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Tax News & Views Revenue Romp Roundup

Jay Heflin
June 7, 2024

Key Takeaways

  • The tax fight is now.
  • Voters hate debt but love tax cuts.
  • High Court rules out Estate Tax refund.
  • ERC update coming.
  • Guidance out on Energy Community Bonus Credit.
  • More IRS audits?
  • Roth conversions.
  • Weed retoolings.
  • Going nomad.
  • Tax cuts pay for themselves?
  • Breakfast and lunch will be delectable.

At End of Trump Tax Cuts, Progressives See Leverage to Target the Rich – Richard Rubin, Wall Street Journal ($):

Huge pieces of Republicans’ 2017 tax law are scheduled to lapse after next year, and Democrats see that deadline as a rare chance to reset fiscal policy and raise taxes on corporations and high-income households.

Policymakers and analysts expect a yearlong fight and Christmas-season negotiations to prevent tax increases from hitting most Americans after Dec. 31, 2025, when the law’s cuts end. Lawmakers are starting to think through what leverage they have—and how and when to use it. 

Here’s the skinny, according to tax staffers:

1. The TCJA fight will likely stretch into 2026, and possibly 2027, meaning the 2026 elections could have more impact on TCJA extensions than the upcoming 2024 elections.

2. When (or if) TCJA provisions are extended, those extensions will likely be one-year at a time. Extending these tax breaks is mind-numbly expensive – to the point that offsetting the cost could be a drain on the economy.

3. Democrats want to extend TCJA tax cuts for taxpayers earning $400,000 or less. Republicans want to extend all TCJA tax cuts. If an extension happens, the cut-off will likely fall somewhere in between - and reaching that agreement could get ugly. 

Speaking of 2025/TCJA debate:

Lawmakers Mull Rejiggering Opportunity Zones Amid Looming Cliff - Chris Cioffi, Bloomberg ($):

Pennsylvania Republican Rep. Mike Kelly is a firm believer in the power of Opportunity Zones to revitalize distressed areas. In fact, a refurbished theater in his district served as the backdrop for a recent hearing to kickstart a discussion on refining the program helping such areas, which expires in 2026.

The Opportunity Zone program, created by the 2017 tax law, has been criticized for not necessarily helping communities that need it most. The program gives capital gains tax breaks to investments in certain federally designated communities, and like many other parts of the 2017 law, portions of the program will expire in the coming years. As lawmakers begin talks about how to extend the expiring provisions, they’re also looking at how to add rural areas and increase transparency around investments.

In other words certain lawmakers who support extending all TCJA tax cuts, which is projected to cost $400 billion a year, want to expand the tax incentives for Opportunity Zones, which will only add to the historic amount of red ink that the Federal government is already amassing. But don’t take my word for it:

Trump Tax Cut Renewal Revives Fight Over Cost, National Debt - Christopher Condon and Steven T. Dennis, Bloomberg ($). "US government debt held by the public soared from 76% of GDP in 2017 to 97% of GDP in December. Yields investors demand on 10-year US Treasury bonds nearly doubled, from 2.4% in 2017 to 4.3% on Thursday. The federal government’s annual net interest payments surged from $263 billion to a projected $890 billion this year — more than the Defense Department budget."

 

Americans dislike deficits and debt. So why don’t they vote that way? – Kevin Kosar, Understanding Congress:

Do voters punish politicians who increase budget deficits and saddle future generations with debt? 

According to one research paper, yes, they do.

Adi Brender (Bank of Israel) and Allan Drazen (University of Maryland) crunched data from 23 nations on budgets and the electoral fortunes of chief executives, who voters tend to view as responsible for fiscal stewardship. Their unambiguous finding was that “increased deficits during an incumbent’s term in office, especially in election years, reduce the probability that a leader is re-elected.”

First off, "one research paper"? Most studies include broader research. 

Also, it is not uncommon for lawmakers promise tax cuts during election years and then enact those tax cuts after the election. Many of them get re-elected, in part because they promised to cut taxes. Voters like money in their pockets.

 

Court Side

Supreme Court Denies Estate Tax Refund in Stock Value Fight - John Woolley, Bloomberg ($):

The US Supreme Court denied a major tax benefit to estates on Thursday, ruling that $3 million in life-insurance proceeds earmarked by a company to redeem a decedent’s stock must be included when valuing the company’s stock for estate tax purposes.

The high court ruled against an estate whose deceased owner had his stock redeemed by his family business using proceeds from an insurance policy the business took on his life. The estate’s executor had challenged an IRS determination that the estate owed about $890,000 in additional tax after undervaluing the stock because the family business had become significantly more valuable after its insurance payout.

 

9th Circ. Won't Revive Org's Push To Restore Nonprofit Status – Kat Lucero, Law360 Tax Authority ($):

The U.S. Tax Court's dismissal of an attempt to reinstate nonprofit status for a California organization that said its officers fell victim to a Ponzi scheme did not breach the group's constitutional rights, the Ninth Circuit said.

XC Foundation argued that the Tax Court had violated its due process rights in dismissing its case, but that argument lacks merit because the corporation can still request a review of its status in future litigation for a tax refund, theappeals court said ina memorandum filed Wednesday.

 

IRS Updates

Employee Retention Credit Update Is on the Horizon, Collins Says – Benjamin Valdez, Tax Notes ($):

Taxpayers should expect an update soon on the IRS’s moratorium on processing employee retention credit claims, according to the national taxpayer advocate.

“I’ve been told ‘soon,’ but we’ll find out when that will be,” National Taxpayer Advocate Erin Collins said at a June 6 event hosted by the American Institute of CPAs and the Chartered Institute of Management Accountants. Collins said the update will address the IRS’s plan to move the pile of unprocessed ERC claims, which total 1.3 million.

 

Treasury, IRS release guidance for the Energy Community Bonus Credit under the Inflation Reduction Act – IRS:

The Department of the Treasury and Internal Revenue Service today issued Notice 2024-48PDF that publishes information taxpayers may use to determine whether they meet certain requirements under the Statistical Area Category or the Coal Closure Category in Notice 2023-29 for purposes of qualifying for the Energy Community Bonus Credit.

These lists are provided in Appendix 1PDF and Appendix 2PDF of this notice. Appendix 1 pertains to the Statistical Area Category and Appendix 2 pertains to the Coal Closure Category.

 

IRS Considering Multiple Pieces of Self-Employment Tax Guidance – Kristen Parillo, Tax Notes ($):

The IRS might issue smaller pieces of guidance on the limited partner exception to self-employment tax as it develops comprehensive proposed regulations clarifying the definition of limited partner, according to an agency attorney.

The guidance would address some specific issues regarding the limited partner exclusion from the Self-Employment Contributions Act (SECA) tax, Anthony Sacco of the IRS Office of Associate Chief Counsel (Passthroughs and Special Industries) said June 5 at a conference sponsored by the Texas Federal Tax Institute in San Antonio.

 

IRS announces tax relief for taxpayers impacted by severe storms, tornadoes, and flooding in Iowa – IRS:

The Internal Revenue Service announced today tax relief for individuals and businesses in Iowa that were affected by severe storms, tornadoes, and flooding that occurred on May 20, 2024. These taxpayers now have until Nov. 1, 2024, to file various federal individual and business tax returns and make tax payments.

Following the disaster declaration issued by the Federal Emergency Management Agency (FEMA), individuals and households that reside or have a business in Adair, Montgomery, Polk, and Story counties qualify for tax relief.

 

Expert warns: IRS has what it needs to pursue more audits - Martha Waggoner, The Tax Adviser:

The IRS now has enough money that it can hire more experienced workers to audit both companies and individuals, and it does not have to pick and choose among whom to audit, a managing director at Grant Thornton told attendees at AICPA & CIMA ENGAGE 2024 in Las Vegas.

"Gone are the days when they would hire folks right out of college, spend six months in some training program, then having spent six months holding somebody else's hand in the field. And it's a year before they're doing anything useful for the agents," said Dustin Stamper, who works in the National Tax Office of Grant Thornton in Washington, D.C., where he leads the tax legislative affairs practice.

 

Fix Backlog in Tax Adjustment Documents, Watchdog Tells IRS - Owen Racer, Bloomberg ($):

The IRS inaccurately reported nearly 500,000 source documents from 2023 tax adjustments that also failed to be updated in a timely manner, a Treasury Inspector General for Tax Administration report released Monday found.

TIGTA said that the IRS has 2.6 million source documents from tax adjustments and no strategy to address the backlog.

 

Finesse Financing 

Mega backdoor Roth conversions can boost tax-free growth — if you avoid these mistakes – Kate Dore, CNBC:

When investors make too much to save directly to a Roth individual retirement account, backdoor strategies can bypass the IRS income limits. A mega backdoor Roth conversion involves after-tax 401(k) contributions, which are shifted to Roth accounts.  

It is more generous than regular backdoor Roth conversions because after-tax contributions can exceed the yearly 401(k) deferral limit, which is $23,000 for investors under age 50. The full 401(k) limit is $69,000 for 2024, including employee deferrals, employer matches, profit sharing and other deposits.

Mega backdoor Roth conversions are “a great tool when used appropriately,” but you need to know your goals first, said certified financial planner Jamie Clark, founder of Ruby Pebble Financial Planning in Seattle.

 

Weed Whatnots

Rescheduling may have cannabis businesses choosing different structures – Roger Russell, Accounting Today ($). The Federal government could reclassify weed from a Schedule I substance (like LSD or heroin) to a Schedule III substance (like prescription drugs). If the reclassification happens, weed industry folk can take deductions for Federal tax purposes.

Cannabis is currently listed as a Schedule I substance, similar to heroin and LSD. Schedule I and Schedule II substances are both subject to negative tax implications under Internal Revenue Code Section 280E, whereas those that are Schedule III substances, such as most prescription drugs, are not. But that could change quickly if the Biden administration's proposal to reclassify cannabis from its current status to a Schedule III substance comes through. 

"Anyone trafficking in a Schedule I or Schedule II substance is generally prohibited from taking ordinary and necessary expenses as a deduction or credit," said John Fraser, a member of the cannabis group at law firm Dykema. "The Tax Code restrictions, once lifted, will be a boon to those in the trade, particularly marijuana retailers," whose profitability has been artificially depressed. "Although they're allowed these deductions at the state level, their federal tax rate approaches 70% because of the restrictions of Section 280E."

The article also reports that certain cannabis operations that are currently structured as a corporation might change to a pass-thru if the reclassification occurs.

 

International Zone

The tax consequences of digital nomadism – Roger Russell, Accounting Today ($):

In recent years, the global workforce has witnessed a significant shift toward remote work and the rise of digital nomads — individuals who work entirely over the internet while traveling and have no fixed place of business. As many countries are recognizing this growing trend, the solution — the digital nomad visa — is increasing in popularity. The visa, offered under varying names, is currently available in more than 70 countries. 

While obtaining a digital nomad visa takes care of the immigration requirement to enter and work in a country for a specific period, it generally does not relieve the individual from income tax or Social Security exposure, or the employer from payroll considerations. 

 

Britain’s Rich Race to Save Their Wealth From Election Hit - Ben Stupples and Charlie Wells, Bloomberg ($):

Wealthy people in the UK, from foreign billionaires to City of London bankers, are rushing to shelter their money after Prime Minister Rishi Sunak surprised the country by calling a summer election.

Some are cashing in investments, paying off bills that may soon rise or leaving the UK entirely, according to interviews with more than two dozen high-net-worth individuals, who asked not to be named, and wealth advisers.

The ruling Conservatives and the opposition Labour party have both pledged to scrap preferential tax treatment for non-domiciled residents — rich foreigners living in the UK, also known as non-doms. Labour leader Keir Starmer has additional plans to tax the wealthy and polls show his party more than 20 points ahead.

If a certain political party sweeps the U.S. elections in November (which is unlikely), wealthier taxpayers who live in the U.S. could be searching for places to hid their money. 

 

From the “Tax Cuts Pay For Themselves” file

Tax Cut Extension Would Only Pay for 1% to 14% of Itself – Committee for a Responsible Federal Budget:

Several major elements of the 2017 Tax Cuts and Jobs Act (TCJA) are scheduled to expire at the end of 2025. While the estimated cost of extending these expiring provisions has gone up dramatically – to $4 trillion over a decade under one possible scenario – the extension could theoretically pay for some of itself to the extent that it leads to faster economic growth.

However, analyses from four different organizations spanning the ideological spectrum, along with comments from the Director of the Congressional Budget Office (CBO), show that this dynamic feedback effect is likely to be quite modest.

How Much Would TCJA Extension Grow the Economy?

While maintaining the lower tax rates and investment incentives in the TCJA would almost certainly boost economic growth by encouraging work and investment, that boost would likely be modest and could decline – perhaps even dipping into negative territory – when accounting for the economic cost of additional debt.

Whether extending TCJA tax cuts will incite economic growth that raises enough revenue to pay for the tax cut extension will be a huge discussion point next year when Congress debates extending TCJA provisions.  Disagreements will be plenty. Buckle up. 

And by the way, many conservative, pro-tax-cut lawmakers do not think tax cuts pay for themselves. 

 

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Happy National Doughnut Day and National Chocolate Ice Cream Day! Breakfast and lunch decisions are made!

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About the Author(s)

Jay Heflin Photo

Jay Heflin

Director of Legislative Affairs
Jay brings more than two decades of experience to his job as Director of Tax Legislative Affairs in Eide Bailly’s Washington D.C. office. Jay provides political intelligence and guidance to the firm on the progress of tax legislation on Capitol Hill. Prior to joining the firm, he was a director at the tax lobbying shop Federal Policy Group, LLC, where he tracked tax legislation in Congress and participated in lobbying efforts to amend tax legislation. Before joining the Federal Policy Group, he was a Congressional reporter for several news organizations where his beat was tax policy.

Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.