As Congress heads into 2024 and President Biden starts the last year of his term, a host of tax issues remain unaddressed, including a much-anticipated expiring tax provisions package, pending regulatory guidance, the outcome of the consequential Moore tax case before the Supreme Court, and implementation of the global minimum-tax regime. A brief discussion of these and other issues arising in the new year are presented below.
2023 Tax Package Carryforward
Passing a potential comprehensive tax extenders package remains a priority on Capitol Hill. Lawmakers will have to find a pathway to pass the package, potentially coupling it with the Taiwan tax agreement or one of the upcoming government funding extensions, which are set to expire on Jan. 19 and Feb. 2. Leaders from the House and Senate tax-writing committees are attempting to finalize a package that will provide tax relief for both businesses and individuals and families.
With increasing bipartisan and bicameral support, the business side of the package has focused largely on restoring three crucial business tax provisions from the Tax Cuts and Jobs Act of 2017 (TCJA, Pub. L. 115-97):
- R&D Amortization: Through 2021, businesses were permitted to deduct immediately certain research and development (R&D) costs under section 174. However, beginning in 2022, businesses must amortize R&D expenditures over five years. Industry concerns have continued to grow regarding the impact of the amortization requirement, especially on startup enterprises and on investments in domestic research generally.
- 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. However, starting this year, the bonus-depreciation allowance decreased to 80%, the first 20% annual stepdown until bonus depreciation expires for equipment placed in service after 2026.
- 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). Beginning in 2022, the provision 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.
Lawmakers have introduced bipartisan proposals for each of the three TCJA business provisions that would reverse the restrictions retroactively.
The individual side of the package has centered largely on expansion of the child tax credit (CTC). Since the COVID-19-era increases to the CTC expired at the end of 2022, Democrats have pushed for significant changes that would increase the refundability of the CTC, ease the earned-income requirement and accelerate the phase-in of the credit.
Questions still remain as to whether the package will include other provisions, such as the traditional tax extenders, many of which expired at the end of 2021, as well as the extent to which the package will be offset. More recently, bipartisan efforts were launched to add affordable housing relief to the package, with attention focused on the low-income housing tax credit and proposals to expand the credit as well as extend expiring provisions like the annual allocation plus-up that expired at the end of 2021.
Prediction: Senate Finance Committee Ranking Member Mike Crapo (R-ID) will hold significant leverage in whether a tax package will pass in Q1 because the Senate will need to act first on a package.
Tax-Writers’ Retirement Watch
Ahead of the 2025 expiration of many of the Tax Cuts and Jobs Act (TCJA) tax incentives, the House Ways and Means and Senate Finance committees could look very different, with both impending retirements and difficult election prospects in 2024 likely to have significant effects on the makeup of both committees. In the House, five members of the Ways and Means Committee so far have announced that they will resign or retire before the start of the 119th Congress: Rep. Brian Higgins (D-NY) will resign in February, while Reps. Earl Blumenauer (D-OR), Brad Wenstrup (R-OH), Drew Ferguson (R-GA), and Dan Kildee (R-MI) have announced their retirements at the end of the current Congress. Should Democrats retake the House in 2024, the 119th Congress could see as many as 10 new faces on the House Ways and Means Committee, bringing with them new perspectives and the need for new member education on the range of issues within the committee’s broad jurisdiction.
Similarly, on the Senate Finance Committee, Sens. Debbie Stabenow (D-MI), Ben Cardin (D-MD) and Tom Carper (D-DE) have announced their retirements at the end of their terms. In addition, several Democratic senators face difficult reelection campaigns, either in their primary or in the general election, including Sens. Bob Menendez (D-NJ), Sherrod Brown (D-OH) and Bob Casey (D-PA). If Republicans win critical seats in Ohio and Pennsylvania and flip control of the Senate, Republicans will look to fill the seats of the Finance Committee with new faces.
Congressional lawmakers potentially angling for positions in these powerful committees include Rep. Rudy Yakym (R-IN), who led a letter joined by about 150 other House Republicans to Speaker Mike Johnson (R-LA), urging him to bring consideration of the three TCJA business tax provisions to the floor. Democrats have pledged to return Reps. Jimmy Gomez (D-CA), Stacey Plaskett (D-VI) and Steven Horsford (D-NV) to the Ways and Means Committee in 2025.
Prediction: Democrats and Republicans will each add at least one new member to the Finance Committee in 2025.
Around the International-Tax World
OECD Pillars One and Two
While domestic tax reforms continue to be negotiated in Congress, international legislative bodies have already begun adopting the Organisation for Economic Co-Operation and Development’s (OECD) Pillar Two global minimum-tax regime, effective beginning in 2024 in many cases. As a result, U.S. multinational companies, with some of the biggest global reaches in the world, will face new tax challenges. Not only will they have to comply with new international rules, but they also will have to reconcile multiple new foreign tax regimes with existing U.S. tax law such as the global intangible low-taxed income (GILTI) rules. The legislative debate in this country and potential responses to the widespread global adoption of Pillar Two will assuredly continue next year, as the consequences for U.S. multinational income and government revenue become clearer.
While U.S. alignment with Pillar Two still hangs in the balance, congressional opposition may contribute to Pillar One’s demise in 2024. Pillar One, which includes the Amount A profit reallocation rules, would affect companies with revenues above $21 billion and profit margins in excess of 10%, with some exceptions. As a result of the Pillar One point system, the United States has an effective veto over whether the treaty will enter into force due to the large number of in-scope companies that are U.S. companies. Congressional Republicans continue to argue that the reforms would threaten U.S. sovereignty and result in the forfeiture of billions of dollars of revenue to other countries claiming taxing rights under the proposed regime. Unified Republican opposition to Pillar One would make it impossible for the multilateral treaty required to implement Pillar One to ever reach the required two-thirds votes for ratification by the U.S. Senate.
Pillar One was effectively designed to be an international substitute for individual countries’ digital services taxes (DST), and the original agreement in 2021 included a two-year moratorium on DSTs while the details of Pillar One were being finalized. However, in 2023, the OECD extended this moratorium by a year, a decision that the Canadian government did not embrace. Citing its “national interest,” Canada has proceeded forward with its DST, which is expected to go into effect in 2024, despite opposition from the OECD and potential trade tensions with the United States. Canada’s decision may also lead other countries to ignore the extended DST moratorium, culminating in the proliferation of DSTs if the OECD does not finalize Pillar One on schedule.
Prediction: The United States will not take action to implement or align U.S. law with Pillar Two in 2024. The global minimum tax will become an election issue, with an eye toward tax reform in 2025.
Taiwan Quasi-Tax Treaty
On Nov. 30, the House Ways and Means Committee unanimously advanced the United States-Taiwan Expedited Double-Tax Relief Act (H.R. 5988). The bill would amend the Internal Revenue Code and provide benefits to business and individual residents of Taiwan with income from sources within the United States, including reducing withholding tax rates, applying permanent establishment rules and determining residency designations of citizens of Taiwan. To become effective, the bill requires Taiwan to enact corresponding tax benefits for U.S. residents with Taiwan-sourced income. In effect, the bill is intended to provide similar benefits to a U.S. tax treaty, which is not otherwise possible due to the lack of formal diplomatic relations with Taiwan. One of the bill’s main goals is to incentivize Taiwanese companies to bring semiconductor chip manufacturing to the United States, countering China’s increasing dominance in the industry.
The bill, which includes the compromise to the competing approaches adopted by the Senate Finance and Foreign Relations committees, is expected to come before both chambers in 2024 and pass with comfortable margins. As noted above, the Taiwan tax agreement could be coupled with the 2023 tax package or move as part of one of the FY 2024 appropriations packages.
Prediction: The United States-Taiwan Expedited Double Tax Relief Act will be adopted by both chambers of Congress and signed into law, likely as part of the carryforward tax package of 2023 and/or as part of the FY2024 appropriations bills.
Biden Administration Tax Priorities
2024 Legislative Priorities
As early as February, the Treasury Department is expected to release its General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals, colloquially known as the “Green Book,” which includes an overview of the Biden administration’s tax policy proposals included in its Fiscal Year 2025 budget proposal.
The Green Book is likely to contain many of the prior tax policy proposals that were offered in 2023, and with the looming presidential election, this will inform President Biden’s tax platform. Based on prior years’ editions, this year’s Green Book is anticipated to include proposals for increases to the corporate tax rate, as well as various proposals to increase individual effective tax rates and limit tax-planning opportunities. The Green Book may also embrace proposals aimed at the ongoing efforts by the Organisation for Economic Co-operation and Development (OECD) to implement its two-pillar approach for a global minimum tax and to address the digitalization of the economy, including modifications to the global intangible low-taxed income (GILTI) rules and the adoption of an undertaxed profits rule (UTPR) (see “Around the International-Tax World” above).
On the regulatory front, the Treasury Department and the Internal Revenue Service (IRS) released the 2023-24 Priority Guidance Plan (PGP) on Sept. 29, 2023, which lists 237 guidance projects that the Treasury Department and the IRS aim to address by June 30, 2024. The PGP provides insight into issues the administration has identified as regulatory tax priorities, often at the behest of taxpayers and practitioners for clarity on particular issues within the tax code. While the PGP is a workflow tool prioritizing tax issues to be addressed through regulations, notices, revenue rulings, revenue procedures and other published administrative guidance, it can also serve as a window into the administration’s tax enforcement objectives and areas where the bounds of its regulatory authority may be tested. The current plan includes new projects on international and corporate tax issues, including the IRA’s corporate alternative minimum tax and stock buyback excise tax. The plan also includes new projects relating to pass-through businesses, including guidance on the exception from Self-Employed Contributions Act (SECA) taxes applicable to certain limited partners and a project relating to the section 199A 20% deduction for pass-through business owners.
Prediction: President Biden’s budget largely adopts the Billionaires Income Tax Act of 2023, which was proposed by Senate Finance Committee Chair Ron Wyden (D-OR) in November.
Race to Finalize Regulations
Since the adoption of the Inflation Reduction Act (IRA, Pub. L. 117-169) in August 2022, the implementing regulations and other guidance for the energy tax incentives have been a top priority for the administration. Building off the array of notices and proposed regulations, the Treasury Department and the IRS are expected to continue releasing new rulemakings as well as pushing to finalize as many proposed rules as possible to protect against potential challenges under the Congressional Review Act in 2025 if there is a change in administration. Major energy-tax guidance releases expected in 2024 include:
- Clean hydrogen production credit (section 45V)
- Advanced manufacturing production credit (section 45X)
- Sustainable aviation fuel (SAF) credits (sections 40B and 6426(k))
- Zero-emission nuclear power production credit (section 45U)
- Renewable electricity production credit (section 45)
- Energy investment credit (section 48)
- Elective-pay and transferability of applicable credits (sections 6417 and 6418)
- Domestic-content bonus credit (sections 45(b)(9) and 48(a)(12))
With the new tech-neutral energy incentives currently slated to become effective in 2025, the Treasury Department and the IRS are also expected to issue at least initial guidance for the new clean electricity production and investment credits (sections 45Y and 48E) as well as the clean fuels production credit (section 45Z).
Other guidance projects on the horizon in 2024 guidance on basis adjustments related to previously taxed earnings and profits (PTEP) and revisions to the 2022 foreign tax credit regulations, which were suspended in December pending future revisions.
Prediction: The Biden administration largely satisfies requests of environmentalists in the energy-tax regulatory space, but some proposed regulations will become easy targets for judicial reversal once finalized.
Direct File Pilot Program Launch
In 2024, the Internal Revenue Service (IRS) plans to begin testing the Direct File pilot program, which will allow select taxpayers to file federal tax returns for free through government-run and operated tax preparation software. According to additional details released on Dec. 20, only “a limited number of people” will be able to access the service—select taxpayers in Arizona, California, Florida, Massachusetts, New Hampshire, New York, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming—at launch. Thereafter, the Treasury Department and the IRS plan to gradually increase taxpayer access to the platform. The pilot will serve as a test for the government’s ability to operate its own tax-filing system and will also assess taxpayers’ appetite for such a program, even though Treasury Department officials say the number of participants in the ”pilot” will not be a metric of its success or failure.
Prediction: The IRS severely limits eligibility for the pilot; partially due to the increased difficulty resulting from the lack of simultaneous state tax-filing, few taxpayers participate in the pilot. Despite disappointing results, the agency will still call the pilot program a success at the end of the filing season.
Additional 2024 Tax Targets
FAA Reauthorization
The last five-year authorization of the Federal Aviation Administration (FAA) expired at the end of September 2023, along with the authorization of the FAA trust fund and airline ticket tax, which are part of the Internal Revenue Code. The tax authorization has since been extended twice on short-term bases, with the current expiration set for March 8, 2024. The House Transportation and Infrastructure Committee and Senate Commerce, Science and Transportation Committee are expected to complete their work on a new five-year authorization package in early 2024, which will be coupled with a corresponding long-term extension of the trust fund provisions in the tax code. In addition to specific tax aspects, like the airline ticket tax, the FAA reauthorization legislation is important to monitor since it is designated as a tax bill, and in some prior reauthorizations it has carried unrelated tax changes.
Prediction: Congress passes a five-year FAA reauthorization bill in 2024.
Moore to Come
On Dec. 5, 2023, the U.S. Supreme Court heard oral arguments in Moore v. United States, a case relating to the mandatory repatriation tax (MRT) enacted as part of the Tax Cuts and Jobs Act (TCJA). The MRT requires U.S. shareholders of controlled foreign corporations (CFC) to pay a one-time toll charge on the previously untaxed earnings of the CFC. The tax applies to earnings from a CFC, even if they had not been distributed to U.S. shareholders. The provision was included in the TCJA as part of the transition from a worldwide to a quasi-territorial tax system for U.S. companies and their shareholders. The case was initially filed by Charles and Kathleen Moore, who invested $40,000 in Indian farming supply company KisanKraft. Under the MRT, the Moores were required to pay $14,729 on KisanKraft’s previously deferred taxable income of $132,000.
The case questioned the constitutionality of taxing unrealized gains and whether the shareholders must directly realize the CFC income through a distribution before the earnings can be subject to taxation. A sweeping ruling in favor of the Moores could have drastic effects on the country’s tax system, resulting in significant uncertainty for businesses as well as the potential loss of hundreds of billions of dollars in federal revenues. In contrast, a broad ruling in the U.S. government’s favor could provide Congress with too much leeway to impose new tax regimes targeting unrealized gains, such as a mark-to-market wealth tax or taxes on stock held in individual retirement accounts. A decision by the Supreme Court is expected as late as June 2024.
Prediction: The justices will take a narrow approach in deciding this case and take care to not encroach heavily on the constitutional aspects of the federal tax code.
