This two-part series forecasts tax developments the remainder of this month and the new year will bring. Part 1 begins with possible scenarios for what’s left of the lame duck session and previews the dynamic of the incoming Congress following a midterm election cycle that saw the House of Representatives flip to a slight Republican majority. Part 2 will analyze the Treasury Department and the IRS’ agenda, including regulatory and guidance priorities.
Congress has until December 16 to either pass a fiscal year 2023 omnibus spending bill or another continuing resolution (CR) to maintain government funding and prevent a shutdown. Meanwhile, a National Defense Authorization Act also has yet to be passed for next year. It remains unclear how tax extenders or other tax provisions will factor into December debates, or if tax will be punted on in the short term.
Marc Gerson, a Miller & Chevalier member and chair of the firm’s tax department, told Checkpoint in an interview that an omnibus bill would be the most likely vehicle for passing a package of tax changes that already enjoy bipartisan support.
“I’m very hopeful that there is an omni this year and there is a tax title. I think it is the preferred course of action to responsibly fund the government and avoid a shutdown,” Gerson said, adding that the two leaders of the Senate Appropriations Committee— Democrat Patrick Leahy of Vermont and Republican Richard Shelby of Alabama—are retiring and would prefer to exit with a “legacy item” as opposed to another CR. “Obviously, politics plays a big part, but I’m hopeful that, in fact, there will be a significantly or sufficiently robust tax package.”
Bipartisan tax provisions potentially in play include, but may not be limited to:
- Undoing the amortization requirement under Code Sec. 174. The Tax Cuts and Jobs Act (TCJA; PL 115-97) modified Section 174 rules to require that, beginning tax year 2022, specified research and experimental expenditures be amortized over five years. Before this went into effect, taxpayers had the option to immediately deduct R&E expenditures. The TCJA provision invited scrutiny from both sides of the aisle and a full repeal could be an easy dunk to attach to an omnibus bill.
- Delaying 100% bonus depreciation phaseout. Under the TCJA, qualified depreciable assets, or qualified property, are eligible for a bonus deduction rate of 100% for assets placed in service after September 27, 2017, and before January 1, 2023. The bonus depreciation rate begins a gradual phaseout next year, dropping to 80% in 2023 and shrinking 20% annually until completely expiring in 2027. Preserving the current 100% is popular among both parties.
- Business interest payment relief. Another TCJA change, Code Sec. 163(j) was revised with a limitation on the deduction for business interest expense beginning tax years 2018. The limit is the sum of business interest income, 30% of adjusted taxable income, and floor plan financing interest. As of 2022, the ATI portion no longer includes depreciation or amortization. The ATI percentage was temporarily increased to 50% under the Coronavirus Aid, Relief, and Economic Security Act (CARES; PL 116-136). Retroactive Section 163(j) relief could be on the table, but specifics would be up for debate as a matter of extent and cost.
- Retirement reform. In March earlier this year, the Democratic House passed the Securing a Strong Retirement Act of 2022 (SECURE 2.0; HR 2954), a package that makes sweeping changes to retirement laws, such as coverage expansions, automatic enrollment, a new credit for certain small businesses, and a set percentage to the saver’s credit. (See Checkpoint’s Executive Summary of the House-approved bill.) SECURE 2.0 has stalled in the Senate, which instead introduced its own retirement proposal. The Enhancing American Retirement Now Act (EARN Act; S 4808) was put forth by both parties’ leaders on the Senate Finance Committee, Democrat Ron Wyden of Oregon and Republican Mike Crapo of Idaho. However, the inclusion of retirement provisions in a lame duck omnibus bill seems less likely than addressing TCJA provisions.
Gerson said that even if these tax provisions do not cross the goal line this year, they will still be on the table next year, though in what capacity is uncertain. He emphasized, though, that the above items may be contingent on how aggressive Democrats want to push for restoring the expanded child tax credit (CTC).
The American Rescue Plan Act of 2021 (ARPA; PL 117-2), another massive COVID-19 relief bill like the CARES Act, temporarily increased the maximum amount of the CTC (up to $3,600 for children under age six and $3,000 for other qualifying children under age 18, from $2,000) and expanded eligibility. The enhanced CTC expired at the end of 2021, and there have been calls to bring it back. Some Republicans, such as Utah Senator Mitt Romney, have proposed their own overhauls to the program.
Gerson, who served as majority tax counsel to the House Ways and Means Committee in 2005 and 2006, said it’s yet to be determined what role the CTC will play in negotiations. “Is that something [Democrats] view as necessary for any deal on taxes, or are there things that could be done even if there isn’t a deal on the child tax credit?” He concluded that while a CTC agreement could open up the potential for traditional tax extenders, it is possible bipartisan proposals could pass independently of a CTC deal.
Some Republican senators are pressuring Senate Minority Leader Mitch McConnell of Kentucky to abstain from any lame duck agreements and milk the clock until the GOP-controlled House is ushered in. “We believe it would be both imprudent, and a reflection of poor leadership, for Republicans to ignore the will of the American people and rubber stamp an omnibus spending bill that funds ten more months of President Biden’s agenda without any check on his reckless policies that have led to a 40-year high in inflation,” read a November 30 letter to McConnell. It was cosigned by Republican Senators Mike Lee (Utah), Ted Cruz (Texas), Rick Scott (Florida), and Mike Braun (Indiana).
“We must not accept anything other than a short-term Continuing Resolution that funds the federal government until shortly after the 118th Congress is sworn in,” the letter continued. “No additional spending, no additional policy priorities should be included. Any urgent items that require the Senate’s attention should be considered separately and under their own terms.”
Taxpayers should not expect major changes to the tax code next year, nor significant tax increases, according to Gerson. Rather, the parties will spend 2023 establishing their policy platforms ahead of the 2024 elections, he said, which will feature plenty of committee meetings and passed House bills that “don’t go anywhere.” The new Republican House will be especially boisterous, Gerson anticipates, about rolling back parts of the Inflation Reduction Act (PL 117-169), such as the corporate alternative minimum tax, the excise tax on stock buybacks, and the $80 billion appropriation authorized for the IRS to spend over 10 years on customer service, enforcement, and tech modernization.
Republican messaging surrounding the IRS money, especially the enforcement activities portion, has maintained that the agency will hire 87,000 agents to conduct audits against taxpayers across the board—a notion refuted by the Biden administration and Democratic lawmakers. But with the House now flipped, Gerson said Republicans will use the opportunity to begin investigations and hold Oversight Committee hearings on how the IRS is spending the additional funds, which will spill over into the annual appropriations process and Senate confirmation of the next commissioner. Such messaging is for the next election cycle, Gerson reiterated, as it is obvious that the Democratic Senate will not consider Inflation Reduction Act repeals, nor make permanent certain provisions of the TCJA.
“Honestly, any tax legislation we’ll see will be on the margins. It will either be kind of opportunistic or episodic if there is an economic stimulus package, or a natural disaster relief package …” Gerson said. “I do think if there is legislation that’s not addressed in lame duck like [Section] 174, retirement, those are potentially things that can be worked out on a bipartisan basis.”
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