakers will continue to be able to purchase graphite from China, Russia, Iran and North Korea. Following the release of the final regulations, the Treasury Department issued a press release praising the final regulations, with Treasury Secretary Janet Yellen stating that the guidance builds on previous Biden administration IRA incentives to onshore the entire clean vehicle supply chain,” and Senior Advisor to the President for International Climate Policy John Podesta adding that the guidance “provide[s] clarity and certainty to an EV marketplace that’s rapidly growing.” Deputy Energy Secretary David Turk also told reporters that the final rules “make it easier for the energy industry to move away from risky supply chains tied to foreign entities that may not share our values.”
Despite Biden administration comments claiming that the regulations would encourage onshore investments, widespread concern and criticism continue, stressing that the loose FEOC rules give an advantage to foreign critical mineral manufacturers, especially with respect to Chinese mineral production. Sen. Joe Manchin (D-WV) quickly criticized the regulations as being “outrageous and illegal” for allowing Chinese mineral producers to claim IRA credits. His sentiment was shared by House Ways and Means Committee Chairman Jason Smith (R-MO), who said that the regulations weaken protections against China and “circumvent[s] Congress’s constitutional authority on trade ... [which] will only make the U.S. more reliant on foreign nations for critical minerals while also undermining our nation’s trade relationships ....”
The regulations will be effective beginning on July 5, 2024.
IRS Releases Guidance on SAF Credits: On April 30, the Treasury Department and Internal Revenue Service (IRS) released guidance on eligibility requirements for the Section 40B Sustainable Aviation Fuel (SAF) credit enacted as part of the Inflation Reduction Act (IRA). While short of anticipated proposed regulations, the new IRS Notice follows earlier guidance released by the Treasury Department and IRS, in consultation with the Environmental Protection Agency (EPA), Department of Energy (DOE) and Federal Aviation Administration (FAA), which provide interim safe harbors for the new SAF credit.
Under the IRS Notice, to qualify for the minimum tax credit of $1.25 per gallon, refineries must show that the SAF produced would result in at least 50% lower emissions compared to petroleum jet fuel. Emission reductions in excess of the 50% threshold result in an increase in the available tax credit of $0.01 per percentage point of emissions reduction above the threshold, for a maximum credit of $1.75 per gallon. Under the guidance, biorefineries manufacturing corn and soybean-based SAF may claim credit in the calculation of the emission-reduction percentage if the input materials are sourced using agricultural production methods that utilize a set of climate-friendly practices, including no-till farming and the use of cover crops.
As part of the new guidance, the Treasury Department announced it would utilize a modified version of the Argonne National Laboratory’s Greenhouse Gases, Regulated Emissions, and Energy use in Technologies (GREET) model for determining the emission reductions associated with different types of SAF. The updated model, titled “40B SAF-GREET 2024,” incorporates factors that contribute to the lifecycle greenhouse gas emissions of SAF, including carbon capture and storage and the use of renewable electricity in the manufacturing process, to determine the overall greenhouse gas emissions of SAF. The guidance and 40B SAF-GREET model are expected to serve as a foundation for the anticipated regulations implementing the tech-neural clean fuels credit under section 45Z, which is scheduled to replace the section 40B SAF credit beginning in 2025.
IRS Updates Strategic Operating Plan: On May 2, the Internal Revenue Service (IRS) issued its 2024 annual update on its Strategic Operating Plan, outlining transformational work the agency is conducting through Inflation Reduction Act (IRA) funding. Much of the update discusses the agency’s major accomplishments since the IRA’s passage, including improvements in taxpayer service, technology modernization, and tax form digitization efforts. The update also praised the Direct File pilot program, noting that, during the last week of tax-filing season, the number of returns submitted through Direct File grew at more than three times the rate of all returns submitted to the IRS. About 140,000 returns were filed through Direct File—an estimated 0.01% of total returns filed.
Along with the update, the IRS released a supplement detailing current work underway and updated goals for the rest of 2024 and the 2025 tax-filing season. These include increased scrutiny on wealthy taxpayers, large corporations and complex partnerships, as the IRS noted that it will seek to fund further transformational efforts by increasing audit rates threefold on large corporations with over $250 million and tenfold on complex partnerships with assets over $10 million. The IRS will also attempt to increase audit rates by more than 50% on wealthy individual taxpayers with total positive income over $10 million. The supplement also revisits the five key Strategic Operating Plan priority objectives to improve taxpayer service by streamlining taxpayer-agency communication, modernizing technology and expanding workforce personnel. IRS Commissioner Daniel Werfel noted the need for continued IRS transformation, stating, “[w]hile we have made significant progress, we realize we need to do a lot more to make improvements and transform the IRS for the benefit of taxpayers, tax professionals and the nation."
At a Glance
House Lawmakers to Introduce R&D Tax Bill for Microchip Manufacturers: On May 2, House Foreign Affairs Committee Chair Michael McCaul (R-TX) announced that he is working with Reps. Doris Matsui (D-CA) and Suzan DelBene (D-WA) on a bill to provide microchip manufacturers and designers with a 25% research and development (R&D) tax credit. The bill also would expand the scope of the CHIPS and Science Act (Pub. L. 117-167) to allow more types of facilities to be eligible for the bill’s manufacturing credit. A spokesperson for Rep. McCaul noted that the bill would be introduced in the next few weeks, to which Rep. McCaul said he would seek to attach the bill to the National Defense Authorization Act (NDAA) reauthorization bill or include bill language in a 2025 tax bill.
IRS Issues Guidance on Section 355 Spinoffs and Split-Offs: On May 1, the Internal Revenue Service (IRS) released Rev. Proc. 2024-24, which updates procedures for taxpayers requesting private letter rulings on certain aspects of Section 355 “spin-off” and “split-off” transactions, including the treatment of direct issuance debt-to-equity exchanges. Simultaneously, the IRS released Notice 2024-38 to request public feedback on various provisions of Rev. Proc. 2024-24. Comments are due by July 30.
Crapo Reportedly Considering Creating TCJA Working Groups for Senate Finance Republicans: In response to the April 24 announcement from House Ways and Means Committee Chairman Jason Smith (R-MO) and Tax Subcommittee Chairman Mike Kelly (R-PA) concerning the creation of 10 “Tax Teams” to educate House Republicans, Senate Finance Committee Ranking Member Mike Crapo (R-ID) indicated that he was considering a similar approach for Senate Republicans to prepare for the tax debate in 2025. Additional details are expected to be announced in the coming weeks.
Senate Republicans Introduce Bill to Repeal IRA EV Tax Credits: On May 2, Sen. John Barrasso (R-WY) introduced the Eliminating Lavish Incentives to Electric (ELITE) Vehicles Act (S. 4237) that would fully repeal the clean-vehicle tax credits under Sections 30D, 25E and 45W and modify the Section 30C Alternative Fuel Refueling Property Credit to exclude electric-vehicle chargers. Sen. Barrasso criticized all four credits, which were enacted under the Inflation Reduction Act (IRA) as ”benefit[ing] the wealthiest of Americans and cost[ing] hardworking American taxpayers billions of dollars.” Though the bill was co-sponsored by 18 other Senate Republicans, it is unlikely to gain ground in the current Democratic-controlled Senate.
Hearings and Events
House Ways and Means Committee
On May 10, the House Ways and Means Committee will hold a field hearing titled “Field Hearing on Empowering Native American and Rural Communities.”
Senate Finance Committee
The Senate Finance Committee has no tax hearings scheduled for this week.
Other
On May 7, the House Appropriations Subcommittee on Financial Services and General Government held a hearing titled “FY2025 Request for the Internal Revenue Service."