Treasury Department and IRS Release Preliminary Guidance on Semiconductor Tax Credit. On March 23, the Treasury Department and IRS published proposed regulations for implementing the new section 48D advanced manufacturing investment tax credit (ITC) enacted through the Chips and Science Act. This ITC is equal to 25% of a taxpayer’s investment in qualified tangible property designed to produce semiconductors or semiconductor tooling equipment. The credit is available for facilities placed in service after Dec. 31, 2022, provided the construction of the facility begins before Jan. 1, 2027.
The proposed regulations offer additional guidelines for calculating the amount of a taxpayer’s qualified investment under section 48D(b)(1) for both corporate and passthrough entities. The rules generally align the credit calculation for partnerships with determinations used in established regulations for solar and wind tax credits under section 48. The regulations further clarify that the tax credit will not apply to any capital expenditures qualifying for the rehabilitation tax credit under section 47.
The proposed regulations provide definitions for several specific terms associated with the tax credit, which signal the approach that the Treasury Department and IRS may take in expected guidance used with other energy credits under the Inflation Reduction Act (IRA). This includes clarity that the term “qualified property” encompasses all items of property or advanced manufacturing facilities operated as part of a single project. This broad definition of included property may provide insight into the future treatment of multiple technologies operated as one project in other credits, such as the modified sections 48, 48C and 48X credits.
Taxpayers can elect to monetize the section 48D ITC as an overpayment against their taxes, allowing eligible entities to receive a direct cash payment equal to the full credit amount regardless of tax liability. Direct pay options are also provided for certain taxpayers monetizing green-energy credits implemented through the IRA.
Last week, Treasury Assistant Secretary for Tax Policy Lily Batchelder confirmed that the IRS had begun work on an electronic pre-filing registration process for eligible companies and organizations to monetize new direct pay and transferable tax incentives. The development of the registry is expected to be completed in late 2023 and will aim to limit tax fraud and ensure eligible taxpayers can more readily access the value of the applicable credits. Before the official launch of the registry, the Treasury Department and IRS will conduct user experience research to ensure the process works as intended.
Upcoming Energy-Tax Guidance Timeline. On a call last Wednesday, Treasury Assistant Secretary for Tax Policy Lily Batchelder outlined the timeline for the release of outstanding guidance on several energy-tax provisions included in the Inflation Reduction Act (IRA). Topping the list will be proposed guidance on the section 30D clean-vehicle tax credit, which the Treasury Department and IRS are expected to release later this week.
This guidance will detail the battery-sourcing requirements for qualifying electric vehicles (EVs) to be eligible for the $7,500 credit. To receive this full amount, the legislation mandates that a certain percentage of the value of the battery minerals must be mined or processed in North America or in a country that maintains a free-trade agreement with the United States. Despite outstanding questions regarding the definition of a “qualifying free-trade agreement,” the Treasury Department is reported to have reached qualified free-trade agreements with both the European Union and Japan (more information below), which have significant interests in the EV battery industry. These agreements are already garnering pushback from members of Congress, organized labor and U.S. businesses engaged in EV battery production.
The section 30D guidance was initially due last year but was delayed to provide regulators more time to draft credit guidelines. In the interim, the Treasury Department has waived the battery-sourcing rules for taxpayers to qualify for the full credit. This move solicited strong criticism from Sen. Joe Manchin (D-WV), who had insisted on the domestic-sourcing requirements as a condition for his support of the expanded EV incentive.
In the coming months, according to Batchelder, the Treasury Department, IRS and Energy Department will release further guidance on certain additional credit amounts provided to taxpayers who place qualified property near localities in which a coal mine or coal-fired power plant has recently closed—so-called “energy communities” under the IRA. Batchelder said that the Treasury Department, IRS, Labor Department and Commerce Department are also finalizing additional domestic-content, wage and apprenticeship guidelines required for taxpayers to receive bonus amounts for certain green-energy credits.
Republicans Urge House Appropriators to Eliminate OECD Funding. On March 24, Rep. Adrian Smith (R-NE), chairman of the House Ways and Means Subcommittee on Trade, sent a letter urging lawmakers to end U.S. support for the Organisation for Economic Co-Operation and Development (OECD) in fiscal year 2024. The letter was specifically addressed to the chairman and ranking member of the House Appropriations Subcommittee on State, Foreign Operations and Related Programs and was signed by nine other GOP members of the House tax-writing committee.
As the letter notes, the United States currently provides nearly $45 million or approximately 20% of the OECD’s Part I budget—more than double the contribution of any other country. The Part I budget is calculated based on the relative size of the member countries’ economies and accounts for a majority of the total OECD funding. Other significant contributors include Japan and Germany, each providing approximately 10% of the OECD’s Part I budget. Notably, China, the world’s second-largest economy, is not a member of the OECD and does not help finance the organization.
Despite significant U.S. contributions, the letter’s authors assert that the OECD has recently acted against the interests of U.S. taxpayers and has generally “evolved into a venue that advocates against the economic interests of the United States.” The letter explicitly references the preliminary global agreement on digital services taxes (DSTs) [Pillar One] and the international minimum-tax regime [Pillar Two] negotiated through the OECD by the Biden administration in 2021. Smith asserts that these agreements do not have sufficient congressional support to be enacted in the United States, but they will still have significant tax ramifications for U.S. multinational companies if enforced by foreign countries.
At a pair of hearings last week with U.S. Trade Representative Katherine Tai, GOP lawmakers raised similar concerns surrounding the ongoing implementation of DSTs by foreign countries. Senate Finance Committee Ranking Member Mike Crapo (R-ID) specifically addressed Canada’s pursuit of a new DST, which he perceived to be a violation of the United States-Mexico-Canada Agreement (USMCA) and the country’s commitment not to enact unliteral DSTs during ongoing Pillar One negotiations.
Regarding Pillar Two, Smith’s call to limit U.S. support for the OECD comes as several governments have already begun to enact policies to implement the global minimum-tax regime. Notably, the European Union reached a preliminary agreement in December for each member country to adopt the changes to their domestic tax laws by the end of 2023. Other countries, such as the United Kingdom, Australia and Japan, have also taken initial steps to adopt the global minimum-tax regime.
Bipartisan Group Rebuffs Biden’s Calls to Limit Step-Up in Basis. Last Tuesday, a bipartisan group of lawmakers introduced H.Res.237 to recognize the importance of stepped-up basis in preserving family-owned farms and small businesses.
The resolution reacts to a provision in President Joe Biden’s FY2024 budget, which would treat any transfer of appreciated property during a taxpayer’s life, or after death, as a taxable event. The proposal would provide individuals with a lifetime exemption of $5 million in property value (indexed for inflation). Lifetime transfers and a decedent’s estate would be subject to exceptions for transfers to a surviving spouse and for certain interests in closely held businesses.
In effect, the proposal would eliminate stepped-up basis for taxpayers seeking to pass property that exceeds the established threshold to their beneficiaries. The proposal is not Biden’s first time offering changes to stepped-up-basis rules. Similar proposals were included in prior budget submissions. Early versions of the Build Back Better legislation also included a similar provision to limit the use of stepped-up basis for transfers by individuals with over $1 million in assets.
However, in opposition to Biden’s proposal, the House resolution expressed formal support for stepped-up basis at death and voiced resistance to any efforts to impose additional taxes on multigenerational enterprises. Introduced by Rep. Tracey Mann (R-KS), the resolution has already garnered 66 co-sponsors, including three Democrats: Reps. Jim Costa (D-CA), Angie Craig (D-MN) and Jimmy Panetta (D-CA).
Democratic Senators Request Yellen Use Existing Authority to Crack Down on Trusts. In a letter to Treasury Secretary Janet Yellen on March 20, a group of progressive senators requested that the Treasury Department investigate and limit wealthy individuals’ use of grantor-retained annuity trusts (GRATs). The lawmakers, led by Sen. Elizabeth Warren (D-MA), expressed their concerns over perceived tax avoidance involving GRATs utilized by “ultra-wealthy” individuals in conjunction with other estate-planning tools, including valuation discounts, step-up in basis and the temporarily increased estate, gift and generation-skipping transfer tax exemptions.
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