Tax News & Views Is R&D On The Horizon Roundup

June 5, 2023

The next fights for Congress – Daniella Diaz, Politico:

What’s next on the calendar: Republicans in the House, which is back in session today, are expected to shift their attention this week to a comprehensive bill that would include tax breaks aimed at boosting economic growth. Timing for that is still up in the air…

R&D expensing is expected to be in this bill. This development was covered in last week’s Capitol Hill Recap.

Congress must also approve 12 annual spending bills by September 30th. Can lawmakers move 12 spending bills and a tax bill by October? We’ll see. 


Here Are the Top 5 Concerns Tax Pros Have About R&D Amortization - Lauren Vella, Bloomberg ($). The five concerns in the article are: 1. What is R&D, 2. When are these costs deductible, 3. Where does Software fit in, 4. How to amortize R&D if business year is short, 5. Can amortization happen on disposed property.  

From the article:

Businesses and their practitioners that have extended their filing date are preparing to amortize R&D costs under tax code Section 174 on their 2022 returns, and they have pressing questions for Treasury and the IRS about key definitions, as well as the size and scope of the law.

From Eide Bailly’s own:

Andrea Mouw, partner and accounting methods and practice leader at Eide Bailly, said because of the rule change, the top issue on her clients’ minds is the definition of R&D costs to ascertain what ‘truly’ counts as an R&D cost under Section 174…

Mouw said the challenge in deciding which costs to include in R&D amortization for her clients is finding a ‘middle ground’ so enough costs are considered without having to do an entire inventory of the business. This kind of overhead calculation could be considered ‘over-inclusive,’ Mouw added.

After participating in literally dozens of meetings with tax staffers on Capitol Hill, the main takeaway was if Congress can expand the Child Tax Credit then R&D outlays can be expensed. While these two tax measures are unrelated to each other, they are linked. It's been that way for over a year. 


Biden Signs Debt-Limit Deal Into Law, Averting a US Default - Jordan Fabian, Bloomberg ($). "President Joe Biden signed legislation averting a US debt default, sidestepping a catastrophic blow to the economy with a bipartisan victory that defied Washington expectations."

What The Debt Ceiling Agreement Means For The IRS – Janet Holtzblatt, Tax Policy Center:

Nine months after Congress enacted President Biden’s proposal to boost the Internal Revenue Service’s 10-year budget by $80 billion, the president and House Speaker Kevin McCarthy (R-CA) have agreed to cut the IRS’s budget by up to $21.4 billion over the next three years as part of a deal to raise the debt ceiling.

The bill cuts $1.4 billion from the agency. The remaining $20 billion in cuts will be at the discretion of appropriators. Will those cuts actually happen, who knows. 

Important to note: What happened to the IRS funding is a cautionary tale. Certain Washington leaders said that the funding would not be touched. It got touched. Green energy tax incentives in the Inflation Reduction Act should be warily looking over their shoulders.  Some lawmakers want to repeal or scale them back because they are now expected to cost more than originally expected:

Revised EV Credit Estimate Further Raises Total Green Energy Costs – Martin Sullivan, Tax Notes ($):

Recently revised Joint Committee on Taxation revenue estimates obtained by Tax Notes indicate that the green energy provisions of the Inflation Reduction Act (IRA, P.L. 117-169) have a total revenue cost of $652 billion over fiscal 2023-2033. Comparing these May 25 estimates for the shorter 2023-2031 period with the original estimates (available only for the 2023-2031 period) made when the IRA was passed indicates that there has been a 103 percent increase in the estimated revenue loss — from $259 billion to $526 billion.

And the cuts could keep coming for the IRS:

Congress could tax IRS again after debt limit deal – Brian Faler, Politico:

The administration itself is downplaying the impact of the impending $21.4 billion cut, saying the money Democrats gave the IRS last year was always intended to be slowly spooled out over the next decade. Now, instead of running dry in ten years, the administration says, the money will be exhausted in eight.

But, by that logic, lawmakers will surely ask why they can’t lop off another year or two or three off the back end, and use the savings for something else.

‘Once you start down this path…’ said Sen. Ben Cardin (D-Md.), a senior tax writer.


IRS Must Be Aware of Risks of AI Use, Tax Professionals Say – Lauren Loricchio, Tax Notes ($):

The IRS’s strategic operating plan for spending its additional funding from the Inflation Reduction Act (IRA, P.L. 117-169) says it will enhance its “use of data and analytics to drive operations and decision-making. Improved data analytics will better position us to optimize operations for taxpayers and employees alike.”

Travis W. Thompson of Sideman & Bancroft LLP told Tax Notes that he expects the IRS to invest some of its IRA funding in AI technology. But with the debt limit deal eliminating more than $20 billion of the agency’s supplemental funding, he said it’s unclear how that might affect planned technology upgrades.


Biden Announces Nominee for IRS Chief Counsel - Naomi Jagoda, Bloomberg ($). “President Joe Biden on Friday announced that he is nominating Marjorie Rollinson to be IRS chief counsel, a position that would play a key role in implementing the Inflation Reduction Act.”


Clean Energy Direct Pay Rules Will Address Grants, Official Says - Erin Slowey, Bloomberg ($). “After the passage of the tax-and-climate law, exempt organizations and governmental entities can monetize their clean energy credits through direct pay, or when a credit can be treated as a refundable payment.”

‘The grants that they may receive could be tax exempt, and they are also entitled to credits or direct pay on the credits,’ said Rich Blumenreich, a special counsel in the Office of Chief Counsel at the IRS. ‘We have gotten a lot of comments as to whether there are special rules or guardrails, and we are looking into that.’

Proposed regs are expected to be released this spring.


Eighth Circuit: Life Insurance Proceeds Add to Estate Tax Value – Chandra Wallace, Tax Notes ($):

In its June 2 opinion in Connelly v. United States, a three-judge panel held that the company’s value included the proceeds of the life insurance policy that the company had taken out against the decedent’s life. The panel’s decision rejects the approach taken by the Eleventh Circuit in Estate of Blount v. Commissioner, 428 F.3d 1338 (2005), which offset the company’s obligation to redeem shares against the life insurance proceeds received.


Minnesota’s New Retail Delivery Fee Takes Lessons From Colorado - Michael Bologna, Bloomberg ($):

Minnesota became the second state to fund its transportation infrastructure with a fee on the growing volume of packages delivered to the doorsteps of consumers under legislation signed by Gov. Tim Walz on Wednesday.

The Democratic-Farmer-Labor Party governor signed the omnibus transportation bill, HF 2887, one of many measures enacting the state’s $72 billion budget for fiscal years 2024 and 2025. The transportation bill raises additional revenue through several new taxes and a 50-cent fee on retail delivery transactions beginning next year. Colorado is the only other state to impose this fee.


Federal government sues four Iowa businessmen accused of bilking taxpayers out of millions - Clark Kauffman, Iowa Capital Dispatch:

The lawsuit, filed in U.S. District Court for the Southern District of Iowa, paints a startling picture of how four Iowans allegedly invested a total of $250 to establish an Iowa company that quickly collected $19 million from the federal government’s alternative-fuel-mixture tax credit program. Within 18 months of making that initial $250 investment, the lawsuit claims, the four men shuttered the company and paid themselves at least $10 million in company funds.


Alabama Lawmakers Pass Bill to Cut 4% Food Sales Tax in Steps - Angélica Serrano-Román, Bloomberg ($):

Alabama residents would see lower grocery bills under a bill both legislative chambers passed unanimously Thursday to lower the state’s 4% tax on groceries in two steps.

If signed by Gov. Kay Ivey (R), HB 479 would reduce the food tax to 2% in September 2025 if the state meets revenue growth requirements. The governor has said she will review the measure.


Business Taxpayers Urge More Federal Preemption on State Taxes - Michael Bologna and Laura Mahoney, Bloomberg ($):

The tension between state sovereignty and the business sector’s interest in some amount of consistency among states was one of the themes aired at a Villanova tax conference. Meanwhile, California lawmakers advanced a bill that would tax short-term rentals to fund housing programs, andTexasis refashioning its longtime economic development tax program.


More countries line up for U.S.'s EV tax credits – Steven Overly, Politico:

The Philippines, Malaysia and Indonesia are among the countries calling on U.S. trade officials to broker a critical minerals pact as part of ongoing negotiations over the Indo-Pacific Economic Framework, a trade initiative that the Biden administration launched last year with 13 other countries.

That, in turn, could enable electric vehicle batteries made with critical minerals harvested or processed within their countries to qualify for tax credits created by the U.S. Inflation Reduction Act, Democrats’ signature climate legislation that Congress passed last year. The law requires foreign countries to have a ‘free trade agreement’ with the United States to be eligible for the tax perks, but the Treasury Department has broadly interpreted what kind of deals can qualify.

The issue goes beyond free trade agreements. For example, Cobalt is indispensable for electric vehicle batteries. The Democratic Republic of the Congo has the world’s largest reserve of this mineral. However, the State Department strongly suggests that Americans do not travel to this country because armed militias clash with each other and sometimes they target civilians.  How does the U.S. allow this country to profit by purchasing minerals from them?


From the “Rich get Richer” file:

Hedge Funds Cash In on Covid-Era Tax Credit Amid IRS Backlog - Miles Weiss, Blooomberg ($). “After finding many claims ineligible or even fraudulent, the IRS issued its latest warning on employee-retention scams last week and is taking the unusual step of scrutinizing refund requests before paying up. Investment firms have capitalized on the ensuing logjam by providing advances to employers that need capital now.”

‘There is more of a marketplace when the IRS is taking longer,’ said Lou Gonzalez, chief executive officer of Valiant Capital , which has originated as much as $200 million in advances for fund managers. ‘People realize, ‘I can’t wait 10 months.’’

Further down the article:

IRS Commissioner Danny Werfel told Congress in April that the agency will devote more resources to processing such claims, with a goal of doubling the 20,000 the agency handles each week. As long as the delays persist, investment firms will profit from the credits.

Speaking of rich getting richer:

A $1.8 Billion EV Tax Credit Shows Tesla Dominance Over GM, Ford - Dana Hull and Gabrielle Coppola, Bloomberg ($):

Elon Musk is getting more firepower for his electric-vehicle price war thanks to President Joe Biden’s signature climate legislation.

Tesla Inc. and its battery partner are poised to receive about $1.8 billion in production tax credits this year under the Inflation Reduction Act, according to forecasts from researcher Benchmark Mineral Intelligence – a windfall that far exceeds an estimated $480 million haul for General Motors Co. and LG Energy Solution. Another rival, Ford Motor Co., won’t begin to reap any benefits from the law’s battery manufacturing credits until 2025.


Do over! It’s National Start Over Day. Today reminds us that it’s “perfectly fine to start over,” according to National Day Calendar.

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