Here’s a look at recent tax-related happenings on the Hill, including a look at campaign promises from the presidential hopefuls.
Lately on the Hill
Campaign Tax Promises May Be Falling Short of Reality
Presidential candidates are throwing deficit-deepening tax proposals against the wall to see what sticks with voters and are leaving analysts wishing for reality.
At a Nevada rally featuring Vice President Kamala Harris, the candidate made a promise triggering déjà vu for supporters of former President Donald Trump: “It is my promise to everyone here when I am president, we will continue our fight for working families of America, including to raise the minimum wage and eliminate taxes on tips for service and hospitality workers.”
In June, Trump said this at his own rally in Nevada: “For those hotel workers and people that get tips, you’re going to be very happy because when I get to office, we are going to not charge taxes on tips.”
Making a no-tax-on-tips promise is not the only similarity between the candidates. They also have not addressed the cost of fulfilling this promise.
Shortly after Trump’s remarks, the Committee for a Responsible Federal Budget, a nonpartisan group concentrated on fiscal policy impact, estimated that eliminating income and payroll taxes on tip income would reduce federal revenues by a staggering $150 to $250 billion over 10 years.1 The estimate is slightly reduced if related provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) are extended beyond 2025 to $125 to $225 billion.
When factoring in the likely shift made by employers and employees to a lower base pay and higher tip income, the estimate of decreased revenues balloons upwards of $500 billion.
Harris’ “one up” to not only eliminate taxes on tips but also increase the minimum wage also was estimated by the committee to increase deficits by $100 to $200 billion over 10 years and upwards of $325 billion after considering behavioral changes.2 The decreased estimate as compared to the estimate of Trump’s proposal is explained: “Based on communications with the Harris campaign, tips would be exempt from the income tax but remain subject to the payroll tax under the proposal; the campaign also told the Washington Post that Vice President Harris would work with Congress to establish an income limit and various guardrails on the exemption of tip income from taxes.”
Republican vice-presidential candidate JD Vance made his own eye-popping proposal on CBS’ “Face the Nation.”3 In the interview, Vance said he and Trump support a bigger child tax credit: “I’d love to see a child tax credit that’s $5,000 per child.” The current maximum credit per child is $2,000 and at its height during the pandemic it still only reached $3,000 to $3,600, depending on the age of the child. The credit is set to drop to $1,000 after 2025.
When asked at what income threshold he would like to see the credit “kick in,” he seemed to reject the notion and instead wants a credit for all families, no matter their income. “I think you want it to apply to all American families. I don’t think that you want this ... massive cut off for lower income families, which you have right now. You don’t want a different policy for higher income families. You just want to have a pro-family Child Tax Credit,” he said.
Gregory Korte with Bloomberg Tax reported comments made by Erica York of the Tax Foundation of the candidate’s proposals: “We’re not dealing with the elephant in the room, which is the expirations of the Tax Cuts and Jobs Act. It’s scattershot, and it’s really detached from reality. I wish we were in a situation where they were trying to one up each other on serious tax proposals. But instead the entire discussion is on the silly side of things.”
Harris Releases Economic Proposals
Not to be outdone by the recent Republican proposal to increase the Child Tax Credit, Harris and her running mate, Gov. Tim Walz, released their economic agenda on Friday.4 In addition to providing undefined tax incentives to homebuilders to build starter homes and affordable rental housing, $25,000 down-payment support to first-time homebuyers, and canceling $7 billion of medical debt, the candidates also would expand the Child Tax Credit to $3,600 per child and $6,000 for newborns.
The agenda states, “Vice President Harris and Governor Walz will work with businesses, entrepreneurs, workers, and all stakeholders to drive an economy that creates opportunity and ensures stability and security for everyone. They believe competition is the lifeblood of our economy, and they will build the confidence and certainty that helps businesses innovate and grow. They will also fulfill their commitment to fiscal responsibility, including by asking the wealthiest Americans and largest corporations to pay their fair share—steps that will allow us to make necessary investments in the middle class, while also reducing the deficit and strengthening our fiscal health.”
The Judicial Report
Taxpayer argues “limited partner, as such” was incorrectly interpreted by the U.S. Tax Court in a limited partner exclusion ruling. Sirius Solutions, LLLP v. Commissioner, No. 24-60240.
In a brief, filed in the Fifth Circuit by Sirius Solutions, LLP, appellants argue that the Tax Court should have interpreted the term “limited partner” consistent with its ordinary meaning under state law in its decision in Soroban Capital Partners v. Commissioner.
The limited partner exception of Section 1402(a)(13) relating to the exclusion of distributive shares of partnership income or loss in net earnings subject to self-employment tax does not apply to a partner who is limited in name only, the Tax Court ruled in late 2023 in Soroban. Although the partner may be considered limited in a state-law limited partnership, a functional analysis test must be applied to determine if, in fact, a partner is a limited partner for purposes of this exception.
Sirius disagreed with the Soroban ruling but conceded that the functional analysis test would not qualify its partners as limited partners. In consequence of the Soroban ruling, Sirius requested in its own case with the Tax Court that a decision be made in the IRS’ favor so it could proceed with an appeal to the Fifth Circuit.
In the brief, Sirius lays out several reasons why the Tax Court ruled in error. Particularly, in defining “limited partner, as such,” as found under §1402(a)(13), the court decided the meaning of the phrase refers to a partner that is “functioning as” a passive investor. Sirius disagrees with the interpretation which changes the ordinary meaning of “limited partner” to “passive investor.” Sirius contends “as such” is properly used as a reference to an antecedent. In other words, “limited partner, as such” means “limited partner, as a limited partner.”
The argument suggests that “as such” was a necessary addition to the statute as a distinguishing feature since a partner can both be a general partner and a limited partner. “Absent this language,” the brief states, “the statute would be ambiguous as to whether a limited partner’s distributive share would be exempt if that partner was also a general partner.”
The brief concludes, “[The Tax Court’s interpretation] disregards the ordinary meaning of both ‘limited partner’ and ‘as such,’ violates a fundamental canon of statutory construction by rendering the carve-out for ‘guaranteed payments’ meaningless, erroneously relies on legislative history, and applies irrelevant case law involving non-state limited partners.”
From the Treasury & IRS
Reopening of the ERC Voluntary Disclosure Program
The IRS has announced (Announcement 2024-30) a second go at the Employee Retention Credit (ERC) Voluntary Disclosure Program. Participants will have until November 22, 2024 to file applications via Form 15434.
The ERC was introduced during the COVID-19 pandemic to incentivize businesses to continue to pay employees while experiencing a decline in gross receipts or an inability to operate due to a governmental order during the 2020 and 2021 tax years. The generous credit became rife with fraud when scammers began filing erroneous claims for businesses even when some did not meet the credit’s requirements.
The first ERC Voluntary Disclosure Program ran from December 2023 to March 22, 2024 and allowed businesses to rescind improper claims to avoid penalties and litigation by the IRS. According to the IRS, the first round attracted more than 2,600 applicants that disclosed more than $1 billion worth of credits.
This second round is less generous than the first, as was promised by the IRS. Rather than requiring ERC recipients to repay 80% of the credit, second-round participants must repay 85% and are limited to claims filed for the 2021 tax period. Eligible employers must have received the refund or credit prior to August 15, 2024.
The IRS also announced (IR-2024-212) plans to mail an additional 30,000 recapture letters to claimants and thousands more to be sent this fall. Recently, the IRS mailed more than 28,000 disallowance letters for pending claims that were deemed to be high risk. It also has identified 50,000 valid claims that will be processed in the short term.
The IRS urges businesses (IR-2024-213) that claimed the credits to review the ERC eligibility requirements and to contact a trusted tax professional to help determine whether the ERC Voluntary Disclosure Program may be right for them.
“We recognize well-meaning businesses are caught up in this,” stated IRS Commissioner Danny Werfel, “and we are taking important steps to help them. This includes reopening the Voluntary Disclosure Program as well as getting more payments out to qualifying businesses.”
Released Guidance
Proposed Regulations (REG-111629-23) provide guidance on the time for making and revoking certain elections relating to foreign currency gain or loss.
The IRS has released corrections to several final regulations, including T.D. 9998, Increased Amounts of Credit or Deduction for Satisfying Certain Prevailing Wage and Registered Apprenticeship Requirements; T.D. 9988, Elective Payment of Applicable Credits; and T.D. 10000, Gross Proceeds and Basis Reporting by Brokers and Determination of Amount Realized and Basis for Digital Asset Transactions.
Revenue Ruling 2024-17 has been issued providing the September 2024 various rates for federal income tax purposes, including the applicable federal rates (AFR), adjusted AFR, adjusted federal long-term rate, the long-term tax-exempt rate, percentages for determining the low-income housing credit, and the AFR for determining the present value of an annuity.
Notice 2024-62 has been released with guidance on the corporate bond monthly yield curve, spot segment rates, 24-month average segment rates, and the interest rate on 30-year Treasury securities.
IR-2024-207 announces relief for individuals and businesses affected by severe storms and flooding in 25 Minnesota counties. These taxpayers have until February 3, 2025 to file tax returns and make tax payments.
IR-2024-209 announces relief for individuals and businesses affected by Hurricane Debby in all counties of Vermont. Previously, the IRS had extended relief to other states affected by the hurricane, including South Carolina and to certain counties of North Carolina, Florida, and Georgia. Affected taxpayers have until February 3, 2025 to file tax returns and make tax payments.
IR-2024-210 encourages qualifying businesses; tax-exempt organizations; and state, local, and Indian tribal governments to complete the pre-filing registration process now for projects placed in service in 2023 if they plan to claim elective pay. Elective payment is an option for claimants of IRA clean energy or CHIPS credits to get a benefit from the credit even if they do not have a tax liability to apply the credit. The IRS recommends eligible taxpayers complete the pre-filing registration 120 days prior to filing their tax returns.
- 1“Donald Trump’s Proposal to Exempt Tip Income from Federal Taxes,” crfb.org, June 16, 2024.
- 2“Kamala Harris’s Plan to Exempt Tips from Taxes and Raise the Minimum Wage,” crfb.org, August 12, 2024.
- 3“CBS News Transcript: Sen. JD Vance on “Face the Nation with Margaret Brennan,” Aug. 11, 2024,” msn.com.
- 4https://mailchi.mp/press.kamalaharris.com/vice-president-harris-lays-out-agenda-to-lower-costs-for-american-families.
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.