An underlying theme in comments from several government speakers at a recent tax conference is that although some preliminary guidance has been issued to begin implementing major tax legislation in various areas of the Tax Code, there is much work to be done.
This reoccurring message came from Treasury Department and IRS officials appearing as panelists during a busy slate of programs March 21 at the Tax Executives Institute’s 73rd Midyear Conference in Washington, D.C. Presented with myriad unresolved issues in gray areas of interim guidance, proposed regulations, and forthcoming clarity from the IRS, the federal representatives towed a fine line between appeasing the concerns of tax practitioners without overcommitting in terms of what to expect next from the department or the agency.
Foreign Tax Credit.
In December 2021, the IRS finalized regs incorporating changes made to the foreign tax credit regime by the Tax Cuts and Jobs Act (TCJA; PL 115-97). After pushback from stakeholders on aspects of the regs, such as the reattribution asset rule, the cost recovery requirement, and the attribution rule, the IRS proposed further FTC regs November 2022.
Among the fixes brought forward is the so-called single country license exception to the source-based attribution requirement for withholding taxes on royalties. Under the exception, such taxes would be eligible for FTC purposes if the taxpayer can produce sufficient documentation of an licensing agreement to use intangible property in the same tax jurisdiction.
Treasury included in the proposed regs a special transition documentation rule for royalties paid on or before May 17, 2023. The agreement must be executed no later than that date, but IRS Associate Chief Counsel (International) Peter Blessing said that in response to submitted public comments, “there may be some change” given that the date is less than two months away. According to Blessing, the IRS is mulling an extension.
“We’ve gotten comments on the need to describe it as a royalty and have taken those under consideration and do understand difficulties with third-party licenses in particular,” he said.
When asked whether an agreement needs the word “royalty” specifically to meet the exception, Blessing clarified that “you don’t need the magic word … if you have something that indicates it’s a transfer for a period of use of intangible properties such as the word ‘license’ or some other word like that. But we’re we are considering further possibilities in that respect, in light of comments.”
Corporate Alternative Minimum Tax.
Established by the Inflation Reduction Act (PL 117-169), the corporate alternative minimum tax (CAMT) is a 15% minimum tax imposed on select large corporations based on adjusted financial statement income, or “book income.”
Since becoming law, the CAMT has presented an array of headaches for taxpayers subject to the tax, given its unique intersection of U.S. accounting principles with other areas of the Tax Code. Thus far, guidance has been issued piecemeal, addressing industry-specific issues, as alluded to in Notice 2023-7. Interim guidance in Notice 2023-20 was targeted to insurance providers and serves to function as a short-term hotfix, but it is unclear if subsequent interim guidance can be expected.
Brett York, deputy tax legislative counsel at Treasury, said if “there are certain issues that can be resolved before others, we may consider issuing another notice providing interim guidance on those issues. We have not made that decision yet. It’s something that we’re considering and the terms of the timing of any forthcoming … guidance.” York added that Treasury is working to release proposed regs “as quickly as we can” but declined to offer any exact timetable. He emphasized, though, that the regs will be largely reflective of comments received from the public during the comment period.
As the panel largely focused on the challenges presented by a tax calculated by book income, York was asked if, during his conversations with Congress, it became evident what Treasury’s guideposts are in terms of its regulatory authority when drafting CAMT guidance. York answered that there may be some cases where Treasury is “not sure” whether to adopt “all of” the principles of a “certain set of rules that exist within the Tax Code” or just “big picture principles” contextually, which the department will study “if it gets any more color.”
Section 174.
A TCJA provision that became effective beginning tax year 2022 was a change to Code Sec. 174 requiring that certain research and experimental expenses be amortized over five years, no longer allowing taxpayers to immediately deduct those expenses. Despite some rumbles over whether to undo that change, the amortization requirement is currently in place.
As the IRS Passthroughs & Special Industries Division has been preoccupied with incorporating green energy tax incentives, the Income Tax & Accounting Division has been filling in to take the reigns on Section 174 guidance, according to IT&A Associate Chief Counsel Scott Vance. “We happen to have some relevant expertise in-house in IT&A on [research and development], so that’s very helpful. We are running the ball on this project.”
In December 2022, a revenue procedure (Rev Proc 2023-11, 2023-3 IRB; IR 2022-235) focused on obtaining the IRS’ automatic consent to change accounting methods for research or experimental expenditures, which Vance said was “important for taxpayers” to receive by the end of the year, “just to figure out how to get to the endpoint.”
“This year, the guidance is really focused on what does that endpoint look like? What types of costs are we talking about here? … We’ve already gotten some formal input on potential safe harbors,” said Vance. He added that the “hard part” is the ratio between Section 174 expenditures and qualified research expenses (QREs) under the Code Sec. 41 R&D tax credit, as in, the “extra” amounts that aren’t creditable as QREs. “The challenge is knowing what that extra looks like.”
When asked to estimate when the next guidance could be released, Vance said he is hopeful for a time frame of before the end of calendar year 2023.
For more information on the foreign tax credit, see Checkpoint’s Federal Tax Coordinator ¶O-4000.
For more information on the CAMT, see Checkpoint’s Federal Tax Coordinator ¶A-8900.
For more information on Sec. 174, see Checkpoint’s Federal Tax Coordinator ¶L-3130.1.
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