Washington Tax Insight April 2020
Politics and Congressional Activity
The coronavirus pandemic has now taken over the agenda of the Congress and the Administration with efforts to deal with both the public health crisis and the economic crisis. Prior to the crisis, 2020 looked to be a quiet year with respect to tax issues due to the November Presidential and Congressional elections. Congress has now enacted three pieces of legislation aimed at addressing the health and economic impacts of the pandemic, and additional legislation is expected this year.
The COVID-19 crisis has now fundamentally changed the tax legislative landscape for 2020 by encouraging the two parties to work in a bipartisan manner on crisis legislation to help alleviate the economic impact of the pandemic, although agreement will continue to be very difficult to reach. A “Phase Four” bill will likely be considered by Congress as government officials continue to assess the impact of the COVID-19 pandemic on the economy and the public health system. House Speaker Pelosi (D-CA) has already stated that the CARES Act “is not going to be the last bill.”
Tax issues that could be considered as part of any future economic relief and stimulus packages include tax extenders, technical corrections, additional retirement legislation, green energy, expansion of the Earned Income Tax Credit (EITC), and infrastructure legislation.
Primary Update: Due to the coronavirus pandemic, twelve states have now delayed their presidential primaries including Alaska, Rhode Island, Hawaii, Delaware, Georgia, Connecticut, Indiana, Ohio, Louisiana, Maryland, Wyoming, and Kentucky along with Puerto Rico. The Democratic Party has announced that its party convention will be rescheduled for August 17th, while the Republican Party has said that they plan to go ahead with their convention in Charlotte, NC, this summer.
Government Response to COVID-19, the Coronavirus Pandemic
In response to the COVID-19 crisis, government officials in Washington DC have taken a number of actions related to the economic effects of the crisis including legislation, regulatory action, and government agency action. The immediate focus has been on immediate, “crisis-specific” proposals, but there will also be discussion of longer-term actions that will be necessary to deal with the economic consequences of the pandemic.
IRS Defers Federal Tax Payment and Filing Date for 90 days
On March 24th, the IRS issued a set of answers to frequently asked questions (“Q&A’s”) to further clarify the relief granted to taxpayers due to the ongoing COVID-19 pandemic. On March 20, 2020, the IRS issued Notice 2020-18, which provides for an automatic 90-day extension (to July 15, 2020) of the filing and payment deadline for all Federal income tax returns and payments previously due on April 15, 2020. Notice 2020-18 supersedes and expands upon the relief granted in Notice 2020-17, in which the IRS initially announced that individuals could defer tax payments up to $1 million for 90 days and corporations could defer tax payments up to $10 million for the same period.
Congress has now approved and the President has now signed a third economic relief bill, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including $2 trillion of tax and spending proposals designed to address the impacts of the coronavirus pandemic.
Congress had already approved, and the President had signed two pieces of legislation designed to address the economic effects of the global coronavirus outbreak.
Families First Coronavirus Response Act (HR 6021)
The Families First Coronavirus Response Act (HR 6201)(“Response Act”) was signed into law by President Trump on March 19th after passage in the Senate by a vote of 90 to 8 and a vote in the House of 363 to 40.
The Response Act does the following:
- Guarantees free coronavirus testing to anyone who has doctor approval for a test and provides funding for the COVID-19 medical tests
- Provides for new refundable business tax credits for certain mandated employer-provided paid sick leave and paid family and medical leave
- Provides funding for expanded unemployment compensation and food assistance for certain individuals
- Mandates two weeks (10 days) of paid sick leave for most employees and three months of paid emergency family and medical leave (covering at least two-thirds of an employee’s wages) throughout the coronavirus crisis
- Provides more than $1 billion in nutrition aid
- Allows closed schools to continue providing free and reduced-cost meals to eligible students
- Adds flexibility for the food stamp program
- Increases the portion of Medicaid spending paid by the federal government (as opposed to the states)
The Coronavirus Aid, Relief, and Economic Security (CARES) Act
The Senate voted 96-0 to approve the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which is a $2 trillion tax-and-spending bill intended to address the effects of the COVID-19 pandemic in the United States. The House approved the legislation by voice vote, and the President has now signed the bill.
The CARES Act includes several significant new provisions that are designed to assist businesses and individuals who have been affected by the coronavirus pandemic and its economic effects. Taxpayers should carefully review all of these proposals to ascertain where there are opportunities that can be used to continue business operations and retain employees during this public health emergency. Taxpayers should also stay engaged and knowledgeable about any new proposals that start to advance in Congress as well as subsequent guidance that the Treasury Department releases.
Summary of the CARES Act
The CARES Act includes several key business tax provisions including the following:
- 5-year net operating loss (NOL) carryback
- Suspension of the excess business loss rules under Section 461(l)
- Changes to the Section 163(j) interest deduction limitations
- Accelerated alternative minimum tax (AMT) refunds
- Payroll tax relief
- Tax credit for employers who retain employees
- Technical correction to the Tax Cuts and Jobs Act (TCJA) related to “qualified improvement property” (“retail glitch”)
- Temporary suspension of certain aviation excise taxes
- Temporary exception from the excise tax for alcohol used to produce hand sanitizer
Tax provisions which were included in the initial drafts of the legislation but dropped in the final bill include:
- Delay of corporate estimated tax payments and expanded filing deadlines – however, recently released IRS guidance, Notice 2020-18, postpones until July 15, 2020 the deadline for making estimated tax payments and filing certain tax returns that were otherwise due on April 15, 2020 (discussed above)
- A technical correction to the TCJA regarding Section 965 overpayment refunds
- A provision restoring the limitation on downward attribution of stock ownership in applying constructive ownership rules
The CARES Act includes several provisions for tax and economic relief for individuals:
- “Recovery rebate checks” (direct cash payments)
- Special rules for the use of retirement accounts to allow penalty-free access
- Expanded charitable donation deduction
- Temporary expansion of the scope of the tax exclusion (but not the amount of) for employer-provided educational assistance to include payments of qualified education loans by an employer to either an employee or a lender
The CARES Act also includes several non-tax provisions to assist with coronavirus mitigation and response including:
- $500 billion for a Treasury Department Exchange Stabilization Fund to provide loans, loan guarantees, and other investments to eligible businesses and $349 billion for a Small Business Administration “paycheck protection program.”
- The Act also includes $340 billion in emergency funding for hospitals, healthcare agencies, and assistance to state and local governments responding to the coronavirus.
- The Act includes $260 billion for increased unemployment assistance, including up to four months of full replacement wages up to certain limits for individuals who lose a job or are furloughed due to the coronavirus crisis. A temporary waiver of waiting period requirements is provided and payments are permitted for individuals not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history, and others) who are unable to work as a direct result of the coronavirus crisis.
Tax Legislation in 2020
House/Ways & Means Committee
New Tax on Nicotine Vaping: The House approved legislation that would levy an excise tax on nicotine vaping products and impose other restrictions on vaping and traditional tobacco products. In addition to the nicotine excise tax, the bill would ban remote sales of vaping products, restrict flavored tobacco products, and impose certain user fees. The bill is unlikely to be acted upon by the Senate. The Joint Committee on Taxation estimated that the bill’s excise tax would raise $7.9 billion over 10 years.
W&M Hearing on Native American tax issues: The House W&M Subcommittee on Select Revenue Measures held a hearing on March 4th to examine tax issues facing Native American tribes, including the Indian employment credit, the use of tax exempt bonds, and the fact that a very low rate of investments related to the New Markets Tax Credit are going to Native American areas.
Senate/Senate Finance Committee: The Senate voted on March 4th to open debate on major energy legislation, the American Innovation Act, which combines dozens of bipartisan energy-related bills into an omnibus measure that broadly aims to improve research and development (R&D) of energy technologies as well as improve energy infrastructure security. Debate on the legislation will likely take several days of Floor time in the Senate as there are over 100 amendments that may be offered. Ranking SFC Democrat Wyden (D-OR) plans to offer an amendment that would extend 11 temporary tax provisions aimed at renewables, conservation, and electric cars.
White House/Treasury Department: During testimony at a W&M Committee hearing on the President’s FY 2021 budget proposal, Treasury Secretary Mnuchin stated that for now the Administration has no plans to call for postponing the imposition of corporate revenue raisers in the 2017 tax code overhaul that are set to take effect in the next few years. Some taxpayers would like to see a delay or repeal of certain corporate revenue-raising provisions in the TCJA including amortizing R&D expenses and stricter limitations on the business interest deduction (both set to begin in 2022) and a scheduled increase in the rate on global intangible low-taxed income (GILTI) beginning in 2026. Secretary Mnuchin also responded to a question about infrastructure legislation by saying that “if there’s a need to stimulate the economy as a result of the coronavirus, I am sure that infrastructure is a priority for the president.”
House Small Business Committee hearing on Wayfair: The House Small Business Committee’s Subcommittee on Economic Growth, Tax, and Capital Access held a hearing on March 3rd to address post-Wayfair compliance issues facing small businesses. The Supreme Court’s decision in the Wayfair case permitted new sales tax collections by states from remote sellers without a physical presence in their jurisdictions. In a majority of states, sellers do not trigger a collection and filing requirement until they reach a specified threshold of sales or transactions in the state, such as $100,000 or 200 transactions, but the threshold differs from state to state as do the sales tax rates and the compliance procedures. Some of the recommendations offered at the hearing include a higher and nationally uniform threshold of $1 million, a single national threshold of $30 million, the elimination of the transaction threshold, and exemption from local-level sales taxes.
Tax Court Judges: The Tax Court announced the re-election of Chief Judge Foley to a 2-year term starting June 1, 2020. The Senate confirmed Travis Greaves to be a Judge of the Tax Court for a 15-year term. Two other nominees, Alina Ionescu and Christian Weiler, are currently awaiting action by the Senate Finance Committee.
Treasury and the IRS
Tax Cuts & Jobs Act (TCJA) Guidance
Treasury and the IRS have issued a significant amount of guidance on provisions of the TCJA, but there are a number of projects that remain outstanding.
IRS Updates Priority Guidance Plan: The IRS issued an update of its 2019-2020 Priority Guidance Plan including a summary of 40 projects published since the initial release in October. No new projects were added, but the update notes that the following tax policy rules are under review at the OMB Office of Information and Regulatory Analysis (OIRA):
- Rules for denial of deduction for certain fines, penalties, and other amounts (TCJA)
- Limitation on business interest expense deductions (TCJA)
- Like-kind exchanges (TCJA)
- NOL deduction
- Preparer Tax Identification Number (PTIN) Update
- Guidance under Section 199A (RIC-REIT) (TCJA)
The following sets of regulations have reportedly been cleared by OIRA and could be issued soon:
- Final rule on hybrid dividends and payments under Code sections 245A(e) and 267A
- Proposed rule under Code section 1502 involving hybrid arrangements
- Proposed rule under Code section 1051 on carried interest
- Proposed rule on Unrelated Business Taxable Income separately computed for each trade or business activity under Code section 512
Other Issues and Guidance
IRS Taxpayer Advocate Appointed: The Treasury Department and IRS announced the appointment of Erin Collins as the new permanent National Taxpayer Advocate. Ms. Collins previously spent 15 years in the Office of the Chief Counsel at the IRS, and she replaces Nina Olson, who held the position for nearly 20 years. The Taxpayer Advocate Service is an independent office in the IRS that reports directly to the IRS Commissioner, whose mission is to “protect taxpayers’ rights under the Taxpayer Bill of Rights, help taxpayers resolve problems with the IRS, and recommend changes that will prevent the problems.” It issues an annual report that includes administrative and legislative policy changes to improve taxpayer compliance and service.
Reporting Rules for Certain Foreign Trusts: The IRS issued Revenue Ruling 2020-17, which waives a reporting requirement for US-owned foreign trusts under Code section 6048. The guidance describes the transactions of certain tax-favored foreign retirement trusts and certain tax-favored foreign nonretirement savings trusts that are eligible for the exemption, as well as those individuals who qualify. The guidance also establishes “procedures for eligible individuals to request abatement of penalties that have been assessed or a refund of penalties that have been paid pursuant to section 6677 for the individuals’ failure to comply with the information reporting requirements of section 6048. The IRS also stated that forthcoming regulations will be formally proposed to modify the requirements to exclude eligible individuals’ transactions with, or ownership of, these foreign trusts, and they requested comments on this issue as well as other similar trusts for potential exemptions. The new guidance applies to all prior open taxable years, subject to the limitations of Code section 6511.
IRS position on issuing FAQs as guidance: The IRS has been criticized for releasing guidance on virtual currencies through FAQs, but the IRS Chief Counsel recently said that they would continue to use FAQs as a way to communicate with taxpayers. He said, “I don’t think I see them as the ideal way to be delivering guidance, but they do serve a very important function for a number of taxpayers, “ noting that sometimes they are used to get advice out quickly to answer a question for the majority of taxpayers.
Rules on Covered Asset Acquisitions/Foreign Tax Credits: The IRS issued final regulations on covered asset acquisitions under Code section 901(m), which affects taxpayers with foreign tax credits. The guidance covers “transactions that generally are treated as asset acquisitions for US income tax purposes and either are treated as stock acquisitions or are disregarded for foreign income tax purposes.” The new rules cover the following issues: (1) scope of covered asset acquisitions (CAAs); (2) aggregate basis difference carryover; (3) foreign basis election; (4) successor rules; (5) de minimis threshold; (6) interaction with Code section 909; (7) changes related to the TCJA; and (8) applicability dates.
Form 8978, Partner’s Additional Reporting Year Tax: The IRS released final instructions to Form 8978, Partner’s Additional Reporting Year Tax to reflect changes to the audit procedures of partnerships under the 2015 Bipartisan Budget Act. Under Code section 6226, a partnership may elect to have each reviewed year partner take into account the partner’s share of the partnership’s adjustments, instead of the partnership paying the imputed underpayment determined under Code section 6221.
IRS Adds Fuel Mixture and Research Credits to Audit Agenda: The IRS has added two new areas to its compliance campaign initiative – fuel mixture credits and research credits. The IRS’ compliance campaigns are part of the agency’s efforts to execute issue-based examinations where “compliance issues that present risk require a response in the form of one or multiple treatment streams to achieve compliance objectives.”
The description of the fuels mixture campaign is: LB&I is initiating a campaign for taxpayers who received fuel mixture credits under Code section 6426 but did not treat the credits as a reduction in their excise tax liability under Code section 4081. The goal of this campaign is to use issue-based examinations to bring taxpayers who maintain that the credits are merely refundable credits, which do not affect the deduction for any excise tax liability, into compliance.
The description of the Research Issues campaign is: The Research Issues Campaign will address research credit and research and experimental expenditures issues. Issues involving the research credit and research and experimental expenditures under Code sections 41 and 174 are some of the most prevalent tax issues within LB&I, utilizing significant examination and taxpayer resources. The campaign objective is to promote voluntary compliance, focus resources on the highest risk research issues, and increase consistency of examinations.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
The OECD continues its work on establishing new rules to identify where taxes on multinationals should be paid (nexus rules) and on what portion of profits these entities should be taxed (profit allocation rules) under Pillar One. The goal is to ensure that multinational enterprises (MNEs) conducting ongoing and significant business in places where they may not have a physical presence can be taxed in those jurisdictions.
Following a 2-day meeting in January, the OECD/G20 Inclusive Framework on BEPS issued a package of documents that updated the current status of the work on tax issues arising from the digitalization of the economy, and they set forth a revised work program. The Inclusive Framework endorsed the OECD Secretariat’s concept of a “Unified Approach” to Pillar One on profit allocation/nexus rules and committed to reaching agreement by the end of 2020. The decision about whether Pillar One will apply only as a safe harbor, which is the US-preferred position, will be made when there is agreement on the key design elements, although there is consensus that countries do not like the unilateral country measures. Chip Harter, the Deputy Assistant Secretary for International Tax Policy at Treasury, has said that he believes the current proposal has no chance of passing the US Senate, which must approve changes to existing tax treaties.
The next full Inclusive Framework meeting is scheduled for July, when the goal is for countries to sign off on a complete political agreement covering Pillars One and Two, with the OECD then to deliver their report to the November meeting of the G20 leaders. Thereafter, an implementation package would be prepared but likely not ready until 2021 at the earliest, with the package covering the process for countries to enact implementing legislation and the revision of multilateral instruments.
The worldwide coronavirus pandemic has now put into question, however, whether this ambitious timetable can be met. The fact that some countries including the US, France, and the UK face potential trade wars related to the unilateral tax measures approved in France and the UK looms as incentive to meet the timing goals. OECD officials has recently confirmed that they intend to meet the timetable despite the fact that international travel is limited, and Paris has been placed on lockdown, and they have reasserted that the December 31, 2020, goal for completion is final and immovable. The OECD released a statement saying that it was “working on full steam” on the project, and they have ensured that all countries can still participate through virtual conferencing.
The OECD Secretariat in February presented an economic forecast of Pillars One and Two citing an initial estimate of a 4% increase in corporate income tax collection – about $100 billion annually across all jurisdictions – with reportedly little effect on investment costs. It has been suggested that the coronavirus pandemic will increase the interest of countries in capturing revenue from online activity, which is able to continue during the pandemic.
The OECD issued a draft document that proposes model rules for standardized tax reporting by sharing and gig economy platforms. The model reporting rules aim to “collect information on transactions and income realized by platform sellers, in order to contain the proliferation of different domestic reporting requirements and to create efficiencies for tax administrations and platform operators alike.”
The model rules are divided into four sections. The first section sets out key definitions. Section 2 contains the due diligence procedures to be followed by platform operators to identify the sellers and determine the relevant tax jurisdictions for reporting purposes. Section 3 includes the information and format to be reported about the platform, its operators, sellers and transactions. Section 4 contains the administration and enforcement hallmarks that jurisdictions are expected to consider when implementing the model rules.
The next steps on this issue will be:
- A framework for the automatic exchange of the information collected under the model rules with interested jurisdictions that have taxation rights over the sellers’ income
- The development of technical solutions to support both the exchange of information, as well as the performance of the due diligence obligations by platform operators
The first post-Brexit UK Budget was released on March 11th and included several proposals related to business taxation. Typically, in the past, Budgets have been enacted within a few months. The Budget covered the following issues:
- UK corporation tax will remain at 19% for 2020-2021 rather than decreasing to 17%.
- The Government has opened a consultation seeking to improve the competitiveness of the UK tax regime as it applies to private fund structures.
- The Government intends to consult on corporate tax rules that apply to hybrid mismatch arrangements to ensure that hybrid mismatch rules work proportionately and as intended.
- The Digital Services Tax (DST) will be introduced from April 1, 2020 at a rate of 2%. The tax will apply to large businesses (with group revenues of over £500 million) that generate their revenue from digital business activities such as social media platforms, online market places and search engines that are accessed by UK users.