Tax News & Views Stays Awake for Tax Bills Roundup

Tax Package at $78B and Counting; Markup January 19 - Doug Sword and Cady Stanton, Tax Notes ($):

The wide-ranging tax package headed for a January 19 committee markup has bipartisan and bicameral support, but there is also a bipartisan, bicameral push for a rewrite of key portions.

House Ways and Means Committee Democrats want more than the proffered enhancements to the partial refundability calculations for the $2,000 child tax credit, while Senate Finance Committee Republicans are pushing in the other direction, seeking stronger work requirements. And Democrats think they might have found a way to pay for changes that would boost the cost of the package’s tax incentives to about $100 billion.

The Ways and Means Committee released the 82-page bill late January 17 as it confirmed the markup would start at 9 a.m. January 19.

Democrats, GOP Gripe Over Bipartisan Tax Package - Naomi Jagoda, Bloomberg ($):

New York Republicans are still pushing to get an increase in the state and local tax deduction cap added to the tax package, though they face significant obstacles.

Rep. Nick LaLota (R-N.Y.) said he wants legislation based on the agreement to move through regular order, which would allow discussion on a SALT-related amendment. But the bill may instead get a House floor vote under suspension of the rules, which would preclude amendments. Moving legislation under suspension of the rules would prevent a small group of House conservatives from being able to block the bill.

The bill extends three key business breaks while increasing the value of the child tax credit. The business breaks are the deduction for research expenses, restoration of bonus depreciation, and loosening the restrictions on interest expense deductions. 

How the retroactive restoration of the research deduction would work. According to the Joint Committee on Taxation summary, the bill would allow a current deduction of 2023 expenditures. For 2022 expenditures that had to be capitalized, it appears the bill would allow taxpayers to amend their 2022 returns and claim a refund based on full deduction. Alternatively, taxpayers may instead deduct the 2022 capitalized amounts in 2023, or equally in 2023 and 2024. 

Jim Donovan, leader of the Eide Bailly R&D tax incentive team, says "This legislation is long overdue and needs to find a way through Congress. Requiring small and midsize businesses to capitalize and amortize their R&D costs, which can be a significant, increased taxable income to the point it was overly burdensome and more than offset the credit incentivizing businesses to create these jobs in the U.S. in the first place." 

Bipartisan Tax Proposal Would Restore Tax Breaks And End The Employee Retention Credit - Kelly Phillips Erb, Forbes:

Under current law, taxpayers can claim the Employee Retention Credit—or ERC—until Apr. 15, 2025. This proposal would put an early end to the beleaguered program as of Jan. 31, 2024.

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Much of the fraud, the IRS believes, is attributable to promoters who enticed businesses to apply for credits they were not eligible to receive. As such, the proposal would also increase penalties related to providing aid, assistance, or advice with respect to a return or claim for ERC-related refunds that did not meet the appropriate criteria and double penalties for tax return preparers who fail to comply with due diligence requirements relating to the ERC. ERC promoters would also be required to disclose certain information, including lists of clients, to the IRS upon request.

House Dems push for changes to tax deal - Punchbowl News: 

If the House takes up the bill, it would likely be under suspension of the rules, a procedure that requires a two-thirds majority for passage. This means it would need a significant number of Democratic votes to pass.

Earlier Wednesday, House Democrats huddled on the tax package and several left their meeting offering some praise but saying they wanted to do more on the child tax credit.

Wis. Senator Signals Interest In Reaching Bipartisan Tax Deal - Natalie Olivo, Law360 Tax Authority ($). "Sen. Ron Johnson expressed willingness Wednesday to work on a bipartisan tax agreement with Democratic lawmakers, alluding to the upcoming expiration of provisions under the 2017 federal tax overhaul."

Capitol Hill Recap: Tax Bill Materializes, But Will It Pass? - Jay Heflin, Eide Bailly:

Right now, it is unclear if the legislation will pass Congress. Currently, the primary backers for the bill are its authors: House Ways and Means Chairman Jason Smith (R-Mo.) and Senate Finance Chairman Ron Wyden (D-Ore.).

Senate Majority Leader Chuck Schumer (D-NY) has spoken positively about the bill. But Speaker Mike Johnson (R-La.) has not yet made public his position on the bill. For the bill to pass Congress, both leaders must agree to host a vote on the legislation.

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There is also an issue with the calendar. The House Ways and Means Committee is expected to discuss and possibly amend the bill on January 19^th. That means a vote this week on the legislation is highly unlikely. Also, the House will recess next week and won’t return until January 29^th, making it very hard to pass this bill before the start of tax season, which also begins on January 29^th.

Congress Unlikely To Pass Tax Deal Before Filing Season Begins - Lindsey McPherson, TheMessenger. "The requests for changes, primarily focused on the child tax credit portion of the deal, are slowing momentum — all but ensuring the bill will not be ready to attach to a short-term government funding extension that is moving this week."

Companies Are Snapping Up New Clean-Energy Tax Credits - Richard Rubin and Amrith Ramkumar, Wall Street Journal: 

A nascent market for clean-energy tax breaks is surging faster than expected, with deals totaling as much as $9 billion already done and tens of billions more expected this year. 

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Congress created the tax credit transfer program for renewable-energy companies in the 2022 climate law. About 100 companies pursuing more than 1,000 clean-energy projects have indicated they plan to sell tax credits in the new market, according to preliminary Treasury Department figures reviewed by The Wall Street Journal ahead of their release. 

Renewable-energy companies often don’t make enough profit to absorb all the tax credits they generate. The law lets them sell the credits to other companies to monetize what they can’t use. Buyers typically pay $90 to $96 for credits that let them reduce their tax bills by $100, turning a near-instant profit.

Related: How the Inflation Reduction Act is Boosting Energy Efficiency Incentives.

Tax statements you need to file your 2023 return - Kay Bell, Don't Mess With Taxes. "The exact tax-related documents differ from taxpayer to taxpayer, but there are some common ones most people get every year. They detail the various types of money we received, from wages to independent contracting gigs to letting our money make more money via investments. It is, after all, called an income tax."

Form 8300 Demystified - Thomas Gorczynski, Tom Talks Taxes. "Form 8300 must be filed by the business by the 15th day after the date the cash is received. If there are multiple payments, the Form 8300 filing is triggered when the total payments received with respect to the transaction (or related transactions) exceed $10,000."

Tax Court Allows Estimated Cost of Goods Sold Expense; Upholds Accuracy Related Penalty - Parker Tax Pro Library. "The Tax Court held that a taxpayer, a fencing contractor who made cash withdrawals when he received checks as payment for his work which he used to pay material and labor costs as well as personal expenses but did not specify what proportion of the withdrawals went to business needs versus personal expenses, was allowed 50 percent of the cash withdrawals as cost of goods sold offsetting his gross income."

Exchange Rates for 2023 - International Tax Blog:

Last Friday the IRS published average currency exchange rates for 2023. These average rates are used:

-On Schedules H and M of Form 5471,

-To convert local currency Subpart F Income and GILTI tested income amounts into U.S. dollars. Code §989(b)(3), and

-To convert GILTI inclusion amounts back into the functional currency of the CFCs. See Form 8992, Schedule A, Column (l) and Treas. Reg. §1.951A-5(b)(3).

I also use these average rates to convert from local currency to U.S. dollars on Schedule C (Income Statement) of Form 5471.

The Remaining Pillar Two Headaches - Alex Parker, Things of Caesar. "Pillar Two advocates are still hoping that Congress can bring the U.S. into the system and relieve worries about increased foreign taxation of U.S. businesses. But Congress may only be able to do so much."

JCT Report Shows How Corporate Tax Breaks Have Expanded - Alex Muresianu, Tax Policy Blog. "The decline in total corporate tax expenditures has reversed in recent years thanks to the IRA and the CHIPS and Science Act, both enacted in 2022. While cost recovery expenditures have shrunk, expanded tax credits for renewable energy production, renewable energy investment, and advanced manufacturing have increased non-cost recovery expenditures enough to push up total expenditures. This reversal points to a troubling trend of moving away from the neutral tax treatment of investment toward targeted, industry-specific tax subsidies."

Evidence Suggests Expanding The Child Tax Credit Could Ease Hardship Among Families With Kids - Nikhita Airi, TaxVox. "A compromise deal taking shape now would pair a temporary and limited expansion of the CTC with increased tax deductibility for businesses’ research & development investments and other business tax relief, which also lapsed in 2021."

DOJ: Littlejohn’s ‘Egregious Conduct’ Merits Max Sentence - Jonathan Curry, Tax Notes ($):

The Justice Department had already signaled that it would seek a harsher punishment for Charles Littlejohn beyond the standard sentencing range that likely wouldn’t have exceeded a 14-month prison sentence. In a January 16 court filing in United States v. Littlejohn, prosecutors said they want Littlejohn to receive the statutory maximum: 60 months in prison.

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The Justice Department acknowledged that normal sentencing rules would suggest a sentence that could include less than a year in prison. After sentencing adjustments for obstruction of justice, abuse of trust, and acceptance of responsibility, Littlejohn would face a guidelines sentence of eight to 14 months. Application of the new adjustment for first-time offenders would further reduce the recommendation to as little as four months in prison, the government noted.

Feds Want 5 Years For IRS Contractor Who Leaked Tax Info - Anna Scott Farrell, Law360 Tax Authority. "Littlejohn's release of Trump's information only inspired him to dig deeper, according to prosecutors. Using the same methods he used to get Trump's returns, Littlejohn downloaded IRS data for thousands of the nation's richest people, culling returns and related information that went back 15 years. He gave the information to the news organization ProPublica, identified in the memo as News Organization 2, which has since published nearly 50 stories on them, according to the memo."

Nevada CPA sentenced to three years in prison in false tax return scheme - IRS (Defendant name omitted, emphasis added.):

According to court documents and statements made in court, Defendant, of Henderson, was a certified public accountant and founder and manager of (CPA firm LLB). LLB performed accounting-related work, including tax preparation, audit and consulting services. Defendant also operated a real estate business that developed office buildings and other real property. In connection with Defendant's real estate development activities, he operated and controlled a real estate investment partnership entity.

In 2011, Defendant began offering LLB's high-net-worth clients an "investment opportunity" through which the clients would make a payment to his partnership entity and, in exchange, receive a large tax deduction of approximately five to seven times the amount of money the client "invested." Defendant advised that the clients' payments would entitle them to claim the large tax deduction based on losses derived from the partnership entity, even though he knew the tax laws did not permit the sale of such deductions in exchange for an investment of money, and the partnership did not incur the losses or depreciation in the amounts represented by Defendant. Defendant also did not report the purported investments as losses on the clients' tax returns as promised. Instead, he caused the clients' returns to report large false deductions for cost of goods sold, professional and consulting fees or nonpassive losses. In total, Defendant's scheme caused a tax loss to the IRS of at least $8 million.

As one example from his investment scheme, in 2014, Defendant asked a client to make a $417,780 "investment" to his partnership entity in exchange for purported depreciation-based losses to be placed on his client's 2013 corporate tax return (Form 1120S). But instead of reporting depreciation related to the investment, Defendant caused LLB to prepare and file a Form 1120S that falsely inflated the company's cost of goods sold by $2,110,000, causing a tax loss to the IRS of approximately $860,627.

A few thoughts. First, he wasn't working alone; he had a colleague who was recently sentenced to 13 months in prison for paying bribes to secure audit work, and for charges relating to claiming these false deductions. 

Also, the clients probably should have known better. If somebody offers you deductions that nobody else has - "five to seven times" the investment - you better get a second opinion, and take it seriously.

The clients were probably glad to find a preparer willing to "be aggressive," "go into the gray areas," and "think outside the box." They might be having second thoughts, as the IRS isn't going to let the clients keep the fraudulent deductions claimed. The IRS will want the taxes back, with interest and probably penalties. 

Caffeine splurge! It's National Gourmet Coffee Day.