Washington Tax Insight December 2021 – Happy Holidays!
Politics and Congressional Activity
President Biden laid out an ambitious agenda in his State of the Union address and FY 2022 budget plan earlier this year, and the Democratic-controlled Congress continues to work to enact that agenda in 2021. After pandemic-relief legislation became law in early spring, Congress then moved on to infrastructure legislation, which was enacted on November 15, 2021.
Prior to the end of 2021, Congress had a legislative agenda that included several issues of critical importance including increasing the debt limit ceiling, passing the National Defense Authorization Act (NDAA), and completion of the Build Back Better Act (BBBA). Another key issue involving funding the federal government for Fiscal Year 2022 was resolved by Congress earlier this month with the approval of legislation extending current funding levels into 2022.
Funding for Fiscal Year 2022, the Debt Limit, and the NDAA
FY 2022 began on October 1st, but in the absence of a package of spending bills approved by both the House and Senate, the government continues to operate under a Continuing Resolution (CR) that funds operations at FY 2021 levels. Congress approved another CR that funds the government through February 18, 2022.
The House and Senate have now approved legislation that would increase the statutory debt limit by $2.5 trillion, which should be sufficient to cover federal borrowing for at least one year, and the President is expected to sign it. The House and Senate have also approved the National Defense Authorization Act, which is also expected to be signed by the President.
Bipartisan Infrastructure Package
The Infrastructure Investment and Jobs Act was signed into law on November 15, 2021, and the President issued a new Executive Order to summarize the implementation process. The new law includes only a handful of tax provisions, including the imposition of new information reporting mandates for cryptocurrencies for businesses that receive cryptocurrency worth more than $10,000 and the early termination of the Employee Retention Credit (ERC) program after 3Q of 2021. It also reinstated the Superfund taxes and included pension smoothing provisions using interest rate stabilization.
The IRS has states they will issue guidance for taxpayers with respect to the early termination of the ERC program. A bipartisan group of Senators are opposed to the details of the cryptocurrency changes and have introduced legislation to narrow the reporting rules.
The Budget Reconciliation Legislation
The major legislation in 2021 with respect to tax issues is the Build Back Better Act (BBBA), which includes many of the key Biden agenda items, including provisions targeting large corporations and high-income individuals, middle-class tax relief, tax incentives and new spending on traditional infrastructure projects and “human” infrastructure initiatives, as well as proposals to address climate change. The BBBA is being considered pursuant to the Fiscal Year 2022 budget resolution that provides for budget reconciliation legislation to be advanced with these tax and spending proposals.
On November 19th, the House approved the BBBA, H.R. 5376, by a vote of 220-213 on party lines with one Democrat voting against the bill. The $1.7 trillion bill includes a package of targeted individual tax relief provisions, clean energy incentives, and increased spending on healthcare, education, childcare, and other programs. The legislation is now being considered by the Senate, where it is expected that changes will be made to the House bill. Although Senate Majority Leader Schumer (D-NY) had originally set December 31st as the deadline for final approval of the BBBA, he reportedly has accepted that consideration of the BBBA will continue into January of 2022.
On December 11th, Senate Finance Committee (SFC) Chair Ron Wyden (D-OR) released text of the Senate’s version of the bill with changes to certain provisions, most notably to the new proposed corporate minimum tax and certain international tax provisions. Regarding the new interest expense limitation under Section 163(n), the SFC draft added an election for taxpayers to use adjusted basis instead of EBITDA to determine the corporation’s share of the worldwide group’s net interest expense. The cost of that taxpayer-friendly change was offset with modifications to strengthen the anti-inversion rules.
The SFC draft is likely to change as it moves through the budget reconciliation process on the Senate Floor. Several Senators are expected to propose amendments to various provisions, and Senate Republicans have announced a plan to mount more than 30 procedural challenges to the bill during the upcoming “Byrd bath” meetings with the Senate Parliamentarian. Some of the provisions that are expected to meet challenges in the Senate include paid family leave, the cap on the deduction for state and local taxes (SALT), immigration reform, and IRS enforcement.
For a detailed discussion of the process and timing of this legislation as well as a summary of the provisions in the House-approved bill affecting individual taxpayers, please see this True Insight. For a detailed summary of the provisions of the House-approved bill affecting businesses and in the international area, please see this True Insight.
House/Ways & Means Committee
The Ways & Means Oversight Subcommittee held a meeting on December 8th on the issue of “The Pandora Papers and Hidden Wealth.” The Pandora Papers involved millions of files leaked from 12 law firms and corporate service providers and is the subject of an investigation by the International Consortium of Investigative Journalists.
The Oversight Subcommittee held a hearing on the Opportunity Zones program in order to review a new report from the Government Accounting Office on investment activity in Opportunity Zones. Democrats who control the subcommittee continue to support the program but believe changes are needed to ensure that the program is delivering economic benefits to the communities it is intended to help.
Senate/Senate Finance Committee
The SFC Subcommittee on Fiscal Responsibility and Economic Growth will hold a hearing on competition, growth, and privacy in the technology sector.
Treasury and the IRS
Issues and Guidance
Guidance on Paycheck Protection Program – Tax Issues: The IRS issued new guidance on the Paycheck Protection Program (PPP) through Revenue Procedure 2021-48, Revenue Procedure 2021-49, and Revenue Procedure 2021-50. The guidance also provides information with respect to additional pandemic-related programs for partnerships and consolidated groups, including Economic Injury Disaster Loans, Shuttered Venue Operators Grants, Restaurant Revitalization Fund grants, and Supplemental Targeted EIDL Advances.
Revenue Procedure 2021-48 provides that taxpayers may treat amounts that are excluded from gross income in connection with the forgiveness of PPP loans as received or accrued; (1) as eligible expenses are paid or incurred, (2) when an application for PPP loan forgiveness is filed or (3) when PPP loan forgiveness is granted. Revenue Procedure 2021-49 provides guidance for partnerships and consolidated groups regarding amounts excluded from gross income and deductions relating to the PPP and other COVID-19 relief programs. Revenue Procedure 2021-50 allows eligible partnerships to file amended partnership returns for taxable years ending after March 27, 2020, to adopt the guidance set forth in Revenue Procedures 2021-48 and 2021-49 if certain requirements are met.
Guidance on the Deduction for Meals: The IRS issued Notice 2021-63, which provides guidance on the temporary 100% deduction for food and drink expenses paid or incurred in 2021 and 2022 provided by a restaurant for purposes of Section 274(n)(2)(D). Taxpayers using the per diem rate to calculate business expenses while traveling can deduct the entire meal portion of the rate as food or beverages from restaurants according to the clarification from the IRS of the temporary 100% deduction. This applies for costs attributable to food or beverages from a restaurant beginning January 1, 2021, through December 31, 2022. The 100% deduction for food and beverages from restaurants is a temporary disaster relief exception to the ceiling of 50% on food and beverages business deductions, and the application to per diem rates is for taxpayers who are following Revenue Procedure 2019-48.
Carried Interest Guidance: The IRS published Frequently Asked Questions (FAQs) concerning carried interest reporting details for partnerships. The purpose of the FAQs is to provide guidance relating to both pass-through entity filing and reporting requirements and owner taxpayer filing requirements in accordance with regulations revised in T.D. 9945. This guidance is under Section 1061, which recharacterizes certain net long-term capital gains of a partner that holds one or more applicable partnership interests as short-term capital gains if the interest was held for less than 3 years. This guidance will be added to next year’s revision of Publication 541-Partnerships.
The IRS has also stated that it is waiting to update carried interest regulations until Congress decides whether to include any changes in the budget reconciliation legislation. Final regulations were issued in January 2021, but the IRS has said that the guidance needs further revision. The current House version of the BBBA does not include a provision on carried interests, although the Ways & Means Committee-approved version did.
Safe Harbor for REITs and RICs to Enhance Liquidity: The IRS issued Revenue Procedure 2021-53, which provides temporary guidance regarding the treatment of certain stock distributions by publicly offered Real Estate Investment Trusts (REITs) and Regulated Investment Corporations (RICs). The guidance is intended to allow REITs and RICs to maintain liquidity during the pandemic. The guidance modifies the safe harbor in Revenue Procedure 2017-45 by reducing the minimum required aggregate amount of cash that distributee shareholders may receive to not less than 10% of the total distribution in order for Section 301 (by reason of Section 305(B)) to apply to such distribution. The modification is effective solely for distributions declared between November 1, 2021, and June 30, 2022. Revenue Procedure 2020-19 applied a similar rule to distributions declared on or after April 1, 2020, and on or before December 31, 2020.
Guidance on the Treatment of COVID Homeowner Relief Funds: The IRS issued Revenue Procedure 2021-47 which provides guidance on the income tax treatment and information reporting requirements for payments made to or on behalf of financially distressed individual homeowners by certain entities with funds allocated from the Homeowner Assistance Fund (HAF), which was established by the American Rescue Plan of 2021 in response to the pandemic. The guidance clarifies that payments sent by states to eligible homeowners from the HAF are treated as qualified disaster relief payments under Section 139(b), and it offers an optional safe harbor for homeowners that used the funds to pay off portions of their mortgage interest or property taxes.
New FAQs on Treatment of Pandemic Relief Payments from State and Local Governments: The IRS published new FAQs providing guidelines on tax reporting for individuals and employers that receive pandemic relief payments and for the state and local governments disbursing the funds. Grants paid to employees and some other types of payments must be included in taxable income including grants used to provide premium pay and cash bonuses to employees during the pandemic. However, direct transfers to families from state and local governments to assist with child care costs from the pandemic are not taxable income because they constitute disaster relief.
Refunds from Business Loss Carrybacks: An IRS official said that there has been a delay in issuing refunds to businesses who are allowed to carry NOLs incurred in 2018, 2019, or 2020 back five years to get a quick refund of previously paid taxes, which was provided for in the CARES Act. The IRS goal is to get the refunds out within 90 days, but limited staff resources have made it difficult to reach that goal. Claims are processed by the Wage and Investment Division but they consult with the Large Business & International Division if any issues arise with a claim.
Tax Year 2022 Annual Inflation Adjustments: The IRS issued a news release and a revenue procedure announcing the tax year 2022 annual inflation adjustments. These adjustments affect more than 60 tax provisions, including the tax rate schedules, and will be used for tax returns filed in 2023.
Low Income Housing Credit: The IRS issued Revenue Ruling 2021-20 regarding whether a 4% floor in Section 42 of the Code related to the low-income housing credit applied to low-income buildings in three scenarios. The IRS also released Revenue Procedure 21-43, which provided safe harbors regarding determining, for purposes of situations like those in two of the scenarios, whether housing credit dollar amounts or exempt facility bond issues made after 2020 are more than de minimis.
Changes to Practice Rules Before the IRS under Circular 230: The IRS has sent a draft revision to Circular 230, which contains the regulations that govern practicing before the IRS, to Treasury for review. The rules were revised in 2014, but tax professionals called for updates to the system. The Director of the IRS Office of Professional Responsibility stated that the IRS has done a “comprehensive review of the whole circular for unenforceable provisions, inconsistencies, and [issues that need to be clarified].”
2021 Required Amendments for Savings Plans: The IRS issued Notice 2021-64, which provides the 2021 Required Amendments List for individually designed plans qualified under Section 401(a) and individually designed plans that satisfy the requirements of Section 403(b).
Accounting method change guidance: The IRS published a notice and request for comments concerning requirements respecting the adoption or change of accounting methods and extensions of time to make elections. Written comments are due by January 4, 2022.
Large Partnership Compliance Pilot Program: The IRS released a memorandum implementing the Large Partnership Compliance Pilot Program, including the identification, selection and delivery of large partnership tax returns, exam procedures and feedback.
Foreign Tax Credit, Form 1116: The IRS published a notice and request for comments concerning the FTC used by individuals, estates or trusts. Comments are requested on Form 1116, Foreign Tax Credit (Individual, Estate or Trust), and Schedules B and C, which are used by individuals (including nonresident aliens), estates or trusts who paid foreign income taxes on US taxable income to compute the FTC. Written comments are due on or before December 27, 2021.
Greenmail – Excise Tax: The IRS published a notice and request for comments concerning rules relating to the manner and method of reporting and paying the nondeductible 50% excise tax imposed by Section 5881 with respect to the receipt of greenmail. Written comments are due on or before December 28, 2021.
Section 199A Deduction: The IRS released a memorandum providing guidance to employees in its Small Business Self-Employed and Large Business & International Campus Pass-Through Function groups on how to address the qualified business income deduction (Section 199A) on investor returns controlled in their operations.
Draft Instructions on Filing Partnership Representative Form: Draft instructions for Form 8979, Partnership Representative Revocation, Designation, and Resignation Form, were released on November 9th with an update to existing instructions on how to file the form. The update differentiates how the Form 8979 is filed if done by a partnership rather than by a partnership representative or designated individual.
Draft Instructions for US Shareholder Calculation of GILTI: Draft instructions for Form 8992, Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), were released on November 9th to reflect a new separate Schedule A and domestic partnerships no longer filing the form. Separate Schedule A is no longer part of the base Form 8992 and taxpayers are now required to attach either separate Schedule A or separate Schedule B, depending upon whether the US shareholder of the CFC is a member of a US consolidated group. Domestic partnerships will not complete Schedule K-2 (Form 1065), Part VI, and Schedule K-3 (Form 1065), Part VI.
Request for comments on PFICs: The IRS released a request for written comments on T.D. 9360, which provides guidance regarding the information a taxpayer must provide in order to substantiate its computation of its share of a passive foreign investment company (PFIC) post-1986 earnings and profits. Comments are due by January 10, 2022.
Tax Pro Authorization Tool Upgrades: The IRS will release new features for the online Tax Pro Account, which was launched in July of 2021, that professionals can use to request authorization to represent taxpayers or view their tax records. This tool allows practitioners to digitally initiate powers of attorney and tax information authorizations for their clients, and the upcoming upgrades will include features that will expedite access to tax data and allow individual taxpayers to initiate authorizations.
Voluntary Disclosure Practice for Offshore Bank Accounts: An IRS official has said that the IRS voluntary disclosure practice for offshore bank accounts will allow participants to supplement their noncompliance summaries if they discover mistakenly omitted information. Participants are permitted to write to the IRS Criminal Investigation Division and explain the nature of the mistake or omission. Certain information must be included in the supplemental disclosure letter. This program is designed to provide a process by which taxpayers can come into compliance while potentially avoiding prosecution.
Taxpayer Advocate Service – Acceptance of New Amended Tax Return Cases: The Taxpayer Advocate Service (TAS) will not accept any new cases where the sole issue involves a delay in the processing of amended tax returns, until the IRS works through its current backlog of unprocessed amended returns, which at October 30th stood at 2.7 million. Processing times are currently taking more than 20 weeks. The TAX issued a directive to the IRS to complete processing of all backlogged amended tax returns by December 29th or provide a detailed plan for working through the backlog.
Incorrectly Filed Amended Partnership Returns: An official at the IRS has said that the IRS will not reject an amended return incorrectly filed by a partnership subject to new auditing procedures, but the filing may increase chances of an audit. New procedures for partnerships were established in 2015 including the process for adjusting previously filed returns, which now must be done by filing an administrative adjustment request.
Guidance or Action That Could Be Forthcoming
Foreign Tax Credit Final Regulations – OMB Review: The Office of Management and Budget (OMB) are reviewing final rules regarding the FTC and the foreign-derived intangible income (FDII) regime. The OMB said that the regulations provide guidance related to the definition of foreign income tax, liability for foreign tax, and when a taxpayer can claim a credit on foreign taxes. They will finalize jurisdictional nexus rules, which deny US tax credits to companies for taxes that other countries impose if they are not based on a company’s physical “nexus” there, such as digital services taxes. The guidance will also provide guidance that clarifies the FDII rules. Treasury’s Deputy Assistant Secretary for International Tax Affairs said that the final regulations will be “largely consistent” with the topics addressed in the 2020 proposed rules. Some parts of the proposed rules that are outside the core foreign tax rules will be moved to a separate package to be dealt with in 2022.
Reporting Small Business Stock Gains: The IRS has indicated that it knows taxpayers need guidance on Section 1202 that governs how gains from selling small business stock should be reported. Section 1202 excludes from an individual taxpayer’s gross income 50% of any gains from selling the stock of a qualified small business held for more than five years. An official from the IRS Office of Chief Counsel said that most of the taxpayer inquiries focus on a provision defining a qualified trade or business, and she advised taxpayers that they should not rely on the definitions included in Section 199A. The IRS has also received questions on how the provision applies to cryptocurrency and how it interacts with tax code provisions related to opportunity zones.
Possible Guidance Related to Inventory Issues: Treasury is considering requests from Congress to provide tax relief to businesses with inventory shortages due to pandemic-related supply chain issues. This relates to those businesses who use the LIFO method of accounting that requires businesses to maintain a minimum level of inventory at year-end or risk adverse tax consequences. Treasury is considering whether the scope of relief should be limited to the automotive industry or to all industries that use LIFO, which is the approach supported by the AICPA. Section 473 gives Treasury the authority to provide temporary tax relief for businesses that cannot maintain inventory levels because of major foreign trade interruptions.
Fractions Rule Regulations: An IRS official has stated that final regulations on the “fractions rule” that factors into the determination of whether nonprofits investing in debt-financed real property through a partnership are subject to unrelated business income tax are expected to be issued early in 2022. Proposed regulations were issued in 2016, but business practices have changed since then, and the IRS intends the final rules to reflect that. The intent of the fractions rule is to prevent tax avoidance by curbing permanent or temporary transfers of tax benefits from tax-exempt partners to taxable partners.
Right to Appeal Regulations: An IRS official has said that the IRS is developing regulations to implement changes from the Taxpayer First Act (TFA) that grant taxpayers the right to an administrative appeal. The TFA established the IRS Independent Office of Appeals, which is designed to review cases before they are sent to court.
2017 TCJA – Challenges to Guidance: The IRS announced that there is a centralized team at the IRS in the Large Business & International Division that is keeping an inventory of challenges to regulations for implementing the 2017 TCJA. The IRS could ultimately provide settlement initiatives if its regulations are found to be invalid.
IRS Noncompliance Priorities: An IRS official recently discussed noncompliance priorities at a Tax Executives Institute conference, noting that they include offshore noncompliance with tax laws, employment tax evasion, fraud, virtual currency, and issues with high-wealth and high-income taxpayers. The IRS spends about 18% of its audit time on compliance campaigns with other audit work focused on the Compliance Assurance Program, which involves real-time audits for large companies, and pass-through businesses.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
The OECD announced that nearly 140 countries have signed on to an agreement that would revise international tax rules in significant ways including requiring participating jurisdictions to impose a minimum 15% tax rate on the income of multinational corporations. The goal is to impose the new tax regime starting in 2023. The agreement states that no new Digital Services Taxes (DSTs) will be imposed if the multilateral treaty comes into force before December 31, 2023.
The two pillar solution, which has been worked on within the membership of the OECD/G20 group known as the Inclusive Framework, is designed to address the tax challenges of the digitalization of the global economy. Pillar One, which would reallocate profits of the largest and most profitable multinational companies to more jurisdictions, is expected to require a multilateral convention and tax treaty changes. Pillar Two would apply a global minimum tax of 15% to large multinationals on a country-by-country basis.
The OECD had stated that they would release model legislation on Pillar Two by November 30th but that deadline was missed, though a top OECD tax official said that rules have been agreed to. The rules will be accompanied by commentary that will explain them.
We will provide additional detail on the OECD agreement in a future True Insight.
United States: The rules under Pillar One would require countries to ratify a new multilateral convention or treaty to implement the agreement globally. It is questionable as to whether this action can be taken successfully in the current Democratic-controlled Senate where there is a 50-50 tie between the two parties with the Vice President breaking a tie and approval of a treaty requiring a two-thirds majority vote. Without US participation, the multilateral treaty could not enter into force because so many of the companies targeted by these rules are US companies.
European Union: The EU’s proposed digital levy, which was intended to settle the bloc’s unprecedented borrowing during the pandemic, has been suspended indefinitely. This action was taken in light of the OECD agreement. The EU is set to publish its draft legislation placing the OECD agreement into law on December 22nd in the form of a new directive, which will lay out the implementation of the new global rules in the EU. The proposed directive will be discussed by EU finance ministers in January 2022 and finalized by June of 2022. EU rules require unanimity of support for tax proposals. An influential EU business group, Business Europe, has advised the EU executive branch that they should follow the OECD agreement closely and not enact stricter rules that would put EU companies at a disadvantage.
The European Parliament has approved the Directive on Disclosure of Income Tax Information by Certain Undertakings and Branches, which will require multinational companies that are active in more than one EU county and have annual revenues of over 750 euros to publish the amount of tax they pay in each member state. Companies currently disclose the details of where they pay tax, but it has been treated confidentially. The directive will come into force 20 days after it has been published, and member states will then have 18 months to incorporate the directive into their national laws.