Here’s a look at recent tax-related happenings on the Hill, including a revised continuing resolution to fund the federal government past October 1.
Lately on the Hill
Republicans Back Off on Voter ID Requirements to Pass Government Funding
A revised continuing resolution to fund the federal government beyond the October 1 shutdown has been offered and is expected to pass in the House and Senate this week.
The original bill failed in the House last week in a 220-to-202 vote. It was expected to fail as the funding legislation was paired with unrelated voter verification provisions encouraged by presidential candidate Donald Trump. The legislation also faced resistance due to the length of the temporary funding, which would have retained 2024 spending levels through March 28, 2025.
The new bill does not include the voter identification requirements and extends 2024 fiscal year spending levels until December 20, 2024. House leadership will proceed with the bill under “suspension of the rules,” an expedited process requiring a two-thirds majority vote before sending it to the Senate.
Trump Reverses Course With Plans to Restore SALT Deduction
At a Long Island campaign rally, Trump pitched an unexpected tax proposal—to reverse the cap on state and local tax (SALT) deductions. The cap was introduced as part of his landmark Tax Cuts and Jobs Act (TCJA) enacted in 2017 during his presidency.
The cap provided some funding for the tax cuts while rankling taxpayers in high-tax states as they saw their federal tax deductions for SALT shrink.
Trump said at the campaign event, “I will cut taxes for families, small businesses, and workers, including restoring the SALT deduction, saving thousands of dollars for residents of New York, Pennsylvania, New Jersey and other high-costs states.”
Ever since its inception, states have looked for ways around the limitation. Many states enacted tax regimes allowing businesses treated as pass-through entities to pay state taxes on their income, thereby providing a federal deduction for the taxes and crediting the owners’ individual state tax liabilities.
The cap is due to sunset at the end of 2025 along with many other TCJA provisions. Many Republicans had called for its extension as a means to fund other tax-cut initiatives and with a desire to limit what many of them view as a federal subsidy for high-tax states.
The Committee for a Responsible Federal Budget has estimated that ending the SALT cap would increase the cost of extending the TCJA by $1.2 trillion over a decade and largely benefit those making more than $400,000 per year.1
Bipartisan Bill Seeks to End ERTC Claims Processing
A Senate trio has introduced legislation to increase penalties for unscrupulous promoters of fraudulent Employee Retention Tax Credit (ERTC) claims and suspend the processing of claims filed post-January 31, 2024.
In a press release from the bill’s authors, Sens. Mitt Romney (R-UT), Thom Tillis (R-NC), and Joe Manchin (I-WV) stated, “The ERTC has been highly susceptible to fraudulent schemes—costing taxpayers nearly 200% more than anticipated and adding an estimated $230 billion to the national debt through Fiscal Year 2023. By eliminating the ERTC, the senators’ bill would save taxpayers an estimated $79 billion over 10 years.”
The ERTC early termination and increased penalties initiative was originally presented as part of the Tax Relief for American Families and Workers Act, which overwhelmingly passed in the House last spring but stalled in the Senate. Certain bipartisan aspects of the failed act, such as tax relief for Taiwan, disaster relief, and ERTC cutoff, were expected to be untethered from the controversial bill, increasing likelihood of their passage.
“Fixing the national debt will require a lot of tough choices … but this isn’t one of them,” stated Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “Congress should promptly address the massive fraud and cost overruns facing the [ERTC], and Senators Romney, Tillis, and Manchin deserve credit for putting forward a bill to do just that.”
The Judicial Report
Opening Briefs Filed in Limited Partners Tax Court Case. Soroban Capital Partners, L.P. v. Commissioner, T.C., No. 16217-22.
Opposing parties in Soroban filed briefs offering their positions on the functional analysis test for limited partners.
In late 2023, the U.S. Tax Court ruled that the limited partner exception under 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 as designated under state law. 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.
In particular, the court defined the statutory phrase “limited partner, as such,” as referring to a partner who is “functioning as” a passive investor. The court explained that a limited partner determination should be made by applying a test similar to the test detailed in Renkemeyer, Campbell, and Weaver, LLP v. Commissioner.
In its brief, Soroban argues that the pertaining code section and legislative history “make clear” that an individual can be considered simultaneously a general partner and a limited partner. Three individuals identified in the case “did not manage or control Soroban in their capacities as limited partners, and those individuals each received substantial compensation that was subject to self-employment tax. Therefore, the remaining earnings allocated to those individuals by Soroban were properly reflected as earnings from their equity interests as limited partners in Soroban, which earnings are not subject to self-employment tax.”
The commissioner highlighted in its brief the individuals’ extensive involvement in the business by providing investment advice. Each contributed more than 2,000 hours a year, had oversight of employees, and had the authority to sign documents. Only one of the partners contributed assets to the company, which “were small compared to Soroban’s income from its investment services.”
“Given the above and based on the record in the case,” the commissioner’s brief concluded, “there is no dispute that the Principals were direct and active participants in Soroban’s business, and their distributive shares were not a return on an investment.”
From the Treasury & IRS
ERTC Appeal Period Extended
The IRS has extended the period to appeal a denied employee retention credit from the normal 30-day time frame to two years. Last summer, thousands of Letters 105-C “Disallowance of the Employee Retention Credit” were issued to taxpayers denying claims for the ERTC that the IRS deemed ineligible.
Filing an appeal, however, does not extend the time to file suit—which still must be done within two years. The IRS also reminds taxpayers that a refund cannot be issued after the two-year period, so if a decision by the IRS has not been made on an appeal or a refund has not been paid by the IRS after a favorable decision is made, a taxpayer would need to file suit to extend the two-year period or preserve the ability to receive the refund.
Instructions to file an appeal and the required documents to include can be found on the IRS’ website.
Released Guidance
Proposed regulations (REG-118269-23) regard the federal income tax credit under the Inflation Reduction Act of 2022 for certain costs relating to qualified alternative fuel vehicle refueling property that is placed in service within a low-income community or within a non-urban census tract.
Notice 2024-64 modifies Notice 2024-20, 2024-7 I.R.B. 668, relating to the alternative fuel vehicle refueling property credit under §30C of the Internal Revenue Code by updating the mapping tools referenced in §§5.02 and 5.03 of Notice 2024-20 and extending the period to which §5.03 of Notice 2024-20 applies.
Notice 2024-68 provides the 2024–2025 special per diem rates for taxpayers to use in substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home.
Revenue Ruling 2024-21 has been issued providing the October 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.
Revenue Procedure 2024-37 provides guidance to issuers of tax-exempt and other tax-advantaged bonds regarding the procedures for filing claims for recovery of overpayments of amounts paid to the U.S. with respect to the rebate requirement under §148(f) for excess investment earnings, the penalty in lieu of rebate provisions under §148(f)(4)(C)(vii) and (viii), or the yield reduction payment provisions under §1.148-5(c).
Notice 2024-67 provides 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-2024-241 announces relief for individuals and businesses affected by Tropical Storm
Debby in certain counties of Pennsylvania. These taxpayers have until February 3, 2025 to file tax returns and make tax payments.
FS-2024-30 updates frequently asked questions for the Premium Tax Credit. The update includes a question concerning the affordability of employer coverage for employees and their family members.
Upcoming Webinar
Between the election and the 2025 legislative sunsets, there is much to consider in the tax world. Join Forvis Mazars for a complimentary webinar as we provide an overview and planning considerations with these upcoming events in mind. Head into the year-end with information you and your business need to know. To register, click here.
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.
- 1“SALT Cap Expiration Could Be Costly Mistake,” crfb.org, August 28, 2024.