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Key Takeaways
- Senators push for action on House-passed tax bill.
- IRS Chief engages in funding battle on Capitol Hill.
- House suspends tax exempt status for terrorists.
- Tax writers narrow use of new clean vehicle credit.
In what could be a last-ditch effort, Senators this week urged action on the House-passed tax bill that has been stalled in the upper chamber for over two and a half months.
What Went Down:
- Senators push for action on House-passed tax bill.
- IRS Chief engages in funding battle on Capitol Hill.
- House suspends tax exempt status for terrorists.
- Tax writers narrow use of new clean vehicle credit.
Let’s Get To It:
Tax Bill Plea
Faced with the very real prospect that the House-pass tax bill will not pass the upper chamber, Senate Finance Committee Chairman Ron Wyden (D-Ore.) this week released Treasury data showing enactment of the legislation would benefit companies.
From the Senator’s press release:
- According to Treasury data, 3.8 million small businesses claimed bonus depreciation or used the deduction for R&D costs in tax year 2021. The 2017 Republican tax law cut the value of the deduction for R&D beginning in 2022 and bonus depreciation beginning in 2023. With those changes having gone into effect, small businesses are facing higher costs for investments in things like new equipment, software, and innovative research.
- According to Treasury data, approximately 10,000 small businesses had R&D expenses greater than 50 percent of their total deductions in tax year 2021. These are the small businesses that are most heavily invested in research-based innovation, and they are facing severe tax increases as a result of the 2017 Republican tax law.
Lawmakers have been confronted with these facts since 2021 (I participated in many of these meetings). Based upon their responses in those meetings, there is bipartisan, bicameral support to enact the business-related tax measures in the bill, which includes R&D expensing for domestic costs, expands the 163(j)-interest deduction from EBIT to EBITDA, and up Bonus Depreciation to 100%.
The bill also expands the Child Tax Credit, which found bipartisan support in the House, but not in the Senate (at least so far).
The main opposer to the bill is Senate Finance Ranking Member Mike Crapo (R-Idaho). He contends the refundability aspect of the credit should be cut from the provision. He also disapproves of the income used to qualify for the credit.
The Senator has other misgivings about the bill as well. For instance, he is resistant to any claims that the bill is “paid for” by prematurely ending the ERC program.
The Idaho Senator has called for the Senate Finance Committee to host a hearing on the bill so disagreements can be discussed, and the bill could possibly be amended. However, he will only support the legislation if a majority of Senators in his party support the bill. Out of the 49 Republican Senators, there are maybe a handful who could potentially vote in favor of passing the bill without Crapo’s consent.
Senator Wyden, who has the power to hold a hearing, has yet to announce that one will occur on this bill. However, Wyden has repeatedly said that he will “pull out all the stops” to pass this bill from the Senate. Whether that includes holding a hearing on the legislation remains to be seen.
There are also some Senators from both political parties who are pushing members to support the bill’s passage. It is unclear how successful their efforts will be.
Legislative outlook: According to a member of the Senate Finance Committee, there is currently no plan for how to move this bill toward passing the Senate. But that could change.
The Senator also said that the longer the bill remains stalled, the harder it will be to pass it.
It appears passage in the Senate is dependent on Senator Crapo supporting the bill, which would allow at least nine Republican Senators to support it. Crapo has yet to back the legislation.
IRS hearing
IRS Commissioner Daniel Werfel testified before the Senate Finance Committee this week about the agency’s budget.
Long story short: Werfel cited that funding from the Inflation Reduction Act enabled the agency to have one of the “best filing seasons ever in terms of customer service.”
He also noted that “the IRS has much more work to do on many fronts: closing remaining gaps on phone service; expanding digital options for all taxpayers; further strengthening data security; and increasing support for vulnerable populations by such actions as increasing access to the Earned Income Tax Credit (EITC) and other refundable credits as well as protecting and supporting scam victims.”
This was a not-so-subtle hint: Don’t cut the agency’s funding.
Certain Senators agreed with Werfel’s funding wish while others did not. The divide was partisan.
The IRS commissioner also touted the success of its Direct File program, which certain lawmakers questioned whether the program needed to exist. They contended that free filing programs exist outside the IRS that could assist taxpayers to file free-of-charge.
Werfel also said that he would like to “crackdown” on unscrupulous tax preparers. This issue includes tax preparers who pushed the Employee Retention Tax Credit (ERTC) on to underserving taxpayers.
“We were worried about honest small businesses that were taken advantage of by aggressive marketers and promoters – convincing these small businesses that they were eligible for a credit that they weren’t truly eligible for. And they were saying that ‘you can get this credit at no risk to you’ and that wasn’t true,” the Commissioner said. “We had to take steps to stop the flow.”
The IRS on September 14, 2023, issued a moratorium on ERTC through at least the end of the year for processing new claims. But the moratorium didn’t stop claims from coming into the agency.
“We did slow it, but even today…we’re still getting 20,000 new claims every week – even when we announced in September that we stopped processing,” Werfel said. “This is because the law allows these claims to be submitted through 2025 and these promoters are out there still pushing for these claims to be filed.”
The above-mentioned tax bill that has stalled in the Senate restricts the ERTC by:
- Penalizing ERTC promoters for “aiding and abetting understatement of a tax liability,” according to description of proposal.
- Requiring that no credit or refund of the ERTC shall be allowed or made after January 31, 2024, unless the claim for the refund or credit is filed on or before that date.
Werfel was also questioned about how the IRS decides who gets audited and who doesn’t when it comes to income within the $400,000 range.
It was highlighted during the hearing that a question exists for how income should be defined that would merit an audit:
- There is “Total Positive Income.” This includes all sources of incoming money (be it income, capital gains or inheritance). It also excludes losses or deductions, so a $10,000 deduction would not lower the taxpayer’s taxable income.
- There is also “taxable income.” This would be how income is currently calculated to determine how much of it is taxable.
Werfel was asked if either of these two choices should be how income is defined. He basically sidestepped the question and said that only taxpayers earning over $400,000 would see an increase in an audit rate.
“We believe our commitment of only increasing audit scrutiny on those above $400,000 is a high enough amount to where middle- and low-income people around the country can breathe easier,” he said.
Legislative outlook: IRS funding will play out during the appropriation season, which is just getting started.
Floor Action
The House this week passed legislation suspending the tax-exempt status of “terrorist supporting organizations”. It passed the chamber by a 382 – 11 vote.
Legislative outlook: The bill was transferred to the Senate Finance Committee. It is not clear what the committee will do with the legislation or if it will be the subject of a Senate floor vote.
Committee Action
The House Ways and Means Committee this week approved legislation called the “End Chinese Dominance of Electric Vehicles in America Act.”
Here is a quick summary of the bill from the Joint Committee on Taxation:
The proposal modifies the requirements of the new clean vehicle credit. Vehicles that have any components contained in the drive battery or any material contained in such components that are extracted, processed, recycled, manufactured, or assembled by a prohibited foreign entity do not qualify for the credit.
Legislative outlook: The committee passed the bill along party lines. If presented to the House floor it would probably pass, but passage in the Senate is unlikely because the bill could be considered politically divisive to the majority party.
Pardon if this recap missed a monumental moment, but we can recap it next time!
Adios amigos!