Here’s a look at recent tax-related happenings on the Hill, including Republicans adopting their 2024 platform and “Main Street” business leaders seeking to make the Section 199A pass-through deduction on business income permanent.
Lately on the Hill
The Republican Party Establishes Its Platform
In the midst of the Republican National Convention in Milwaukee this week, the party has adopted its 2024 platform, including promises to make permanent the Tax Cuts and Jobs Act (TCJA), expand the Child Tax Credit, eliminate taxes on income derived from tips, and continue to seek ways to cut taxes.
The Republican nominee Donald Trump first floated the idea to do away with taxes on tips at a campaign rally last month in Nevada, a state heavily involved in the service industry.
The Republican platform also seeks to shift the nation’s tax burden on foreign producers through a baseline tariff on imported goods and institute legislation to address “unfair” trade practices. “As tariffs on foreign producers go up, taxes on American workers, families, and businesses can come down,” the party reasons.
Sen. Ron Wyden (D-OR) released a statement in response: “Any benefits for working Americans, including his bogus proposal to eliminate taxes on tips, would be wiped out by the ‘Everything Tax’ [Trump] wants to impose on nearly all the basic consumer goods people buy on a daily basis, including food, clothes, school supplies, you name it.”
The centerpiece of the Republican tax agenda, the extension and permanency of TCJA provisions, including the §199A pass-through deduction on business income, garnered some attention last week as dozens of “Main Street” business leaders urged members of the House Ways and Means Committee to make the deduction permanent.
The Main Street Employers Coalition Makes Its Case
In a letter written to congressional members of the “Main Street Tax Team,” the coalition made up of “dozens of trade associations representing businesses operating in virtually every industry and community across the country” extended its support of the Main Street Tax Certainty Act.1
The legislation, introduced by Rep. Lloyd Smucker (R-PA) and Sen. Steve Daines (R-MT), would make permanent the §199A deduction.
The letter argues the importance of extending the deduction to keep pass-through businesses competitive with corporations, which received a substantial and permanent tax reduction with the passage of the TCJA. “The effective marginal rates faced by corporations and pass-through businesses post-TCJA are roughly equivalent, but only with Section 199A in place,” it said.
The letter points out a common criticism of the §199A deduction—that it only benefits the wealthy—but refutes the argument by asserting, “[it only does] when they employ lots of people or make significant investments.” The deduction for large pass-through entities can be limited by the amount they spend on employee wages and capital investments, incentivizing investments in both.
The TCJA reduced the top individual income tax rate from 39.6% to 37% and further reduces to 29.6% on business income for those claiming the 20% pass-through deduction. A reversion to a nearly 40% tax rate as compared to the 21% rate for corporations could drive many business owners to convert from a pass-through tax structure to a C corporation structure. In fact, the Congressional Budget Office (CBO) is trying to calculate the cost to the government due to the expected flood of conversions if §199A is allowed to sunset, according to CBO Director Phillip Swagel in a recent Senate Budget Committee hearing.
The Judicial Report
House Committee Chairs Press Regulatory Agencies in Light of Loper Bright Decision
House committee chairs have sent letters to regulatory agencies, including the U.S. Department of the Treasury, requesting information on how the departments could be affected by the recent U.S. Supreme Court decision in Loper Bright Enterprises v. Raimondo and the overturning of the “Chevron doctrine.”
The decision last month overturned decades-old precedent allowing a federal agency’s interpretation of a statute to receive deference from the courts.
House Majority Leader Steve Scalise (R-LA) announced the committee initiative with a statement thanking the Supreme Court for its decision: “With their ruling in this case, the Supreme Court restored proper constitutional separation of powers as our Founding Fathers intended by overturning Chevron deference and requiring the courts to decide disputes over interpretation of statutory text.”
In letters to Treasury Secretary Janet Yellen, the chairs of the House Financial Services Committee, House Oversight Committee, Committee on Ways and Means, and the Committee on Oversight requested lists of agency legislative rules proposed or promulgated, enforcement actions, and judicial decisions relevant to Chevron deference prior to the Supreme Court’s decision in Loper Bright since the start of the Biden administration in January 2021.
The letters state, “As the committee of jurisdiction overseeing your agency, we assure you we will exercise our robust investigative and legislative powers not only to reassert forcefully our Article I responsibilities, but to ensure the Biden administration respects the limits placed on its authority by the Court’s Loper Bright decision.”
The Government Continues Defending the Corporate Transparency Act. Small Business Assoc. of Michigan et al. v. Yellen et al., No. 1.24-cv-00314.
In a brief filed in a district court, Treasury is seeking summary judgment in its defense of the Corporate Transparency Act (CTA).
The act requires certain businesses to report ownership information in an effort to “curb money laundering, terrorist financing, and other harmful economic activities,” according to the brief. The law has received backlash from its opponents as an excessive government overreach and has been ruled unconstitutional in a limited number of cases so far.
In its argument that the CTA is authorized by Congress and does not violate the Fourth and Fifth Amendments, the government asserts, “First, the CTA fills a critical gap in a comprehensive scheme to prevent harmful economic activity and it directly regulates commercial enterprises, and is thus authorized by both the Commerce and Necessary and Proper Clauses. Second, the CTA is a proper exercise of Congress’s authority to regulate foreign affairs and ensure the nation’s security. Third, the CTA is necessary to prevent bad actors from frustrating the government’s ability to lay and collect taxes.”
From the Treasury & IRS
Proposed Regulations (REG-102161-23) have been released by the IRS that identify certain basket contract transactions as listed transactions. These transactions seek to defer income recognition and convert ordinary income to long-term capital gains subject to favorable tax rates by using a contract denominated as an opinion, notional principal contract, forward contract, or other derivative contract. Such transactions have special reporting requirements under §6011(a) and are subject to penalties for failing to do so. A public hearing has been scheduled for September 26, 2024.
Fact Sheet 2024-25 provides answers to FAQs regarding the §45Z Clean Fuel Production Credit. The FAQs center around registration requirements pursuant to Notice 2024-49 and address which entities must apply for registration, registration requirements for disregarded entities, and the ability of owners of disregarded entities to claim the credit.
IR-2024-187 alerts taxpayers to a scam circulating around social media promoting a “Self Employment Tax Credit” that does not exist. The credit that scammers are misrepresenting is the Credit for Sick and Family Leave, which is narrow in scope and for which many do not qualify. According to the alert, promoters claim that Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, may be used to incorrectly claim a credit based on employee wages and not as a self-employed individual. IRS Commissioner Danny Werfel states, “This is another misleading social media claim that’s fooling well-meaning taxpayers in thinking they’re due a big payday. People shouldn’t be misled by outlandish claims they see on social media. Before paying someone to file these claims, taxpayers should consult a trusted tax professional to see if they meet the very limited eligibility scenarios.”
- 1 https://s-corp.org/wp-content/uploads/2024/07/7-11-24-MSEC-Tax-Teams-Submission.pdf.
This newsletter features developing content that is subject to change at any time. It does not constitute legal or tax advice. Consult your professional advisors prior to acting on the information set forth herein.