Expansion of energy tax credits under the Inflation Reduction Act

Discover how the IRA’s expanded energy tax credits offer substantial incentives for a range of projects, from solar power to energy storage. Delve into the specifics of these credits and learn how these changes can benefit project developers and innovators in the energy sector.

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Expansion of energy tax credits under the Inflation Reduction Act

Article | January 31, 2024 | Authored by KDP LLP

 

The Inflation Reduction Act (IRA) of 2022 ushered in an era of renewed interest in clean and renewable energy investments, earmarking $400 billion in federal funds for energy and climate projects. The IRA incentivizes a broad array of clean energy projects from personal endeavors like purchasing electric vehicles to larger-scale projects designed to impact entire communities. 

For project developers and industry innovators involved in energy storage technologies, microgrid controllers, fuel cells, geothermal initiatives, microturbines, and solar and wind technology, the IRA provides some significant tax incentives. 

Expansion of energy tax credits under the IRA

Energy tax credits have long been a lever for businesses to invest in sustainable energy solutions. With the IRA, these opportunities have been expanded considerably.

Initially introduced decades ago, the Investment Tax Credit (ITC) and Production Tax Credit (PTC) have evolved significantly over time. In a nutshell, the PTC is a subsidy for the production of clean electricity, while the ITC supports new investments in clean electricity installations. Generally, the PTC can be claimed by those generating electricity via solar, wind, geothermal, or hydroelectric technologies (among others). The ITC can be claimed by those investing in things like energy storage, fuel cells, and microturbines. It’s important to note that a given project can benefit from either the PTC or the ITC, but not both. 

The ITC started as a temporary 10% tax credit for non-fossil fuel energy property, while the PTC was introduced as an inflation-adjusted tax credit for electricity generated using wind or biomass systems. The IRA has not only extended the lifespan of these credits but has also introduced new definitions and provisions, making the credits more robust. 

Treasury proposes to amend several regulations

In late November 2023, the Treasury proposed to amend four provisions in the regulations. Notable changes include increased credit amounts for fulfilling prevailing wage and apprenticeship requirements, and special rules tailored to the current energy landscape. 

New Rate Structures for PTCs and ITCs

The IRA introduced a two-tier rate structure for both the PTC and ITC, offering a base credit and some additional bonus credits. The base credit for the ITC is worth roughly 6% of a project’s cost basis. For the PTC, credits are awarded on a kilowatt-hour basis but are roughly comparable to 6% of the project’s value like the ITC (a detailed calculation is beyond the scope of this article, so we will use a 6% base rate to simplify the example). However, by meeting labor standards, the credits can be boosted to 30%.

For example, an ITC-eligible solar power plant with a $1 million cost basis can receive a 6% credit ($60,000), or if it meets the new labor standards, it can receive a 30% credit worth $300,000. 

To meet the labor standards and receive the full credit, projects must meet prevailing wage and apprenticeship requirements. 

The prevailing wage requirement mandates that laborers and mechanics be paid the same local prevailing wages (which differ by state and region) paid on federal construction jobs. For ITC projects, all wages paid for the first five years of a project must be prevailing wages. For PTC projects, prevailing wages must be paid for the first ten years of a project. 

The apprenticeship requirement calls for a certain percentage of construction labor hours to be performed by an apprentice, and the percentage increases over time from 12.5% to 15%.

Bonus Credits for Special Categories

The PTC and ITC may qualify for additional credits (beyond 30%) depending on the project’s location and use of domestic materials. 

Energy community bonus: projects in designated ‘energy communities,’ including brownfields, certain statistical areas, and coal closure tracts, can qualify for this bonus. This is a bonus of up to 10% for developers locating projects in communities historically dependent on fossil energy jobs and tax revenues. This bonus can be applied to the PTC or ITC. 

Low-income communities’ bonus: exclusively applicable to the ITC, this bonus supports projects in low-income areas. A 10% increase is available to eligible solar and wind facilities installed in low-income communities or on Indian land, and a 20% credit increase is available to eligible solar and wind facilities that are part of a qualified low-income residential building or a qualified low-income economic benefit project. 

Domestic content bonus: this credit boosts projects using domestic materials. The credit requires that all iron and steel and at least 40% (increasing over time to 55%) of the cost of all manufactured products that are components of a project upon completion of construction must be produced in the US. 

These bonuses can be combined. For instance, the same qualifying solar power plant, if meeting all labor requirements in an energy community with domestic content, could be eligible for a 50% ITC.

Monetization of Tax Credits

The IRA offers novel ways for businesses to capitalize on their tax credits. Under the section 6417 direct pay mechanism, certain tax-exempt and governmental entities can elect to receive cash payments from the IRS in lieu of claiming tax credits. 

Under the section 6418 transferability mechanism, most taxpayers (other than tax-exempt and government entities) can instead sell all or a portion of their tax credits to an unrelated party in exchange for cash. The cash is neither includible in the income of the transferor nor deductible by the transferee. There is an IRS pre-filing registration process and special rules applicable to partnerships and S corps. 

This article is intended to provide a brief overview of proposed amendments to certain energy credits under the IRA. The world of energy tax credits is dynamic and complex, so it is advisable to speak with an expert advisor if you’re considered a qualified energy project. For more information, please contact our office.

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KDP Certified Public Accountants, LLP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
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Deadline for filing 2023 forms 1099 is near but beware of important changes

New electronic filing requirements, revised form 1099-NEC and new form 15397 present addional challenges for 1099 filers that may necessitate updates

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Deadline for filing 2023 forms 1099 is near but beware of important changes

ARTICLE | January 24, 2024 | Authored by RSM US LLP

Executive Summary:

As the Jan. 31 deadline for filing IRS forms 1099 rapidly approaches, filers are reminded of several small but important changes that have been published in the last few weeks that might affect your ability to file timely and may necessitate changes to your systems and processes. Specifically: 

  • On Jan. 8, 2024, the IRS published a new version of the 2023 Form 1099-NEC, Nonemployee Compensation, which is now a continuous use form, so make sure that you are using the latest version of the form.
  • In November 2023, the IRS published new Form 15397, which must now be faxed to the IRS to request additional time to furnish recipient copies of Forms 1099. An extension of time to file 1099s can still be requested by filing Form 8809 but form 15397 must be faxed as well to avoid penalties.
  • Starting Jan. 1, 2024, filers of 10 or more forms 1099 must file the forms electronically and may be subject to penalties if paper forms are filed unless a waiver is requested. 
  • To file 1099 forms electronically this year, filers must request a new IR-TCC code from the IRS, which can take up to 45 days to obtain. Old TCC codes issued prior to September 2023 are no longer valid, so filers should plan accordingly and may need to outsource the filing of forms. See prior alert here for details.
  • In December 2023, the IRS announced a one-year delay in implementation of the lower $600 filing threshold for third party settlement agents, including payment processors, ride share platforms, and others to file forms 1099-K. Instead, the filing threshold remains at $20,000 and 200 transactions for 2023 returns which means that filers may need to revise systems and processes to properly flag 1099-K reportable payments for 2023 and avoid over reporting. See prior alert for details. 

Additional details on new requirements appears below.

Deadline for filing 2023 forms 1099 is near but beware of important changes

IRS releases revised final continuous use Form 1099-NEC

On Jan. 8, 2024, the IRS published a revised version of the 2023 Form 1099-NEC. Form 1099-NEC is used for reporting compensation (such as fees, commissions, and other payments) made to U.S. persons who are not the filer’s employees. The January 2024 version of the form incorporates several changes from the previous draft 1099-NEC released in September 2023 and follows the IRS announcement to move the Form 1099-NEC to a continuous use basis, instead of single year forms updated each year.

Key changes are the following:

  1. The “2nd TIN Not” field which was removed from the September 2023 draft at the bottom of the form was added back to the form
  2. The tax year field was changed from “20__” where filers only needed to enter the last 2 digits of the year to just a blank line “____”

Additionally, the instructional note/preamble that is attached to the official form was updated to clarify that filers of 10 or more information returns are now required to file them electronically.

Companies that are filing Forms 1099-NEC in house should build in sufficient lead time and budget to address these changes to Form 1099-NEC. There are potential system errors that may arise for taxpayers/filers if the above changes are not made prior to preparing the 2023 forms 1099-NEC. Filers using third parties to prepare and file their forms 1099-NEC should also confirm that their software vendors have updated their systems for the latest version of the form published this month.

IRS publishes new Form 15397 for requesting extensions for recipient copies

The IRS recently published new Form 15397 in November 2023 which should now be used to request an extension of time to furnish recipient copies of information returns including forms 1099-NEC to each respective recipient. Filing form 15397 will extend the time to furnish recipient copies of Form 1099 to recipients by 30 days.

The deadline for furnishing recipient copies of 2023 Forms 1099-NEC to recipients is Jan. 31, 2024, while the deadline for furnishing recipient copies of Forms 1099-B, and 1099-S, and 1099-MISC (if amounts are reported in boxes 8 or 10) is Feb. 15, 2024.

If form 15397 is completed correctly and signed, and successfully transmitted to the IRS, the extended due date for furnishing the 2023 Forms 1099-NEC Recipient copies will be March 1, 2024, and the extended due date for filing Forms 1099-NISC, 1099-B, and 1099-S will be March 15, 2024. The form 15397 must be faxed to the IRS on or before January 31 each year at:

Internal Revenue Service Technical Services Operation

Attn: Extension of Time Coordinator

Fax: 877-477-0572 (International: 304-579-4105)

Please contact us if you have questions regarding your 1099 filing obligations and the impact of the changes discussed.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by Aureon Herron-Hinds, Paul Tippetts, Dustin Freeman and originally appeared on 2024-01-24.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2024/deadline-for-filing-2023-forms-1099-is-near-but-beware-of-import.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP Certified Public Accountants, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Protecting value with your compliance and response program

An integrated team of compliance and investigative professionals with the right technology can protect your reputation and profitability.

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Protecting value with your compliance and response program

ARTICLE | January 23, 2024 | Authored by RSM US LLP

Businesses with an eye on compliance know that the Department of Justice’s (DOJ) Criminal Division has recently released an update to the Evaluation of Corporate Compliance Program (2023 Guidance). Although this update is meant to assist prosecutors in evaluating and determining the adequacy and effectiveness of a corporation’s compliance program, the 2023 Guidance should be considered by in-house counsel, corporate compliance leaders and auditors as they administer and oversee their own programs, including their response to allegations of noncompliance, both in design and practice. For instance, recent regulation regarding clawback of management compensation due to noncompliance has been top of mind for executives and attorneys alike.

The importance of a robust compliance program cannot be emphasized enough in today’s complex regulatory and legal environment. The financial impact of settlements, fines and penalties for compliance violations are continually on the rise—and often on the front page of the news. All things considered, your company’s reputation, as well as current and future profitability, will be better protected when you have integrated compliance and investigations teams.

The case for integrated compliance and investigations teams

A sophisticated compliance program recognizes that (1) proactive compliance and (2) any resulting investigations into alleged noncompliance can each influence, complement and strengthen the other.

  1. A strong and effective compliance program lays the foundation for a healthy and ethical business operation. However, even the most robust ethics and compliance programs cannot eliminate all fraud and corruption risk. As such, while the occurrence and magnitude of misconduct can be minimized, it cannot be fully eliminated. When allegations of misconduct and noncompliance occur, companies can quickly determine the who, what, when, where, how and potentially why through deploying leading practices in conducting investigations.
  2. After misconduct or noncompliance is alleged or identified, well-executed investigations should be conducted that include root cause analyses to provide valuable feedback on required internal control and compliance program remediation, further enhancing the effectiveness of the corporate compliance program. The integrated cycle of identify—investigate—report—remediate across the compliance and investigations functions demonstrates the organization’s earnestness regarding its obligations toward compliance and legal issues.

What should companies focus on?

Compliance programs are not one-size-fits-all. Your organization should tailor your program to fit your needs and circumstances. However, based on recent cases resolved under the DOJ guidance, your company should consider how well your programs are designed to address four key elements critical to compliance programs. Addressing these issues will increase the chances of a more positive outcome when faced with compliance issues:

  1. Risk mitigation: Compliance frameworks are designed to identify and mitigate risks so corporations can adhere to relevant laws and regulations. Understanding the existing legal and regulatory landscape (both domestically and globally) facing your organization, coupled with a focus on communication and engagement, as well as conducting periodic risk assessments shaped by the evolving environment in which you operate, will increase your organization’s preparedness and reduce harm.
  2. Know and use your data: Understanding the information and data available to you, including where it resides and its limitations, is imperative to both assess compliance and respond to allegations of misconduct or noncompliance. In more mature compliance programs, the same data and technology utilized by management to make strategic decisions can be leveraged to identify key issues with compliance. Regulators have now come to expect continuous monitoring of key risk areas to mitigate the severity of compliance issues and limit their frequency.
  3. Investigation management drives reputation management: The rigor with which a business investigates misconduct allegations can demonstrate a company’s commitment to ethical conduct. Organizations that do not disclose all facts may lose credibility with regulators, enforcement agencies and their employees. By enhancing employee awareness of confidential reporting hotlines and other resources, including whistleblower protection rights, reputational harm can be mitigated by all employees within the organization.
  4. Consequence management: Finally, the objectives of any compliance and investigation effort should include limiting financial and reputational impact on the business. If a violation occurred, swift and meaningful action, based on the severity of the conduct and the pervasiveness of the issue, illustrates the thoughtful and strategic manner in which your organization has created an environment of compliance in spirit and practice.

Help to integrate

There are a variety of ways your organization can look to mature your compliance and investigations efforts with the help of external experience and insight.

Compliance program review and continuous improvement

An effective compliance program should evolve and adapt to the changes in the business, industry and any other relevant external circumstances. To that end, companies may periodically engage with external advisors to independently review and update their existing compliance program. Experience from outside your organization brings lessons learned from competitors, other industries and geographies to leverage against the specific compliance needs at issue, limiting risks of noncompliance with new industry standards, regulations and laws.

Gap analysis key factors to change

Third-party risk management (TPRM) and international compliance

Third-party resellers, vendors, suppliers, agents and contractors play vital roles in organizations in the global business environment. However, the use of third parties and their relationships introduces certain risks. In some cases, external entities can affect your company’s compliance status and its brand reputation. Risk mitigation begins with establishing and monitoring a TPRM program led by trained compliance advisors to ensure effective due diligence, mitigating potential risks associated with higher-risk external parties.

Third-party relationship management

For companies operating globally, navigating the complexity of international regulations and laws of foreign countries could be challenging. External advisors with a global network can help your company comply with diverse regulatory requirements and form law-abiding strategies abroad.

Investigation support

Without timely and thorough investigations of allegations of noncompliance, the effectiveness of a compliance program can be significantly diminished. Your organization should maintain relationships with experienced law and investigative firms to provide appropriate global subject matter experience when required. Your organization may lack well-established procedures, personnel or resources; the necessary tools and technology to conduct a thorough investigation; or sometimes, the stakes may simply be too high to go at it alone.

Post-investigation analysis and remediation recommendation

As part of the conclusion of any investigation, a thorough root cause analysis of noncompliance incidents is essential to address the underlying financial or operational issues. Internal controls and process management advisors have deep insights into the types of noncompliance activities and control failures in specialized industries. Advisors can perform the appropriate analyses, determine remediation efforts, assess the adequacy of your data and technology, and develop a prioritized, actionable work plan to remediate control deficiencies.

Post-investigation analysis and remediation recommendation

The risks, the expectations and the stakes for compliance and response have never been higher.  When you establish a team of integrated compliance and investigative professionals that deploy the right technology and outside resources when needed, you are positioned for future success reputationally and financially.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 373-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





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This article was written by RSM US LLP and originally appeared on 2024-01-23.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/financial-management/protecting-value-with-your-compliance-and-response-program.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

KDP Certified Public Accountants, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890

Tax framework agreement sets direction for potential business and individual tax relief

Section 174 expensing, a return to EBITDA for section 163(j), an extension of 100% bonus depreciation and disaster relief paid for by ending Employee Retention Credits (ERC)

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Tax framework agreement sets direction for potential business and individual tax relief

ARTICLE | January 19, 2024 | Authored by RSM US LLP

Executive summary 

Momentum continues to build towards a potential tax agreement that would couple an expanded child tax credit with a temporary reinstatement of certain TCJA-related business tax benefits, including:

  1. Research and development (R&D) expensing (section 174)
  2. Less stringent business interest limitations (section 163(j))
  3. Continuation of 100% bonus depreciation

To that end, proposed legislation H.R. 7024, the “Tax Relief for American Families and Workers Act of 2024” key tax writers in the Senate and the House, building upon a framework agreement released Jan. 16, that would further advance these provisions toward potential enactment. However, significant obstacles remain, including the need for buy-in from senior lawmakers, as well as the support (and vote) from enough lawmakers in both the House and the Senate to ensure passage. The framework also includes disaster relief provisions, enhanced section 179 expensing benefits, expansion of the low-income housing tax credit, and relief from double taxation for Taiwan residents. The proposals would be completely paid for by barring new employee retention credit (ERC) claims after Jan. 31, 2024. 

Discussion

Senate Finance Chairman Ron Wyden and House Ways and Means Chairman Jason Smith have proposed legislation that would temporarily postpone certain scheduled tax increases for the “big 3” business provisions that were enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA) in exchange for an expanded child tax credit. The Tax Relief for American Families and Workers Act of 2024 represents the culmination of a months-long negotiating process between key lawmakers, and the measure must now navigate a tricky political environment where Congress is faced with several competing priorities, and where action before the impending tax filing season is critical. The House Ways & Means Committee marked up, and ultimately approved by a 40-3 vote signifying strong bipartisan support, the legislative text on Friday Jan. 19, and the full House will likely take up the measure when they return from recess on Jan. 29, if not sooner. ?

Both the legislative text as well as the Joint Committee on Taxation’s summary of the measure provide additional details of the initial proposals, which may change as the bill advances through Congress. A summary of those initial proposals, as set forth in the framework, as well as our preliminary observations, is provided below. Further changes or modifications will be addressed as needed in subsequent insights from RSM. 

Deduction for research and experimental expenditures.?The framework delays the date on which taxpayers must begin capitalizing their domestic research or experimental costs and amortizing them over a five-year period, as required under the TCJA. Under the proposal, taxpayers would be able to deduct currently (rather than capitalize) domestic research or experimental costs that are paid or incurred in tax years beginning after Dec. 31, 2021, and before Jan. 1, 2026. Foreign research and experimental costs would continue to be capitalized and subject to amortization over a 15-year period.

Observation: Hope for restoration of full expensing for qualifying R&E expenditures under section 174 has been at the top of the wish list for many impacted businesses since the law change became effective in 2022 and is considered a critical component to the package. 

Less stringent business interest deduction limitation.?Under the framework, deductibility of business interest would increase for many taxpayers. The limitation or cap on business interest would revert to an amount based on an EBITDA approach (i.e., earnings before interest, taxes, depreciation, and amortization) , in place of the current more-stringent EBIT (i.e., earnings before interest and taxes) calculation. The provision would take effect for taxable years beginning after Dec. 31, 2023 (and, if elected, for taxable years beginning after Dec. 31, 2021), and before Jan. 1, 2026, thus allowing for potential retroactive treatment.

Observation: How a taxpayer would elect retroactive application for taxable years beginning after Dec. 31, 2021 is not specified in the legislation. Should this bill become enacted, taxpayers wishing to make the election would need to wait for additional procedures from the Treasury and IRS that specify how to make the election.

Observation: Where control of a business entity has changed in a sale (or other transaction), the framework’s retroactive aspects may give rise to business issues. Additional tax deductions retroactively available for either interest or for research and experimental expenditures can still provide tax benefit for the business after the sale. However, the transaction documents for the sale may restrict who can make the tax filings needed to pursue the tax benefit and may dictate whether the additional tax benefit could result in a purchase price adjustment, Taxpayers engaging in merger and acquisition activity should consider the provisions of their transaction documents prior to pursuing any retroactively available tax benefits.

Extension of 100% bonus depreciation. The provision extends 100% bonus depreciation for qualified property placed in service after Dec. 31, 2022, and before Jan. 1, 2026 (Jan. 1, 2027, for longer production period property and certain aircraft.)

Increased expensing of depreciable business assets. The provision increases the maximum amount a taxpayer may expense under section 179 for qualifying property to $1.29 million, reduced by the amount by which the cost of qualifying property exceeds $3.22 million. The $1.29 million and $3.22 million amounts are adjusted for inflation for taxable years beginning after 2024. The proposal would apply to property placed in service in taxable years beginning after Dec. 31, 2023.

Child tax credit. As currently proposed, the framework would expand and extend the child tax credit for three years and would modify the calculation of the refundable child tax credit to enable more families with multiple children to claim a larger credit before running into limits based on earned income. The framework would increase the current child tax credit of $2,000 per child for inflation in tax years 2024 and 2025. In determining their maximum child tax credit, taxpayers would be able to use earned income from the prior taxable year to the extent it exceeds the current year’s amount. The provisions on the child tax credit would be effective for tax years 2023 through 2025.

Observation: It remains to be seen whether proponents of an expanded child tax credit will view these changes as sufficient to meet their demands for a COVID-era equivalent credit, including full refundability, and whether proponents of adding work requirements to the credit will support this provision, or require additional modifications. ???? 

Increasing global competitiveness. The framework provides targeted and expedited relief from double taxation on US-Taiwan cross border investment through changes to the U.S. tax code Notably, it would provide certain treaty-like benefits for income from US sources that is earned or received by qualified residents of Taiwan, contingent on reciprocity to U.S. persons with income subject to tax in Taiwan. Such benefits would generally include (i) reduced withholding tax rates on interest, dividends and royalties; (ii) an increased permanent establishment threshold, and (iii) favorable tax treatment on certain wages of qualified residents of Taiwan that are performing personal services in the U.S. (subject to certain exclusions). The framework includes a provision that would authorize the President to consult with Congress and negotiate an agreement with Taiwan, as none currently exists. 

Observation: In broad brush, these provisions would allow the Biden Administration to negotiate and conclude an executive agreement that would contain provisions similar to those contained in a tax treaty that the U.S. might conclude with a new treaty partner. We expect that the agreement would contain provisions that would grant relief from double taxation including access to the U.S. competent authority.?It remains to be seen whether any future agreement(s) would provide benefits more advantageous than those available under the U.S.-China double tax treaty. Presumably, the agreement will include information reporting/exchange provisions as well.?

Assistance for disaster-impacted communities 

Casualty loss relief for certain disasters

The framework extends the rules for the treatment of certain disaster related personal casualty losses passed in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, including the elimination of the requirement that casualty losses must exceed 10% of adjusted gross income (“AGI”) to qualify for the deduction, to a potentially large amount of disasters. While the AGI limitation would be removed, each separate casualty would still be subject to a $500 floor (a very small limitation in the grand scheme). Further, the taxpayer would be able to take this casualty loss “above the line”, meaning even if they don’t itemize their deductions, they are allowed to claim the casualty loss in addition to the standard deduction. 

Observation: It is our understanding that this provision would relate to many, if not all, of the disasters listed on the IRS website, Tax relief in disaster situations | Internal Revenue Service, starting with the ones listed in 2020 through 2023 and any that occur within 60 days after the date of enactment of this proposal – so a significant amount of disasters. Any future disasters within this 60-day period must still be declared a major disaster by the President. This proposed legislation would provide much needed relief to Taxpayers who experienced casualty losses, especially those victims of Hurricane Ian, Hawaii Wildfires, California Storms and Wildfires, among many other disasters. 

Qualified wildfire relief payments

The framework also includes relief in the form of an exclusion from gross income for compensation for losses or damages resulting from qualified wildfires relief payments. Qualified wildfire relief payments mean any amount received as compensation for losses, expenses, or damages (including compensation for additional living expenses, lost wages (other than compensation for lost wages paid by the employer which would have otherwise paid such wages), personal injury, death or emotional distress) as a result of a qualified wildfire disaster that were not compensated by insurance or otherwise. A qualified wildfire disaster is defined as any federally declared disaster as a result of any forest or range fire. This provision applies to qualified wildfire relief payments received by the individual during taxable years beginning after Dec. 31, 2019 and before Jan 1, 2026. It should be noted that this provision is clear that no double benefit is allowed and as such, no deduction or credit shall be allowed for any expenditure to the extent the amount was excluded from income. Further, if the taxpayer uses these qualified payments on any property they shall not be allowed to increase their basis in the property. 

East Palestine (Ohio) disaster relief payments 

This provision provides necessary relief from the victims of the East Palestine Ohio train derailment insofar that relief payments will be treated as qualified disaster relief payments as defined in section 139(b). Section 139(b) allows these relief payments to be excluded from gross income. East Palestine Train Derailment Payments means any amount received by an individual as compensation for loss, damages, expenses, loss in real property value, closing costs with respect to real property (including realtor commissions), or inconvenience (including access to real property) result from the East Palestine train derailment if such amount was provided by (1) a Federal, State, or local government agency, (2) Norfolk Southern Railway, or (3) any subsidiary, insurer, or agent of Norfolk Southern Railway. East Palestine train derailment means the derailment of a train in East Palestine, Ohio on Feb. 3, 2023. This provision applies to payments received on or after Feb. 3, 2023.

More affordable housing. This provision of the framework seeks to increase the supply of affordable housing by increasing the ceiling on the state housing credit (for purposes of the low-income housing tax credit) for calendar years 2023 through 2025. This would allow states to allocate more credits towards affordable housing projects. In addition, the framework would lower the bond-financing threshold (as part of the tax-exempt bond financing requirement) to 30% for projects financed by bonds with an issue date before 2026, subject to a transition rule for certain buildings that already have bonds issued.

Employee retention credit. The framework would end the period for filing ERC claims for both 2020 and 2021 as of Jan. 31, 2024 and would beef up penalties on a “COVID-ERTC promoter” (as separately defined) who is aiding and abetting the understatement of a tax liability or who fails to comply with certain due diligence requirements relating to the filing status and amount of certain credits. While these changes would stop any claims from being filed before the standard period for filing ERC claims ends (April 15, 2024 and April 15, 2025), it would not have any retroactive effect for claims filed prior to Jan. 31, 2024. However, the framework would extend the statute of limitations period on assessment for all quarters of the ERC to six years from the later of the original filing or the date of the claim. This could potentially allow, for example, a claim filed on Jan. 1, 2024, for the second quarter of 2020, to be examined and adjusted until Jan 2, 2030. This would enable the IRS to examine and seek the return of ERC refunds for years to come. 

The proposed legislation also provides for an extension on the period of time to amend corresponding income tax returns on which employers may have reduced wage deductions to account for the prohibition on claiming ERC on wages deducted from income; however as currently drafted this additional extension seems to only apply to individual and corporate returns and not partnership returns. This proposal would bring parity to the period for making an adjustment to the wage deduction with the period of time the IRS has to make adjustments to the ERC claimed, correcting a mismatch between the limitations period currently in existence on the third and fourth quarters of 2021. 

Next steps

As indicated above, the House Ways & Means Committee marked up the bill on Friday, Jan. 19, where the measure passed by a very strong vote of 40-3 in favor. According to the House’s calendar, a recess is planned for the week of Jan. 22, with members returning Monday, Jan. 29 which happens to coincide with start of the tax filling season, as announced recently by the IRS. The next step would be for the full House to consider the measure on the floor, and if passed, would be sent to the Senate for consideration. Timing will be tight, however, as many lawmakers view Jan. 29 as a deadline for House passage. It is possible that timing could shift beyond this date somewhat to the extent significant progress has been made. There are no guarantees, however, and additional timing and procedural constraints could similarly surface in the Senate, where leading Republican Senators have expressed reservations, particularly around the child tax credit and have called for changes. This could further inject uncertainty into the process.  

It is important to keep in mind this is a very fluid and evolving development, and that ultimate passage of a tax bill is far from certain. Moreover, the provisions (and accompanying observations) described above are subject to potential change as the negotiation process moves forward. 

RSM US LLP’s Washington National Tax and Tax Policy team members are actively monitoring developments and will be issuing additional insights as warranted.

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This article was written by Matt Talcoff, Ryan Corcoran, Fred Gordon, Tony Coughlan and originally appeared on 2024-01-19.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2024/tax-framework-agreement-sets-direction-potential-business-individual-tax-relief.html

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