Washington Tax Insight November 2020
Election Results and Congressional Activity
Voters in the United States turned out in record numbers on November 3rd to cast their ballots in the Presidential race as well as state and local races. Although most of the results have been officially announced, there are some outstanding races that have been labeled either “too early to call” or “too close to call.”
Presidential Election: With 270 electoral votes needed for victory, several major media outlets have called the Presidential race for Joe Biden with his current electoral vote count at 279 and President Trump at 214. There are four states whose results are outstanding: Alaska, Arizona, Georgia, and North Carolina. It is expected that Alaska and North Carolina will go to President Trump. Joe Biden currently holds a slim lead in Arizona and Georgia with a recount already planned for the state of Georgia. The Electoral College meets on December 14th, and states have until December 8th to certify their results. President Trump has already filed a number of lawsuits to challenge the election results in various states and has indicated that more lawsuits may be forthcoming.
House of Representatives: The Democrats maintained control of the House of Representatives, but lost seats, so their margin of control will be smaller in the next Congress. Current reports are that Democrats will hold 226 seats to 209 seats for the Republicans. These numbers could change when all races are officially certified, but it is unlikely that there will be a change in control.
Senate: Control of the Senate in 2021 remains unclear due to four uncalled results from the November 3rd elections. Currently, Republicans and Democrats each hold 48 seats. The Senate races in North Carolina and Alaska have not officially been called yet, but those two seats are likely to go to the Republicans. No candidate received a majority of the vote in either of the two Georgia senate races, which requires a run-off election under Georgia state law that will be held on January 5, 2021.
If the Senate split is 50-50 after the two Georgia elections, Vice-President Elect Kamala Harris would cast the tie-breaking vote in the Senate, if necessary, and the Democrats would most likely chair the Senate committees. It is unclear, however, if other power-sharing agreements would be negotiated in order to deal with issues such as procedural rules, office space, and staff funding. A 50-50 Senate has only happened 3 times in American history, most recently for approximately four months after the 2000 election until one Republican Senator switched parties which gave control to the Democrats. Although the final split in the Senate is unclear at this time, it is clear that the party in control will have a very slim margin, which will make it difficult to move legislation and reach consensus on major issues.
Lame Duck Session: Members of Congress will return this week to deal with outstanding legislation in the lame duck session. The most urgent issue is the current Continuing Resolution to fund the federal government , which is due to expire on December 11th. House Speaker Pelosi and Senate Majority Leader McConnell have reportedly agreed to negotiate an omnibus spending bill that will cover the remainder of FY 2021, rather than passing another Continuing Resolution, but there is no certainty that their respective parties will support the proposed omnibus legislation.
The other outstanding issue is additional COVID-19 relief legislation. In post-election comments, Senate Majority Leader McConnell stated that he wants Congress to pass this legislation before the end of the year, which is a reversal from his pre-election position. To date, negotiations have taken place between House Speaker Pelosi and Treasury Secretary Mnuchin, but recent reports are that negotiations will proceed between the Speaker and the Senate Majority Leader. According to statements from the Speaker, Democrats and Republicans remain far apart on several issues so there is no certainty that they will reach an agreement before they adjourn.
House Ways & Means Committee
Ways & Means Committee Chair Neal (D-MA) and Ranking Republican Brady (R-TX) introduced a bipartisan bill on retirement savings with several tax provisions. This legislation continues the focus on retirement issues that began with the SECURE Act (Setting Every Community Up for Retirement Enhancement Act), which was enacted in December of 2019.
The House Ways & Means Oversight Subcommittee held a hearing on taxpayer fairness on October 13, 2020.
House Republicans introduced the Commitment to American GROWTH Act, which calls for some modifications to the TCJA as well as some incentives intended to encourage US-based manufacturing and research, including in the medical area. The House is not expected to consider this bill.
Government Response to the Coronavirus Pandemic
In response to the COVID-19 pandemic, 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. As summarized in past True Alerts (Tax Issues Addressed by COVID-19 Emergency Legislation; Congressional Action on the COVID-19 Pandemic: The CARES Act), Congress has passed several major pieces of legislation to provide economic relief to the US economy and US taxpayers.
In May, the Democratic-controlled House approved the Health and Economic Recovery Omnibus Emergency Solutions Act (“HEROES Act”), which was intended to lay down markers on the issues the House Democrats believe should be addressed in the 4th Phase Bill. On October 1st, House Democrats passed an updated version of the HEROES Act by a vote of 214-207.
On October 21st, the Senate voted again on whether to move forward with a $520 billion virus relief package developed by Senate Republicans, but a procedural motion on the bill failed by a partisan vote of 51-44 because 60 votes were required. The bill, which was similar to the legislation that also failed on a procedural vote in September, was not expected to advance but was brought to the Senate Floor by the Majority Leader as a messaging vote on pandemic relief legislation before the elections.
As noted above, negotiations between House Speaker Pelosi (D-CA) and Treasury Secretary Mnuchin have been ongoing for weeks, but they stalled prior to the elections. In a letter from Speaker Pelosi to Secretary Mnuchin, the following areas were cited as critically important but without agreement to date:
- State and local funding
- Safe Schools funding
- Child Care funding
- Tax Credits for Working Families
- Unemployment insurance
- OSHA and Liability
Treasury and the IRS
COVID-19 Crisis Guidance & Related Issues
IRS Procedure for faxing CARES Act quick-refund claims: The IRS announced on an updated FAQ page that temporary procedures permitting digital transmission of Applications for Tentative Refunds (Form 1139 and Form 1045 for corporations and individuals, respectively) of the credit for prior-year alternative minimum tax (AMT) liabilities and net operating loss (NOL) deductions will be terminated after December 31, 2020. The IRS established the temporary procedures in April to process claims under §2303 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which allows taxpayers to carry back NOLs arising in 2018, 2019, and 2020 to the 5 prior tax years, and §2305, which enhanced the refundability of certain previously generated corporate AMT credits. FAQ 21 states: The last day to fax an eligible refund claim under these procedures is December 31, 2020, and the fax numbers listed under the temporary procedures will not be operational as of midnight EST on December 31, 2020. The end of the faxing process is independent of any filing due dates.
Transition Relief for Affordable Care Act/Health Coverage Reporting: The IRS issued Notice 2020-76 providing additional transition relief for certain health coverage reporting related to the 2020 Form 1095-B, Health Coverage (for insurers), and the 2020 Form 1095-C (for employers), Employer-Provided Health Insurance Offer and Coverage.
No Extra Tax Guidance for Virus Travel Issues: Representatives of Treasury and the IRS have stated that they do not have any plans to provide additional relief or guidance for foreign individuals who were forced to remain in the US due to the COVID-19 pandemic. Guidance was issued in April including two revenue procedures that provided tax relief with respect to the determination of residency for people who were not able to leave the US, and the IRS also posted FAQs on this issue. The IRS continues to monitor the situation.
SBA Guidance on Ownership Change Obligations for PPP Loans: The Small Business Administration (SBA) issued new guidance detailing when small businesses receiving Paycheck Protection Program loans must obtain approval from either the SBA or their lender before closing on transactions leading to changes of ownership.
Tax Cuts & Jobs Act (TCJA) Guidance
TCJA guidance update from the IRS: At a public conference, Michael Desmond, the IRS Chief Counsel, stated that the IRS and Treasury would likely reach their goal of finalizing all of the major regulations related to the TCJA by the end of 2020. He further commented that in the months and years ahead, they would look to resolve issues within existing guidance about which taxpayers have raised concerns.
Office of Information and Regulatory Affairs (OIRA) review: The Treasury Department has submitted two sets of regulations to OIRA for review regarding implementation of certain TCJA changes to the active insurance exception in the passive foreign investment company (PFIC) rules: (i) final regulations that address when a foreign insurance company’s income is excluded from passive income under §1297(a), and (ii) proposed regulations that address when a foreign insurance company’s income is excluded from the definition of passive income under the PFIC rules.
Rules on the Deduction for Meals and Entertainment: The IRS issued final regulations under §274 on the deduction for certain meals and entertainment expenses reflecting changes in the TCJA. The guidance explains that the final regulations address the elimination of the deduction for expenditures related to entertainment, amusement, or recreation activities, and provide guidance to determine whether an activity is of a type generally considered to be entertainment. The finalized rules provide that a 50% deduction continues to apply for food and beverage purchases that can be separated from entertainment expenses for business purposes and clarify which kinds of business meal transactions qualify for the limited tax break. Meal expenses that cannot be distinguished from entertainment expenses are disallowed.
Foreign Partnership Withholding: The IRS issued final regulations that provide guidance under §1446(f) on tax withholding and information reporting regarding the dispositions of certain interests in partnerships that conduct business in the US. The guidance implements changes made by the TCJA and, according to the IRS, retain the basic approach and structure of the proposed regulations. Under the TCJA, a foreign taxpayer’s gain or loss on the sale or exchange of a partnership interest is treated as effectively connected with the conduct of a US trade or business to the extent that gain or loss would be treated as effectively connected with the conduct of a US trade or business if the partnership sold all of its assets. In this case, the new law would impose a withholding tax on the disposition of a partnership interest by a foreign taxpayer. The new rules cover the following areas:
- Reporting requirements for foreign transferors and partnerships with foreign transferors
- Scope of the withholding obligation under §1446(f)
- Withholding on the transfer of a non-publicly traded partnership interest
- Partnership’s requirement to withhold under§1446(f)(4) on distributions to transferee
- Withholding on the transfer of a PTP (publicly traded partnership) interest by a foreign person
- Amendments to existing §1446 regulations relating to distributions by PTPs
Income Source Rules: The IRS issued final regulations that instruct on determining the source of income from sales of inventory produced (entirely or partially) inside and outside the country, including new rules for determining whether foreign source income is effectively connected with business conducted inside the US. The TCJA amended §863(b) to allocate or apportion income from the sale or exchange of inventory property produced (in whole or in part) by a taxpayer within the US and sold or exchanged without the US, or produced (in whole or in part) by the taxpayer without the US and sold or exchanged within the US, solely on the basis of production activities with respect to that inventory. The guidance provides new rules for determining the source of income from sales of personal property (including inventory) by nonresidents that are attributable to an office or other fixed place of business that the nonresident maintains in the US.
Net Operating Losses (NOLs) in the Context of Consolidated Groups: The IRS issued final regulations on NOLs of consolidated groups under §§172, 1502 and 1503 implementing changes made by the TCJA and the CARES Act. The guidance advises on how the recent statutory changes to the carryback and carryforward of NOLs apply to consolidated groups, including life insurance and other businesses, and it also retains a calculation method included in the proposed regulations, issued in July 2020, which address the computation of a consolidated group’s post-2017 deduction limit. The proposed regulations also included an alternative calculation approach that would have required a consolidated group to first offset income and loss items within a pool of non-life insurance companies and other members, but the IRS decided not to implement this method. The IRS explained that this guidance addresses 3 issues that were not directly addressed by either statute, specifically:
- How to determine that 80% limitation in the case of a “mixed” group – that is, a consolidated group containing nonlife insurance companies and other members;
- The calculation and allocation of farming losses; and
- The implementation of the 80% limitation in existing regulations to determine the consolidated NOL deduction attributable to losses from a member arising during periods in which that member was not part of that group.
Withholding Rules and Guidance on Filing Form 1040-NR: The IRS issued final regulations regarding the amount of income tax employers should withhold from employees’ wages related to changes made to §§3401 and 3402. According to the IRS, the final regulations provide “flexible and administrable rules for income tax withholding from wages to implement the 2020 form W-4 and its related tables and computational procedures described in Publication 15-T and to work with 2019 or earlier Forms W-4.” The guidance supports both the 2019 and 2020 Form W-4 and related withholding procedures. Employees are not required to furnish a new Form W-4 solely because of the redesign of the Form W-4. Also, the IRS issued Notice 2020-70, which modifies Notice 2011-26, to generally remove Form 1040-NR, US Nonresident Alien Income Tax Return, from the list of returns that are administratively exempt from the electronic filing requirement imposed on specified tax return preparers by §6011(e)(3), and also provides the circumstances where the Form 1040-NR can be exempt.
Treasury comments/intangibles: A representative of the Treasury Department has said they are considering whether to write regulations to expand on the definition of intangible properties related to changes in the TCJA. The 2017 law added categories to the existing intangible definition in §367(d) and broader language to include any potential sources of value not attributable to tangible property or services of an individual. The new definition includes “goodwill,” and the TCJA also added “going concern” value and “workforce in place.”
Treasury comments/bonus depreciation guidance: The IRS recently issued guidance on the bonus depreciation provision in the TCJA, but has indicated that they will be issuing additional guidance to address issues that remain including the interaction with business interest expensing under §163(j) and how businesses can retroactively elect to apply the bonus depreciation rule for components of assets.
Other Issues and Guidance
Compliance Campaign for Consolidated NOL Carryovers: The IRS Large Business and International Division announced a new campaign on the carryover of consolidated NOLs when a member joins or leaves the consolidated group. The IRS said that it will apply single-entity treatment to the members of a consolidated group and recommended issue-based examinations for taxpayers who fail to comply with the rules.
Inflation Updates for 2021: The IRS issued Revenue Procedure 2020-45, which provides adjustments to more than 60 tax provisions that are tied to the annual rate of inflation. This guidance covers several commonly used tax provisions including standard deduction, QBI (§199A) threshold amount, AMT exemption amount, the foreign earned income exclusion, and the annual exclusion for gifts. The IRS included a reminder that the minimum additional tax for failure to file a tax return within 60 days of the due date has been increased to $435 or 100% of the amount of tax due, whichever is less – an increase from $330.
Inflation Adjusted Limits for Retirement Plans: The IRS issued Notice 2020-79, which provides inflation-adjusted dollar limits for retirement plans for 2021 covering Defined Contribution Plan Limits and Defined Benefit Plan Limits.
Guidance for Health Reimbursement Accounts (HRAs): The IRS issued Revenue Procedure 2020-43, which leaves unchanged for 2021 at $1800 the maximum amount allowed to be available for excepted benefit health reimbursement arrangements (HRAs).
Draft Instructions for Form 1065/Partnerships: The IRS released draft instructions for Form 1065, US Return of Partnership Income for tax year 2020 with updated instructions for partnerships required to report capital accounts to partners on Schedule K-1 (Form 1065). The IRS has asked for comments on the new instructions (including with respect to Item L/Partner’s Capital Account Analysis) by November 20, 2020. They also plan to draft similar revisions to Form 8865, Return of US Persons with Respect to Certain Foreign Partnerships. In releasing the draft instructions, the IRS stated the following: The revised instructions indicate that partnerships filing Form 1065 for tax year 2020 are to calculate partner capital accounts using the transactional approach for the tax basis method. Under the tax basis method outlined in the instructions, partnerships report partner contributions, the partner’s share of partnership net income or loss, withdrawals and distributions, and other increases or decreases using tax basis principles as opposed to reporting using other methods such as GAAP.
LIBOR Transition Relief: The IRS issued Revenue Procedure 2020-44, which is intended to ease the transition of markets away from the London Interbank Offered Rate (LIBOR). The guidance states that it mitigates certain potential tax consequences of adopting fallback language recommended by the Alternative Reference Rates Committee and the International Swaps and Derivatives Association.
Treasury Department Boycott List: Treasury released its current list of countries which require or may require participation in, or cooperation with, an international boycott. The list is unchanged from the last published list and includes Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates, and Yemen.
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. Public comments are due by December 14, 2020, and virtual public consultation is scheduled for January 2021. The two blueprints were discussed at the G20 Finance Ministers Meeting on October 14, and the new timeline was endorsed by the G20 group, stating “Building on this solid basis, we remain committed to further progress on both pillars and urge the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting to address the remaining issues with a view to reaching a global and consensus-based solution by mid-2021.”
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.
The status of unilateral digital services taxes: A UK government official has stated that the UK will not drop their digital services tax, which became effective in April 2020, until a global deal is reached. The EU plans to move ahead with its own blocwide digital tax if a global agreement is not reached by the new deadline in 2021. France had agreed to suspend the collection of its digital tax when trade tensions developed with the US in 2019.
OECD/Transfer Pricing Guidance
The OECD expects to issue guidance on transfer pricing compliance during the pandemic by the end of 2020 with the focus on these four key areas: (1) how to account for various benefits from government assistance programs; (2) benchmarking comparable results for 2020; (3) allocating losses; and (4) the impact of the pandemic on advance pricing agreements (APAs). The OECD received input on these areas and expects to issue guidance that is practical in nature, with it unlikely that they will amend the transfer pricing guidelines. The two groups working on this project are Working Party 6 (transfer pricing) and the Forum on Tax Administration, and they will be meeting from the end of October through November with a goal of consensus agreement among the 137 countries participating.
Brexit: The European Union and the UK
European Union leaders have told the European Commission to prepare for no Brexit deal with the UK since key issues remain to be resolved, including regulatory alignment, fisheries, and the governance of the final settlement. The regulatory transition period of the UK’s withdrawal from the EU ends on December 31, 2020, and if a deal is not reached by then, the UK will be considered a trading partner of the EU on World Trade Organization terms, which could harm the British economy. The UK had set a deadline of October 15th to resolve issues, which has now not been met. The two sides have resumed negotiations, and the EU has said it is ready to negotiate until mid-November, but there must be time to ratify any deal before the year-end deadline by both the EU Parliament and the British Parliament.
Barbados and Anguilla have been added to the European Union’s blacklist of uncooperative jurisdictions for tax matters. The Cayman Islands and Oman have been dropped from the list. The blacklist is used as a tool to convince countries outside of the EU to bring their tax policies in line with international norms. Countries on the list can lose access to some EU funding.