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2025 Outlook—Democrats Setting Battle Lines as 2024 Elections Loom: Though much of the attention on the expiration of key tax provisions of the Tax Cuts and Jobs Act (TCJA, Pub. L. 115-97) has been focused on the variety of options congressional Republicans could employ, as well as the multitude of scenarios concerning control of the White House and Congress after the November elections, congressional Democrats have been doing their own planning to prepare for 2025.

Supreme Court Issues Ruling in Closely Watched Repatriation Tax Case: On June 20, the Supreme Court issued a decision in Moore v. United States, a case relating to the mandatory repatriation tax (MRT) enacted as part of the Tax Cuts and Jobs Act (TCJA). The MRT requires U.S. shareholders of controlled foreign corporations (CFC) to pay a one-time toll charge on the previously untaxed earnings of the CFC. The tax applies to earnings from a CFC, even if they had not been distributed to U.S. shareholders. The provision was included in TCJA as part of the transition from a worldwide to a quasi-territorial tax system for U.S. companies and their shareholders. The case was initially filed by Charles and Kathleen Moore, who invested $40,000 in the Indian farming supply company KisanKraft. Under the MRT, the Moores were required to pay $14,729 on KisanKraft’s previously deferred taxable income of $132,000.

Treasury Department, IRS Issue Guidance on Prevailing Wage and Apprenticeship Requirements: On June 18, the Treasury Department and Internal Revenue Service (IRS) issued final regulations implementing the prevailing-wage and apprenticeship (PWA) requirements applicable to most energy-tax incentives enacted as part of the Inflation Reduction Act (IRA). For taxpayers that pay workers area-specific prevailing wages—as determined under existing Davis-Bacon labor standards—and use registered apprentices for the construction, alteration and repair of qualified clean-energy property, the taxpayer may increase the base amount of an applicable IRA energy incentive by five times. The PWA requirements apply to the tax incentives provided under sections 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, 48E, and 179D. For most credits, however, a taxpayer is not required to meet the PWA requirements in the case of certain small energy facilities with a nameplate capacity of less than 1 megawatt, or if the facility began construction before Jan. 29, 2023.

IRS Announces Shift in ERTC Claims Processing Practices as Backlog Swells: On June 20, the Internal Revenue Service (IRS) announced that the agency would begin denying claims for the Employee Retention Tax Credit (ERTC) considered “high risk,” while processing claims deemed lower risk, citing the results of an internal review conducted over the past year. The IRS has estimated that between 10% and 20% of ERTC claims show “clear signs” of being erroneous and the agency will begin to systematically deny such claims. Between 60% 70% show an “unacceptable level of risk” that the IRS will conduct additional analysis on before deciding whether to accept or deny those claims. The credit was enacted by the CARES Act (Pub. L. 116-136) as an incentive for companies to keep employees on the payroll during the COVID-19 pandemic, but has become a hotbed for erroneous claims due to aggressive marketing promotions and fraudulent actors. Due to ERTC fraud, the agency had announced a moratorium on claims processing in September 2023, and as a result, the number of outstanding ERTC claims has grown to 1.4 million, according to IRS Deputy Commissioner Douglas O’Donnell. He added that agency initiatives allowing taxpayers to withdraw an outstanding claim or pay back an erroneous claim have also not seen much take-up, with only about 9,000 taxpayers utilizing those programs.

CBO Estimates Surge in Individual Tax Collections If TCJA Expires: On June 18, the Congressional Budget Office (CBO) released a report finding that the expiration of key tax provisions of the Tax Cuts and Jobs Act (TCJA) would lead to an increase in individual tax collections by 10% in 2025 and 11% in 2026. This increase is about $100 billion higher than previous CBO projections of collections for 2026 and 2027, with total revenues of $3.1 trillion now expected in 2027. CBO attributed a significant portion of the increase to the reduced threshold for the estate and gift taxes should the TCJA-set thresholds expire, as revenues from these taxes are set to grow by 40% in 2027. The report also notes that the cost of implementing the clean vehicle credits in the Inflation Reduction Act (IRA, Pub. L. 117-169) is expected to become more expensive over the next 10 years.

House, Senate Republicans Introduce Bills Exempting Tips from Federal Taxation: On June 20, Sen. Ted Cruz (R-TX) introduced the “No Tax on Tips Act” (S. 4621), which would exempt cash tips—including tips received via credit and debit card charges and checks—from federal income taxes by establishing a full deduction for tip income. This deduction would be available to taxpayers regardless of whether they elect to take the standard deduction or choose to itemize. The bill comes as a proposal echoing former President Trump’s campaign speech in Nevada on June 9, where he raised the issue as a potential tax policy proposal. Sen. Cruz dismissed the idea that the proposal could increase the federal deficit by at least $250 billion over the next decade, instead blaming the increased deficit on excessive spending. The bill was co-sponsored by Sens. Steve Daines (R-MT), Kevin Cramer (R-ND) and Rick Scott (R-FL). Similar legislation exempting tips from federal taxation (H.R. 8785) was introduced in the House by Reps. Thomas Massie (R-KY) and Matt Gaetz (R-FL).

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