January 2024 Policy Pulse

Introduction

Each month, Baker Tilly’s tax policy department will bring you a summary of key legislative and regulatory tax developments. The tax insight pieces contained in our Tax Counsel Email will provide additional detail on how these developments may impact your tax situation.

This week, both the Senate and the House of Representatives returned to kick off the second session of the 118th Congress. Lawmakers returned to a flurry of activity as they face two major deadlines for funding the federal government and a potential new tax bill.

Potential tax bill

Over the last several days bipartisan negotiations on a bill that would address three critical business tax provisions and the child tax credit has been making headlines. Efforts to find a compromise have been led by Senate Finance Committee Chair Ron Wyden (D-OR) and Ways and Means Committee Chair Jason Smith (D-MO). The deal is expected to include:

• Business interest deduction limitation – reversion to the more taxpayer friendly pre-2022 business interest limitation deduction calculation through 2025
• Bonus depreciation – reinstatement of full expensing for qualified property in the year placed in service, via bonus depreciation through 2025
• Research and experimental expenditures – restoration of the deduction for domestic research and experimental expenditures retroactive to 2022 and through 2025
• Child Tax Credit – expansion of the child tax credit, possibly to 2021 levels, subject to some adjustments. The deal could also index the current and expanded credit to inflation beginning in 2025.

The proposal’s framework and text have not yet been released, meaning the details and effective dates of the proposed changes are not available. The cost of the overall deal is reported to be generally evenly split between Republican priorities, which include the three business provisions, and the Democratic child tax credit priority. The total cost, which was initially estimated to be $100 billion, has been scaled an estimated $70 billion in recent days. While the reduced price tag may make the bill more palatable to deficit hawks, it almost certainly means there will be concessions on the size and scope of some or all of the provisions. Negotiators are pursuing adjustments to the Employee Retention Credit as a revenue-raiser to offset the cost of the compromise.

It’s important to note that, even if the committee is able to find common ground, there are significant challenges to turning the proposal into law. The cost of the compromise could prove to be an issue, particularly with House Republicans, who are unhappy with current federal funding negotiations. Additionally, lawmakers need to find a suitable vehicle to carry the legislation. The tax proposal has changes that are intended to be retroactive. With filing season set to begin on Monday, Jan. 29, there are few, if any, options that would allow the changes to be implemented in time to be effective for the 2023 tax year.

Potential government funding deal, reduced IRS funding

In November 2023, Congress passed a continuing resolution (CR), a deal that temporarily funds the federal government at the prior fiscal year’s levels when final appropriations bills have not been passed. The November CR was “laddered,” extending four of the twelve appropriations bills through Jan. 19 and the other eight through Feb. 2. Without passing the fiscal year 2024 (FY24) appropriations bills or another continuing resolution before the expiration dates, the government could face a partial shutdown next week and/or a full shutdown just two weeks later.

On Sunday evening, just before Congress returned, Speaker Mike Johnson (R-LA) announced a bipartisan agreement on a topline spending level of $1.59 trillion for the 2024 fiscal year. Overall, the deal comes in much closer to the Democratic funding proposal, and the levels set by the Fiscal Responsibility Act, than the Republican House proposal. However, it includes a key Republican priority of accelerating the clawback of an additional $10 billion in IRS funding from FY24 to FY25, making the total reduction $20 billion for FY24. The deal also rescinds approximately $6 billion of Covid relief funds and excludes an additional $14 billion of supplemental funding the Senate Appropriations Committee had previously agreed to, both of which were Republican priorities. In total, Speaker Johnson is touting a $30 bill concession by Democrats.

Senate Majority Leader Chuck Shumer (D-NY) and House Minority Leader Hakeem Jeffries (D-NY) quickly came out with statements in support of the compromise. However, the House Freedom Caucus was quick to condemn the agreement, calling it a “failure” and there has been growing discontent among House Republicans.

Even with a topline deal, lawmakers have a great deal of work in front of them, including allocating funding across and drafting the 12 appropriations bills. There is a growing consensus that this isn’t achievable before Jan. 19 and Congress will need to pass another CR to keep the government funded.

IRS implements ERC voluntary disclosure program

The IRS in late December 2023 announced the highly anticipated ERC voluntary disclosure program, which will allow eligible taxpayers to repay 80% of credits claimed without interest or penalties. Read more about it in our Jan. 9 article, ERC Voluntary Disclosure Program announced.

Tax policy

Our tax policy department is excited to bring you a monthly discussion of key developments in our Policy Pulse. Also be on the lookout for our inaugural Tax Strategy Playbook, set to be released later this month.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.