28th Time’s the Charm?
For 27 years in a row Congress has failed to pass its 12 spending bills by the Sept. 30 deadline. Will this year bring more of the same? Or will the streak finally be broken?
Short-Term CR to Avert a Government Shutdown Likely in September
With only 11 legislative days left before the Sept. 30 fiscal year deadline, Congress is unlikely to pass anything other than a short-term continuing resolution (CR). The House Appropriations Committee approved 10 of the annual appropriations bills, though the full chamber has voted to pass only one of the bills (Military Construction-Veterans Affairs). The Senate Appropriations Committee has approved all 12 annual appropriations bills, though none of these bills has advanced through the full Senate. Additionally, there is a $115 billion difference between the two chambers’ appropriations bills, which will need to be addressed in a final deal.
The best we can hope for by Sept. 30 is a short-term CR that goes through the end of November or early December. This will give Congress much-needed time to strike a potential deal. The chances of a shutdown after the expiration of a short-term CR are much higher.
Year-End Tax Package
Lawmakers on both sides of the aisle have been working toward a tax deal for over a year. With key provisions of the Tax Cuts and Jobs Act of 2017 either having expired or soon expiring, lawmakers are eager to strike a deal. However, a potential package hinges on whether Democrats and Republicans can agree to an extension and expansion of the child tax credit (CTC) to balance the extension of several business-related provisions, with a focus on the research and development (R&D) amortization deduction, bonus depreciation, and the net business interest deduction:
- R&D Amortization: Historically, taxpayers were permitted to deduct certain research and development (R&D) costs immediately under section 174. However, beginning in 2022, businesses must amortize R&D expenditures over five years. Lawmakers have introduced bipartisan proposals to reverse the restrictions retroactively, although those have failed to be enacted despite growing industry concerns about the impact of the amortization requirement, especially on startup enterprises.
- Accelerated Bonus Depreciation: Through 2022, taxpayers could claim the 100% bonus depreciation under section 168(k) for eligible property placed in service during the taxable year. However, starting this year, the bonus-depreciation allowance is 80%, the first step in a phase down by 20% annually until it is entirely eliminated for equipment placed in service after 2026.
- Business Interest 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). Beginning in 2022, the provision narrowed to allow the deduction based on only earnings before interest and taxes (EBIT)—not taking into account depreciation or amortization.
These three provisions were included in the Republican Ways and Means Committee’s comprehensive tax package (H.R. 3936, H.R. 3937 and H.R. 3938). While two of the three provisions have bipartisan support, Democrats in both chambers have indicated that they also want support for working families in any legislation that addresses expired business provisions—most likely an expansion of the CTC.
Ways and Means Committee Chairman Jason Smith (R-MO) is a strong advocate for extending the increased CTC enacted in TCJA, and he previously introduced legislation to make permanent the $2,000 per-child credit amount. Democrats would like to see the credit restored to levels enacted under the Democrats’ 2021 Reconciliation bill, the American Rescue Plan Act (ARPA), which increased the value of the credit for $3,600 for children age 5 and under and $3,000 for children age 6 and over. That credit was also available in monthly installments. A possible CTC deal would need to find the middle ground between the Democratic and Republican proposals. It would also likely have to be paired with some form of a continuation of work requirements under current law—a stipulation that Sen. Joe Manchin (D-WV) insisted on throughout negotiations over a potential CTC provision in the Democrats’ Fiscal Year 2022 reconciliation bill, the Inflation Reduction Act.
In addition to these priorities, U.S. auto dealers may finally see some success in their ongoing effort to seek broad relief for an elective deferral of last-in, first-out (LIFO) accounting provisions. Last year, on Dec. 23, the Senate passed the Supply Chain Disruptions Relief Act, a bill led by Sen. Sherrod Brown (D-OH) that would allow auto dealers to wait until 2025 to replace their inventory. However, the bill was unable to pass the House due to procedural rules concerning the origination of tax bills. With broad bipartisan support, this provision could also be included in a year-end tax package.
Additionally, a solution on 1099-K reporting may also be included. The reporting threshold for third-party payment platforms to issue a Form 1099-K decreased from $20,000 and 200 transactions to $600 in 2023—this change was enacted pursuant to ARPA. While the change was intended to increase the number of transactions subject to reporting, it attracted criticism from certain lawmakers who argued the lower threshold imposes an undue administrative burden. Negotiations are ongoing on what an appropriate threshold might be
For more information on the ongoing negotiations into both a potential year-end tax bill and the IRS’s budget, the Brownstein National Tax Policy Group recently recorded a podcast where members of the Tax Team shared their insights into the topography of the tax landscape. The podcast is available here.
Lawmakers Prepare for IRS Funding Fight. Lawmakers returned to Capitol Hill on Sept. 5 after a monthlong congressional recess with an eye on the 12 Fiscal Year 2024 appropriations bills that must pass before Oct. 1 to avoid a government shutdown, in the absence of a continuing resolution (CR). Many of the appropriations bills, especially those advanced by the Republican-controlled House Appropriations Committee, contain clawbacks to either funding for the IRS contained within the Inflation Reduction Act (IRA, Pub. L. 117-169) or to the IRS’s annual enforcement and operations support budget appropriated every fiscal year. These appropriations bills are set up for a collision course with Senate Democrats’ appropriations bills, which keeps funding for the agency flat.
Although President Biden and House Speaker Kevin McCarthy (R-CA) have informally agreed to a $10 billion IRS-IRA funding clawback for Fiscal Year 2024, many Republican appropriations bills exceed this amount.
Below are the House appropriations bills containing IRS clawbacks:
Financial Services and General Government (FSGG) Bill: The House FSGG spending bill would freeze spending for taxpayer services and operations support at FY2023 amounts, while proposing a significant $1.2 billion (22%) cut to tax enforcement. The bill would restore funding to the business-systems modernization account, providing $150 million to supplement the $4.75 billion in funding allocated for this task by the IRA. Additionally, the proposed House FSGG bill would rescind approximately $10.2 billion of the supplemental funding provided to the IRS by the IRA. The bill proposes repealing $6.1 billion of the funding allocated specifically for enforcement and $4.1 billion of the funding allocated for operations support. The bill also includes a provision to prevent the IRS from using any funding to develop or provide taxpayers with a “free, public electronic return-filing service option” without prior approval from both the House and Senate Appropriations committees and tax-writing committees.
In contrast, the Senate Appropriations Committee reported its FSGG bill favorably on July 13 by a unanimous 29-0 vote. The bill would hold IRS spending levels flat at approximately FY2023 amounts and would rescind $10 billion in enforcement from IRA-provided IRS funds—the same amount agreed to by Biden and McCarthy.
Transportation, Housing and Urban Development and Related Agencies (THUD) Bill: The House THUD spending bill would rescind about $25 billion of the IRA’s unobligated tax-enforcement funding.
Commerce, Justice, Science and Related Agencies (CJS) Bill: The House Appropriations CJS Subcommittee’s spending bill would rescind about $12.9 billion and $9.1 billion from the IRA’s unobligated tax-enforcement and operations-support funding for the IRS, respectively.
Labor, Health and Human Services, Education and Related Agencies (LHHS) Bill: The House Appropriations LHHS Subcommittee’s spending bill would rescind about $9.8 billion of the IRA’s unobligated operations-support funding for the IRS.
Democratic Lawmakers Accuse Tax Preparers of Fighting Direct e-File While Advocacy Group Begins Messaging Campaign. Sen. Elizabeth Warren (D-MA) and Rep. Katie Porter (D-CA) sent letters to tax-preparation companies and industry trade groups on Aug. 23 requesting information on their efforts to lobby the government against the creation of an IRS-operated Direct e-File option. The lawmakers addressed the four letters to the heads of Intuit, H&R Block, the Free File Alliance and the American Coalition for Taxpayer Rights. Much of the information sought is publicly available. The letters accused the recipients of launching a “lobbying campaign aimed at protecting [their] ability to gouge taxpayers and preventing the creation of a free and simple system for taxpayers to file their taxes.” The recipients of the letter acknowledge that they are exercising their First Amendment rights.
Free File Alliance Executive Director Tim Hugo responded to the letter on Aug. 25. Hugo noted that a simple and free system for taxpayers to file their taxes already exists via the Free File program. Hugo also pointed to a recommendation included in a recent Electronic Tax Administration Advisory Committee report that offered support for expanding existing free-file programs before investing agency funds into the creation of a new IRS-operated system. An Intuit spokesperson also issued a response on behalf of the company, arguing that the Direct e-File effort “is a solution in search of a problem, and that solution will unnecessarily cost taxpayers billions of dollars.”
On Aug. 14, the Coalition for Free and Fair Filing (CFFF) hosted a webinar with Sen. Warren and Rep. Porter, along with Rep. Don Beyer (D-VA), to highlight support for the 2024 Direct e-File Pilot. The members spoke in support of the organization’s efforts, criticizing paid preparers and tax-preparation software companies for their opposition to the IRS’s development of the platform. Warren and Porter shared sentiments reflected in their earlier letters, and all three members disparaged the Free File program for not providing reliable services for low-income Americans.
Over the past two decades, the Free File Program has helped file over 70 million free federal and state income tax returns, in addition to what individual companies provide as a pro bono service. Additionally, the IRS Volunteer Income Tax Assistance program serves low-income individuals that have earnings below a certain threshold
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