Washington Tax Insight December 2020
Politics & Congressional Activity
Presidential Election: Former Vice President Joe Biden was elected to serve as the forty-sixth President of the United States on November 3rd with over 80 million votes and 306 Electoral College votes. Senator Kamala Harris will be the new Vice President. President-elect Biden was declared the winner of the Presidential election on November 7th.
On December 14th, the Electoral College delegations met and voted in their respective states with President-elect Biden receiving 306 electoral votes and President Trump receiving 232 electoral votes. On January 3, 2021, the 117th Congress will convene, and on January 6th, there will be a Joint Session of Congress to count electoral votes and declare the election results to be official.
President-elect Biden and Vice President-elect Harris will be inaugurated on January 20th with the transition to the new Administration taking place at noon on that day.
The Biden Administration and the First 100 Days
President-Elect Biden has named Janet Yellen, the former Chair of the Federal Reserve Board of Governors and former Chair of the Council of Economic Advisers, to be the Secretary of Treasury where she will be responsible for the new Administration’s economic and national security agenda. She will be the Administration’s key player on tax policy, which should be a priority issue for the White House in 2021 since President-elect Biden made raising taxes on wealthy individuals and corporations a central party of his campaign.
Nominees for the other key positions of the new Administration’s economic team include Brian Deese as the Director of the National Economic Council, Cecilia Rouse as the Chair of the Council of Economic Advisors, Susan Rice as the Director of the Domestic Policy Council, and Neera Tanden as the Director of the Office of Management and Budget.
Under federal law, the Biden Administration is required to submit its budget proposal for FY2022 by February 1, 2021, but it is likely that deadline will not be met, which is often the case in the first year of a new presidential administration. During the campaign, President-elect Biden campaigned with a platform to address income inequality and ensure that corporations pay their fair share of taxes. Several of his proposals would raise significant revenue, which would be used to finance an agenda designed to help middle- and lower-income Americans. Many of his policy proposals would reverse rules that were enacted in the Tax Cuts & Jobs Act (TCJA) that benefit corporate and wealthy taxpayers.
With the challenges presented by the new Congress, particularly if the government remains divided in 2021 (which depends on the outcome of the Senate run-offs elections as discussed below), Biden’s tax agenda will need to be less ambitious. This does not mean, however, that he must abandon his entire agenda or that legislative gridlock is a certainty.
Divided U.S. governments in the past were able to compromise and produce legislative activity. Similar bipartisan efforts will be required in order to combat the dual crisis that the COVID-19 pandemic created on the U.S. economy and healthcare system, including passing additional COVID-19 relief and stimulus legislation, retirement security legislation, and an infrastructure investment package. Because some of the key provisions of the TCJA will expire over the next few years, the parties may also find a way to work together on more ambitious tax legislation that could include some parts of Biden’s tax agenda. The reality for the Biden Administration’s tax policy may be that incremental change is more achievable than broad sweeping tax reform.
House of Representatives: Democrats will retain control of the House of Representatives in 2021, although they lost some seats as a result of the election so their margin of control will be smaller. The Democrats currently are expected to hold 222 seats and the Republicans 211, with two races outstanding. Democratic members of the House who are selected to serve in the new Biden Administration will vacate their House seats, including Representative Cedric Richmond, who will become the Director of the White House Office on Public Engagement, and Representatives Marcia Fudge and Deb Haaland, who are Cabinet nominees. This will further narrow the Democratic margin of control until an election is held for their seats.
Senate: Control of the Senate is yet to be determined with the current split at 50 Republicans and 48 Democrats. Two races are headed for a run-off in Georgia on January 5th. In the two Georgia races, the Republican candidates both held a lead over their opponent, but neither achieved 50% of the vote, which is required in Georgia in order to declare a winner.
Whichever party ultimately controls the Senate will do so with a very slim margin, which will make moderate Republicans important votes on issues in the new Congress, including for confirmation of Biden appointees as well as legislation. In addition, several members of the Senate will be looking ahead to the 2022 mid-term elections, when a total of 33 Senate seats will be on the ballot.
Lame Duck Session
Federal Government Funding: After approving multiple short-term Continuing Resolutions to fund the federal government, Congress finally agreed to legislation on a long-term deal to fund the government. This agreement includes a dozen annual appropriations bills designed to avoid the necessity of dealing with these issues early in the new Biden Administration.
COVID-19 Relief: Negotiations on additional relief related to the COVID pandemic finally reached a conclusion and a new package of relief measures has been approved by the House and Senate. The President signed the bill. The new legislation covers nearly all of the key issues that Republicans and Democrats wanted, except for specific aid to state and local governments and liability protection for businesses related to pandemic lawsuits. Democratic leaders have suggested that they will work on additional pandemic-related legislation in 2021 with the new Biden Administration.
A future True Alert will detail the provisions of the new legislation including tax issues and pandemic relief issues. Generally, the following issues are included:
- Deductibility of business expenses paid for using PPP loan funds
- Tax extenders, including the New Markets Tax Credit, the Work Opportunity Tax Credit, and excise tax rates for beer, wine and spirits
- 100% deductions for business meals that are provided by a restaurant in 2021 and 2022
- Extension of the Employee Retention Tax Credit (with changes) and the credit for paid sick leave
- Earned Income Tax credit and Child Tax Credit changes
- Changes to the Low Income Housing Tax Credit
- Clean Energy reforms and extension of clean energy tax credits
- Extension of the PPP (with changes) and funding for low-income communities and movie theaters, museums and live venues
- Direct payments to individuals and funds for increased unemployment compensation
- Funding for vaccines, testing, and tracing
- Rental aid and an eviction ban
National Defense Authorization Act: Congress approved the National Defense Authorization Act (NDAA), but President Trump vetoed the bill based on two issues. The House has voted to override the veto, and the Senate is scheduled to vote on December 29th. First, he has expressed opposition because it would create a commission to study renaming military bases named for Confederate officials. He also wanted to include a provision to repeal Section 230 of the Communications Decency Act, which provides a liability shield for social media companies.
Joint Committee on Taxation: The Joint Committee on Taxation (JCT) issued its annual report and revenue estimate of tax expenditures, which are defined as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.” This report is intended to be used by members of Congress in their analysis of the merits of tax benefits that are provided for in the tax code and is seen as a potential list of possible revenue offsets for tax legislation that would result in decreased revenue.
Treasury and the IRS
COVID-19 Crisis Guidance & Related Issues
Paycheck Protection Program Loan (PPP) Forgiveness and the Deductibility of Business Expenses: The newly approved legislation on COVID-19 relief includes a provision that would allow the deductibility of business expenses paid for by PPP loan funds, with certain restrictions. There was broad bipartisan support for this proposal, which was opposed by Treasury Secretary Mnuchin. It is expected that Treasury and the IRS will issue new guidance on this issue very soon so that taxpayers will understand the appropriate tax treatment required under the new law.
Guidance issued earlier in 2020 reflected the Treasury position that such business expenses would not be deductible if they were paid using PPP loan funds. On November 18, 2020, the IRS issued Revenue Ruling 2020-27 and Revenue Procedure 2020-51, which address the deductibility of certain business expenses paid with PPP loan funds. According to the Treasury Press Release, the new guidance is intended to clarify the tax treatment of expenses where a PPP loan has not been forgiven by the end of the year in which the loan was received. The PPP offered loans of up to $10 million to many small businesses and nonprofit organizations and the loans are generally forgivable if program rules are met. On May 2, 2020, the IRS released Notice 2020-32, which explained that otherwise deductible expenses would not be deductible if paid utilizing a PPP loan that was later forgiven. In addition, PPP funds that were forgiven would be excluded from gross income as a “class of exempt income” under Section 265 of the Internal Revenue Code (IRC).
IRS Request for Input on Ways to Ease Regulatory Burden on Taxpayers during the Pandemic: The IRS issued a request for public input on “regulations and other requirements that can be rescinded, modified, or waived to assist business and individual taxpayers with the ongoing economic recovery from the Coronavirus Disease 2019 pandemic.” The request for comment was published in the Federal Register on November 17, 2020, with public input due 45 days later.
Extension of the Funding-Related Deadline for Defined Benefit Pension Plans: The IRS issued Notice 2020-82 extending the deadline by which contributions otherwise required during 2020 must be made to single-employer defined benefit plans. The new deadline is January 4, 2021.
Like-Kind Exchanges: The IRS issued final regulations under §1031 on like-kind exchanges of business or investment property so that taxpayers can determine whether the exchanged properties are appropriately categorized as real property. The new rules reflect changes made by the TCJA, which narrowed the deferral of gain or loss so that it applies only to exchanges of real property, and not to exchanges of personal or intangible property. To qualify, a taxpayer generally must hold the real property for productive use or for investment. Under a transition rule, an exchange of personal or intangible property can qualify as a like-kind exchange if the taxpayer “began the exchange by transferring property or receiving replacement property on or before December 31, 2017.” According to the IRS, the final regulations “limit the application of the like-kind exchange rules under section 1031 to exchanges of real property, add a definition of real property, and adapt an existing incidental property exception to apply to a taxpayer’s receipt of personal property that is incidental to real property the taxpayer receives in the exchange.” Notably, the IRS decided in the final rules not to subject property to a purpose-or-use test when determining like-kind exchange eligibility, which was a rule included in the proposed regulations that were released in June.
Rules Coordinating GILTI and the Deduction for Foreign Source Dividends: The IRS issued final regulations coordinating the extraordinary disposition rule under §245A with the disqualified payment rules under §951A, which covers the Global Intangible Low-Taxed Income (GILTI) regime. With the release of the new rules, the IRS explains that the regulations “coordinate the extraordinary disposition rule and the disqualified basis rule through two operative rules: the DQB reduction rule, which reduces disqualified basis in certain cases, and the EDA reduction rule, which reduces an extraordinary disposition account in certain cases.” The IRS also states that these operative rules also apply to coordinate the extraordinary disposition rule and the disqualified payment rule, which addresses transactions similar to those to which the disqualified basis rule applies. The new rules will take effect on January 11, 2021.
Bonus Depreciation Rules: The IRS issued final regulations providing additional instructions on claiming the bonus depreciation deduction under §168(k). The new rules include clarifying changes to the 2019 regulations and additional issues not covered by those prior rules, including: (1) the definition of qualified property; (2) rules for consolidated groups; (3) rules related to certain acquired or self-constructed components; (4) the application of the mid-quarter convention, and (5) the changes to the definitions in the 2019 final regulations for the terms qualified improvement property, predecessor, and class of property. The IRS also issued Revenue Procedure 2020-50, which provides guidance for taxpayers to apply certain previously issued regulations on the additional first-year depreciation deduction and permits taxpayers that apply those regulations to revoke certain previously made elections or make certain late elections.
SALT Payments by Passthroughs: The IRS issued Notice 2020-75, which states that proposed regulations will be issued to clarify and provide certainty to taxpayers that certain state and local income taxes (SALT) imposed on and paid by a passthrough entity, such as a partnership or an S corporation, are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the taxable year of payment. The new rules will take effect on November 9, 2020, and taxpayers may rely on the Notice until the regulations are issued. The TCJA generally capped the deduction for SALT payments at $10,000 per year, although that limitation is scheduled to expire after 2025.
Calculating UBTI for Nonprofits for Multiple Revenue Streams: The IRS issued final regulations under §512 regarding changes made by the TCJA that generally require tax exempt organizations with more than one unrelated trade or business to calculate unrelated business taxable income (UBTI) separately for each trade or business so that losses can only offset income from the same trade or business. The final rules explain how a tax exempt organization determines if it has more than one unrelated trade or business and how to calculate its UBTI.
Low-Income Housing Tax Credit: Treasury and the IRS released proposed regulations related to the “average income test” for purposes of the low-income housing tax credit under §42. The proposed regulations provide guidance with respect to the implementation of the average income test and create narrow forms of administrative relief that will help in mitigating some of the risks associated with the average income test.
IRS Comments on Final Regulations on Carried Interest and Business Interest Expense: A representative of the IRS Office of Chief Counsel reported that the intention is to issue final rules on carried interest as well as business interest expense regulations by the end of 2020. Proposed rules on carried interest under §1061 were issued in July of 2020. The IRS issued final regulations on the business interest expense in July of 2020 while concurrently issuing proposed regulations on the interest expense with respect to pass-through entities as well as controlled foreign corporations.
Other Issues and Guidance
The 2020-2021 Guidance Priorities: The IRS issued its annual Priority Guidance Plan, which lists the regulations and guidance that the IRS plans to issue during the current plan year which runs from July 1, 2020, through June 30, 2021. The 2020-2021 Priority Guidance Plan includes 191 guidance projects, including 57 which had been released as of September 30, 2020. A key priority for the IRS is to conclude major guidance associated with the TCJA, the release states that they expect that virtually all published guidance necessary to implement the TCJA will be issued by December 31, 2020. The IRS stated that this includes 59 final regulations, 42 Revenue Procedures, 59 Notices, and other guidance.
Partnership Audit Rules: The IRS issued proposed regulations that address certain partnership exceptions to the centralized audit regime enacted in 2015 under the Bipartisan Budget Act. The IRS stated that “the centralized partnership audit regime does not apply to a partnership-related item if the item involves a special enforcement matter described in these regulations” and includes an explanation of “special enforcement matters” in the new rules. The proposed regulations relate to Notice 2019-06, which identified two areas for guidance: (1) situations in which an adjustment during an examination of a person other than the partnership requires a change to a partnership-related item, and (2) situations where a qualified Subchapter S subsidiary is a partner in a partnership.
Updated Life Expectancy Tables for Minimum Required Distributions: The IRS issued final regulations that update the life expectancy and distribution period tables used to calculate minimum required distributions from qualified plans and individual retirement accounts. The tables also apply to eligible deferred compensation plans under §457, as well as §403(a) and (b) annuity contracts, custodial accounts, and retirement income accounts. The final regulations apply to distribution calendar years beginning or after January 1, 2022.
Office of Appeals Memorandum on Secure Messaging Pilot Program: The IRS Independent Office of Appeals (Appeals) released a memorandum to all employees concerning a new pilot program that will provide a platform for taxpayers to digitally interact in a secure manner with Appeals. The memorandum included interim guidance for those Appeals employees identified as volunteer participants in the IRS Taxpayer Digital Communications Security Messaging pilot. The purpose of the program is to offer taxpayers and Appeals personnel a more rapid and secure means of communications than the traditional methods, which include in-person meetings, telephone, fax, and correspondence.
IRS Launches High-Income Audit Initiative: In June, the IRS announced plans to increase audits on high-net-worth individuals as part of a joint effort between the Large Business and International Division (LB&I) and the Small Business/Self-Employed Division (SB/SE). Despite the challenges presented by the pandemic, the IRS is moving ahead with this initiative and has launched its first several hundred exams.
LB&I Focus Guide for Fiscal Year 2021: The LB&I released its Fiscal Year 2021 Focus Guide, which is the annual document that outlines its strategic vision and goals for the upcoming fiscal year. The Guide includes a summary of several LB&I strategic goals for Fiscal Year 2021 divided into six categories: (1) Compliance Activities; (2) Major Program Priorities; (3) Workforce Tools and Opportunities; (4) Communication and Collaboration; (5) Staffing; and (6) Equity, Diversity, and Inclusion.
Use of “Telescoping” Related to MAP and APA cases: The IRS Advance Pricing and Mutual Agreement (APMA) program issued guidance restricting the use of “telescoping” in the implementation of resolutions for mutual agreement procedure (MAP) and advance pricing agreement (APA) cases negotiated under US income tax treaties. Telescoping allows US taxpayers that have obtained a MAP or APA resolution to reflect adjustments arising in one or more prior years to be aggregated, netted, and reported into a later year, allowing taxpayers to reduce the burden of amending US federal income tax returns. Without telescoping, a taxpayer would be required to file amended federal tax returns for each year covered by the MAP or APA resolution.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
Multilateral tax negotiations, which have been ongoing at the Organization for Economic Cooperation and Development (OECD) with the goal of producing a global agreement on the taxation of multinational corporations, including those that provide digital services, have been impacted by the COVID-19 pandemic. The original deadline for reaching a global agreement has now been delayed from the end of 2020 to mid-2021.
Status of the OECD Project: On October 12, 2020, the OECD released for comment two new blueprints on Pillar One and Pillar Two, which are technical outlines of the two proposals. The new blueprint for Pillar One would establish new rules on where tax should be paid (nexus rules) and a fundamentally new way of sharing taxing rights between countries. The updated blueprint for Pillar Two would introduce a global minimum tax.
Public comments were due by December 14, 2020, and a virtual public consultation is scheduled for January 14-15, 2021. A meeting of members of the Inclusive Framework will be held later in January to debrief on the public consultation after which the OECD staff will prepare a calendar of a workplan designed to deliver the project by the new target date of mid-2021.
The OECD has stated that they are waiting for the new Biden Administration to make key appointments to the Treasury Department so that the US can participate in future meetings.
OECD: The OECD has announced that 18 jurisdictions have improved their tax practices to the point that they are no longer deemed harmful and they meet an international standard for combating corporate tax abuse. The results come from an annual peer review addressing 49 practices across 19 of the countries and territories that participate in Action 5 of the OECD’s BEPS project. Action 5 is a minimum standard intended to ensure that preferential tax practices in a jurisdiction are not abused to facilitate tax avoidance or evasion. The jurisdictions considered to be in line with Action 5 include: Aruba, Belize, Cook Islands, Curacao, Dominica, Dominican Republic, Georgia, Hong Kong, Jamaica, Maldives, Mauritius, Morocco, North Macedonia, Qatar, St. Kitts and Nevis, San Marino, Switzerland, and Tunisia.
Brexit: The European Union and the UK
The UK and the EU reached a post-Brexit trade deal prior to the December 31, 2020 deadline. European Union nations have unanimously approved the post-Brexit trade deal, which was a prerequisite for the agreement to take effect on January 1, 2021. The EU legislature must also approve the deal, which is expected in February. The UK’s House of Commons is expected to approve the deal prior to the end of the year.
EU: The European Union Commission announced its Work Programme 2021 in October with a focus on several key areas for tax issues including energy taxes, digital services taxation, and carbon border adjustment issues. It was also announced, however, that the EU Budget will not be in place until 2Q because it will take several weeks for it to be approved by national parliaments. One of the key areas which is still under discussion includes the issue of revenue streams, since tax measures must be unanimously agreed to within the EU. Candidates for the new revenue streams include a plastics tax, levies on aviation fuel and maritime fuel, a carbon border tax, and a new tax on digital services.