Washington Tax Insight January/February 2021
The Biden Administration and the First 100 Days
In the first weeks of his Administration, President Biden has signed several executive orders on a wide range of topics representing shifts in policy in the areas of pandemic control and relief, immigration, international relations, and climate change. Work is ongoing in the Senate to win confirmation of his Cabinet nominees with a number already confirmed including Secretary of State, National Security Advisor, and Treasury Secretary.
House of Representatives/Ways & Means Committee
House Rules: The House adopted a package of rules that will govern member conduct and the terms of legislative debate in the House for the 117th Congress, although House rules can be waived by a simple majority vote. Notable changes to the prior package of rules include the exemption from the PAYGO rules for certain COVID-19 and climate-related bills; the elimination of a point of order against reconciliation instructions calling for net direct spending increases; and the creation of a Select Committee on Economic Disparity and Fairness in Growth.
W&M Committee/Addressing income equality: The W&M Committee Democrats released a legislative framework that proposes a broad tax and spending plan aimed at reducing health and economic inequality in the 117th Congress along with a report that considers how various federal policies have contributed to “disparities in health and inequities in employment, income, and wealth opportunities. There are four policy areas included: (1) child- and family-focused proposals; (2) economic and workforce development proposals; (3) retirement security and savings-focused proposals; and (4) environmentally-focused proposals. The framework does not discuss potential revenue-raising proposals that would offset the cost of the revenue-losing proposals.
W&M Committee New Members: New members of the Committee include Representative Stacy Plaskett (D-VI), Representative Kevin Hern (R-OK), Representative Lloyd Smucker (R-PA), and Representative Carol Miller (R-WV).
Senate/Senate Finance Committee
Democrats Raphael Warnock and Jon Ossoff have both won their Senate run-off elections in Georgia, so the Democrats will control a 50-50 Senate with the tie-breaking vote of Vice President-elect Kamala Harris giving Democrats a de facto 51-50 majority. Due to the 50-50 split in the Senate, it was necessary for the two parties to reach a power-sharing agreement. The Democrats control the Senate due to the election of President Biden and Vice President Harris with the Vice President casting the tie-breaking vote when necessary, but an agreement on how to operate in the Senate with respect to committees and Floor procedures was required and has now been reached with Senate Minority Leader McConnell (R-KY) backing down from his demand that the filibuster be protected. Democrats have taken over the leadership of the Senate committees, and Senate Majority Leader Schumer (D-NY) will control the Senate Floor schedule and procedures.
Senate Finance Committee/Wyden Agenda: Incoming SFC Chair Wyden (D-OR) confirmed his interest in implementing an annual mark-to-market regime for high-income taxpayers that would also result in taxing capital gains at higher rates. He also expressed support for raising the corporate tax rate, increasing the effective minimum tax rate on US multinationals’ foreign income under the global low-taxed intangible income (GILTI) regime, eliminating the preferential tax rate for carried interest income, and expanding refundable tax credits for low-income workers and families.
SFC Member Portman announces retirement: Senator Rob Portman (R-OH) announced that he will not run for re-election in 2022. He is the third member of the SFC to announced his retirement in 2022 along with Senator Pat Toomey (R-PA) and Senator Richard Burr (R-NC).
COVID-19 Relief Legislation – The New Biden Plan and Congressional Action
President Biden released the American Rescue Plan (ARP) prior to his inauguration, and Congress quickly moved to advance this legislative package. It calls for providing additional economic impact payments to individuals, expanding several refundable tax credits for individuals, extending the refundable tax credits for businesses that provide sick and family leave, and renewing the requirement for businesses to provide paid emergency leave to their employees. On the spending side, the plan would provide substantial assistance to state and local governments, increase funding to accelerate vaccine production and distribution, further extend the federal supplement to state-level unemployment benefits, provide additional housing assistance, provide nutrition assistance, and raise the federal minimum wage to $15 an hour.
The package has a price tag of $1.9 billion, and it does not include tax increases or spending cuts that would offset the impact on the federal deficit. The House is expected to vote on the American Rescue Plan this week with Senate action to follow. The goal is to send the bill to the President for signature by mid-March.
Congressional Budget Office: The nonpartisan Congressional Budget Office (CBO) released a report called “Options for Reducing the Deficit: 2021 to 2030,” which summarizes 83 tax and spending options for reducing the deficit over the next decade. In acknowledging that this is a time of a “daunting budgetary situation,” the report collected the options from legislative proposals, previous presidential budget submissions to Congress, and the private sector. There are 31 options for generating additional revenue including issues such as increasing tax rates, eliminating itemized deductions, a financial transaction tax, and increasing the gas tax. This type of report is typically used by members of Congress for purposes of finding revenue offsets in tax and spending legislation.
Joint Committee on Taxation: The Joint Tax Committee issued the annual summary of 78 expiring tax provisions covering 2021 through 2029. 26 provisions are set to expire in 2021, including the Employee Retention Tax Credit, which was enacted as part of COVID-19 relief legislation.
Treasury and the IRS
Confirmation of Treasury Secretary Yellen: The Senate voted to confirm Janet Yellen as the Secretary of the Treasury by a vote of 84-15. She formerly chaired the Federal Reserve Board and the White House Council of Economic Advisers. During her confirmation hearing, she pledged to pursue targeted tax relief for small businesses and families while also working on President Biden’s campaign promise to revise the Tax Cuts and Jobs Act (TCJA) with higher tax rates for wealthy individuals and large corporations, although she testified that the President has no plans to raise corporate rates during the pandemic. She stated that she will work to implement the $900 billion COVID-19 relief bill that was enacted in December of 2020. After her hearing, she released 114 pages of answers to several questions from Senate Finance Committee members on a range of economic issues.
Wally Adeyemo has been nominated to be Deputy Secretary of the Treasury, which is a position that must be confirmed by the Senate. Other key positions at Treasury which do not require Senate confirmation have been filled including Aruna Kalyanam (Treasury Deputy Assistant Secretary for Tax and Budget in the Treasury Office of Legislative Affairs) and Mark Mazur (Deputy Assistant Secretary for Tax Policy in the Office of Legislative Affairs).
Treasury/IRS Regulatory Activity: A memorandum issued soon after the inauguration placed a government-wide freeze on federal rulemaking that was started under the prior Administration, in a manner similar to policies that were put in place under prior Administrations. The memorandum directs heads of federal agencies and departments to “propose or issue no rule in any manner – including by sending a rule to the Office of the Federal Register (OFR)– until a department or agency head appointed or designated by the President after noon on January 20, 2021, reviews and approves the rule.” The freeze affects sub-regulatory guidance, such as revenue procedures, and the memo states that rules that had been sent to the OFR but were not yet published in the Federal Register should be withdrawn and reviewed. Finally, for rules that had been published in the Federal Register but that have not yet taken effect, the memo states that agency heads should “consider postponing the rules’ effective dates for 60 days,” consider initiating a 30-day comment period, and delay effective dates further if additional time is needed to continue reviewing “questions of fact, law, and policy.”
Some of the recent tax regulations related to the TCJA that were finalized near the end of the prior Administration included effective dates concurrent with or prior to their publication, so that this guidance would not be affected by this freeze. Examples include the regulations related to the treatment of carried interests and the §163(j) limitation on the deduction for business interest expense as it relates to pass-throughs and certain other entities. For guidance that falls into this category, it would be necessary to go through the normal regulatory process to make changes to the regulations. Note, however, that the memorandum issued by Chief of Staff Ron Klain does state that “should actions be identified that were undertaken before noon on January 20, 2021, to frustrate the purpose underlying this memorandum, I may modify or extend this memorandum, pursuant to the direction of the President, to request that agency heads consider taking steps to address those actions.”
Another tool that can be used with respect to guidance issued at the end of the prior Administration is the Congressional Review Act (CRA), which enables lawmakers to review and repeal certain recently issued regulations.
Therefore, Treasury Secretary Yellen will be in a position to review and change guidance that was issued under the prior Administration, and this could be where a key part of the focus on tax policy is early on in this Administration, especially if legislation is slow to move in the Congress. Due to the fact that the Secretary agrees with the President that some policies enacted as part of the TCJA should be reversed, it is also likely that the focus in the short term will be on guidance that has been issued in the last four years related to the TCJA, although she has not commented directly on this issue or her plans with respect to regulatory work of the Department.
COVID-19 Crisis Guidance & Related Issues
The Paycheck Protection Program (PPP) was modified and extended as part of the Consolidated Appropriations Act, 2021, enacted in December 2020. The legislation changed certain rules for PPP loans issued in 2020 and provided nearly $2.85 billion in new PPP loan funding. One of the important changes included in the legislation was that taxpayers who received PPP loans in 2020 are now allowed to claim the Employee Retention Tax Credit (ERTC) for 2020 as long as certain rules are followed and are also permitted to claim the credit for 2021 even if they apply for a second PPP loan. The IRS is expected to issue guidance soon on how such taxpayers can claim the ERTC.
The IRS issued several pieces of compliance guidance relating to the COVID-19 pandemic including Notice 2021-06 (which waives the requirement to file certain information returns or furnish payee statements related to “gross income” under Chapter 61 of the Code), Notice 2021-08 (related to §6654, the underpayment of estimated income tax by individuals), and Notice 2021-10 (related to §7508A for qualified opportunity funds and their investors.)
The IRS issued Notice 2021-11, which provides that the end date of the period during which employers must withhold and pay the deferred taxes is postponed from April 30, 2021, to December 31, 2021, and associated interest, penalties, and additions to tax for late payment with respect to any unpaid deferred taxes will begin to accrue on January 1, 2022, rather than on May 1, 2021.
Deduction of Business Expenses for Recipients of loans under the Paycheck Protection Program: The Treasury Department and the IRS issued guidance allowing deductions for the payments of eligible expenses when such payments would result (or be expected to result) in the forgiveness of a loan (covered loan) under the Paycheck Protection Program (PPP). The new guidance reflects changes included in the COVID-related Tax Relief Act of 2020, enacted as part of the Consolidated Appropriations Act.
The Consolidated Appropriations Act amended the CARES Act to say that no deduction is denied, no tax attribute is reduced, and no basis increase is denied by reason of the exclusion from gross income of the forgiveness of an eligible recipient’s covered loan. This change applies for taxable years ending after March 27, 2020. Revenue Ruling 2021-02 makes Notice 2020-32 and Revenue Ruling 2020-27 obsolete. The obsoleted guidance disallowed deductions for the payment of eligible expenses when the payments resulted (or could be expected to result) in forgiveness of a covered loan.
Taxpayers will also need to address whether states will allow similar treatment to these business expenses as it cannot be assumed that they will necessarily conform to this federal tax treatment. Most state taxing regimes are based on the federal tax code, but conformity to the tax code in its entirety is not automatic. States can choose to use rolling conformity, static conformity, or selective conformity.
Relief for Employers Using Automobile Lease Valuation Rule: The IRS issued Notice 2021-07, which provides temporary virus-related relief for those using the automobile lease valuation rule for calculating the value of an employee’s personal use of an employer-provided vehicle. The new guidance allows certain employers and employees to use the vehicle cents-per-mile valuation rule to determine the value of an employee’s personal use of an employer-provided automobile beginning as of March 13, 2020. For 2021, employers and employees may revert to the automobile lease valuation rule or continue using the vehicle cents-per-mile valuation rule provided certain requirements are met.
Use of E-Signatures: The IRS released a memorandum allowing taxpayers to use e-signatures to file certain federal tax forms through June 30, 2021, extending a temporary policy change that was implemented in September 2020 and expired on December 31, 2020. The memorandum also expanded the relief making it available for additional tax forms.
- 163(j) Final Regulations: Treasury and the IRS issued final regulations under §163(j) on the limitation on the deduction for business interest expense which reflect changes made by the TCJA and the CARES Act. Treasury previously released proposed regulations under §163(j) on July 28, 2020. The Final Regulations provide additional guidance addressing the limitation’s application in contexts involving passthrough entities, regulated investment companies (RICs), and controlled foreign corporations. They also provide guidance regarding the definitions of real property development, real property redevelopment, and syndicate.
The IRS provides transition relief for partnerships that relied on 2018 proposed regulations stating, “The Treasury Department and the IRS agree that relief should be accorded to partners of trading partnerships that do not materially participate in the trading activity and that relied on the statement in the preamble to the 2018 Proposed Regulations.” The 2018 proposed regulations would have allowed partnerships to allocate excess business interest expense to partners that were not “materially” engaged in trading, but the Final Regulations generally prohibit that type of allocation.
Carried Interest/§1061: The IRS issued final regulations on carried interest that provide guidance on §1061, which was enacted in the TCJA and provides that carried interests be held for at least three years, instead of one year, to be taxed under preferable long-term capital gains tax rates rather than ordinary income rates. The IRS stated that the rules “retain the structure of the proposed regulations, with certain revisions.” One notable change in the final regulations relates to the transfers of applicable partnership interests, which will require recharacterization, not immediate tax recognition.
Deduction Limits for Executive Compensation: The IRS issued final regulations under §162(m) regarding executive compensation above $1 million implementing changes made by the TCJA that narrowed the deduction available to publicly held companies for certain compensation above that threshold. The regulations will apply to taxable years beginning on or after publication in the Federal Register, but the IRS instructs that taxpayers may choose to apply the final regulations to a taxable year beginning after December 31, 2017, provided the taxpayer applies them in their entirety and in a consistent manner to that taxable year and all subsequent taxable years. In response to public comments, the IRS declined to narrow the scope of the guidance to apply only to services performed by executives as employees of the a company, finding that determination to be immaterial with respect to whether the compensation is subject to the deduction limitation. Proposed regulations were issued in December 2019, and the new guidance follows those rules but there is one exception included that relates to the ability of companies to grandfather payable compensation under executive compensation arrangements established before the TCJA was passed.
Simplified Accounting Rules for Small Business: The IRS issued final regulations that simplify the application of accounting rules for certain businesses with gross receipts of $25 million or less. The guidance was issued under §§263A, 448, 460, and 471 to implement changes made by the TCJA. The TCJA expanded the base of taxpayers qualifying for favorable small business accounting method reform and provided a simplified accounting method change filing requirement for years beginning after December 31, 2017. Proposed regulations were issued in July of 2020 incorporating the statutory changes, but a number of outstanding issues were not addressed including the application of the inventory accounting alternatives under §471 and the scope of the syndicate rule as applied to §448(c). The rules include special accounting rules for long-term contracts under §460 applicable to corporate taxpayers.
Accounting Rules on Advance Payments and Income Recognition: The IRS issued final regulations under §451 that provide guidance on the timing of income inclusion under an accrual method of accounting, including the treatment of advance payments for goods, services, and certain other items reflecting changes made by the TCJA. Note that the new guidance does not include a definition of “realization” due to conflicting language Congress included in the TCJA conference report.
Transportation and Commuting Expenses: The IRS issued final regulations on changes under the TCJA that generally prevent a deduction for the commuting and parking expense of any qualified transportation fringe (QTF) provided by employers to their employees. The new guidance provides information on how to determine the amount of the expenses that is nondeductible and how to apply certain exceptions under §274(e) that may allow the expenses to be deductible.
Denial of Deduction for Fines and Penalties: The IRS issued final regulations on the deduction of certain fines and penalties under §162(m) and reporting under §6050X. The TCJA amended §162(m) to disallow a deduction for amounts paid to a government or governmental entity for a violation or potential violation of a law, unless the amount paid is identified in a court order or agreement as restitution (including remediation) or required in order to come into compliance with a law.
Other Issues and Guidance
IRS/2021 Filing Season: The 2021 tax filing season started on February 12, 2021. In announcing the start date, the IRS explained that the delay gave the agency time to do additional programming and testing of IRS systems following the tax law changes enacted in the 2020 year-end omnibus legislation. The IRS also announced that the Free File program is now available to individuals and families who earned less than $72,000 in 2020. The IRS issued News Release 2021-23, which includes “important reminders before filing 2020 tax returns” covering issues such as the taxation of unemployment compensation, the home office deduction, and workers moving into the gig economy.
Final Regulations for Tax on Executive Pay by Exempt Organizations: The IRS issued final regulations under §4960 related to the 21% excise tax imposed on remuneration above $1 million paid by certain tax-exempt entities to covered employees. The IRS stated that the final rules retain the basic approach and structure of the proposed regulations issued in June 2020. The Tax Exempt and Government Entities Division of the IRS has a compliance strategy that focuses on reviewing the impact of §4960, and the IRS has noted that their ongoing review shows that there is a high volume of exempt organizations that may not be reporting correctly on this issue.
Passive Foreign Investment Companies (PFICs): The IRS issued final regulations addressing the determination of whether a foreign corporation is treated as a PFIC for purposes of the Code and the application and scope of certain rules that determine whether a US person that indirectly holds stock in a PFIC is treated as a shareholder of the PFIC. Also issued were proposed regulations that address whether a foreign corporation is treated as a PFIC for federal tax purposes and when a foreign insurance company’s income is excluded from the definition of passive income under the PFIC rules.
Carbon Capture final regulations: The IRS issued final regulations providing guidance on the credit for qualified carbon oxide captured using equipment placed in service on or after February 9, 2018. The new guidance summarizes the circumstances under which owners of carbon capture and sequestration equipment may transfer the value of a tax credit to third parties. In addition, the final regulations address these issues: (1) adequate security measures for the geological storage of qualified carbon oxide; (2) exceptions to the general rule for determining to whom the credit is attributable; (3) definition of carbon capture equipment; and (4) standards for measuring utilization of qualified carbon oxide. The IRS also states that the guidance covers recapture rules and provides for smaller facilities to be aggregated into one project for purposes of claiming the credit when certain factors are present, such as common ownership and location.
Mileage Rates for 2021: The IRS issued Notice 2021-02, which lists the optional standard mileage rates for taxpayers to use in deducting the costs of operating an automobile for business, charitable, medical, or moving expense purposes. For 2021, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be: (1) 56 cents per mile drive for business use; (2) 16 cents per mile driven for medical or moving purposes for qualified active duty members of the Armed Forces; and (3) 14 cents per mile driven in service of charitable organizations.
Cryptocurrency Guidance: The Associate Chief Counsel of the IRS Income Tax and Accounting Division said at a recent public meeting that the IRS recognizes the need to produce additional cryptocurrency guidance, but that the need to issue guidance related to COVID-19 pandemic issues has been of greater priority as well as completing guidance related to the TCJA. The IRS issued some guidance on cryptocurrency issues in 2019.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
The Inclusive Framework released new Blueprints for Pillars One and Two of the BEPS project on digital taxation and announced a new target date of mid-2021 for achieving consensus on the project, acknowledging that there is not yet agreement on the new rules. A public consultation meeting was held virtually on January 14-15, 2021, and a virtual meeting of the OECD/G20 Inclusive Framework was held on January 27-28th followed by a set of briefings on the tax and development work of the OECD on January 29th.
The OECD received more than 200 submissions from the public and over 3000 viewers attended the virtual public consultation. The OECD Secretariat stated that the main issue that underlay many of the public comments was the need for reducing both the inherent complexity of what the project is seeking to achieve and the practical complexity of making the proposed changes work. The Chairs of the virtual meeting stated that simplification has already played a key role in the OECD discussions and will continue to do so, while noting that fundamental policy issues remain open. The ability to make progress will require the involvement of the new US Administration, but the Chairs expressed their view that there is a solid foundation for consensus in the future.
The US has been a key player in the OECD negotiations but, under the prior Administration, they became a party that created significant challenges to progress on reaching a global consensus. During Treasury Secretary Yellen’s confirmation hearing, several members of the SFC voiced concerns about the unilateral DSTs that have been enacted by several countries around the world. In answers to questions from SFC members, the Secretary stated her preference for resolving disputes over DSTs through multilateral negotiations, but she noted that if negotiations were unsuccessful, she would work with the United States Trade Representative (USTR) to determine the best alternative course of action. She also pledged active participation in the OECD talks during a call with the German Finance Minister with the goal of reaching a “timely international accord.”
The USTR under the Trump Administration issued rulings finding that the DSTs adopted by Austria, Spain, and the United Kingdom discriminate against US companies, but the USTR declined to recommend tariffs or other sanctions. The USTR announced that they were also investigating DSTs that are under consideration in Brazil, the Czech Republic, the EU, and Indonesia. The new Biden Administration will have to determine whether to continue the actions that have been ongoing at the USTR with respect to unilateral DSTs.
OECD: The OECD issued updated guidance on January 21, 2021, related to the issue of whether a permanent establishment is created for businesses when their employees work from home in compliance with public health measures related to the COVID-19 pandemic following on to initial guidance issued in April of 2020. The OECD guidance concludes that if an employee is stranded because of travel restrictions, “it would be reasonable for a jurisdiction to disregard the additional days spent in that jurisdiction under such circumstances for the purposes of the 183-day test in article 15(a)(2) of the OECD model.” The guidance does state, however, that some governments may decide to implement different measures or issue specific guidance to address those situations.
Brexit: The European Union and the UK: Now that the UK has left the EU as a result of the Brexit agreement, the UK could be added to the EU’s tax blacklist if it is judged to have poor tax governance according to an EU official, although EU officials have also said that they see little risk of the UK diverging from international tax norms set by the OECD. The EU criteria for the list includes tracking international standards for transparency and a willingness of countries to comply with the automatic exchange of information on request by other countries’ tax authorities. The UK and the EU have concluded a negotiation on their future trading relationship and are currently negotiating an equivalence agreement in the area of financial services.