Debt-Limit Increase Discussions, Taiwan Tax-Treaty, Energy & Solar, and More

Debt-Limit Increase Discussions Commence After Negotiators Mark Their Turf. President Joe Biden met with congressional leaders at the White House earlier this afternoon, May 9, to discuss increasing the debt limit and simultaneous legislative action on deficit reduction. House Speaker Kevin McCarthy (R-CA), House Minority Leader Hakeem Jeffries (D-NY), Senate Majority Leader Chuck Schumer (D-NY) and Senate Minority Leader Mitch McConnell (R-KY) each staked out their positions and views on the negotiations.

McCarthy solidified his initial negotiating position with the House’s passage of the GOP debt limit increase bill, the Limit, Save, Grow Act, on April 26. The bill is estimated to reduce the deficit by more than $4 trillion over the next decade but would repeal several key elements of the Biden administration’s legislative agenda. McConnell supported McCarthy’s position, stressing that the only solution was for Biden and McCarthy “to come together and solve the problem.” In fact, 43 Senate Republicans signed a letter pledging not to support cloture on a bill that does not include significant spending reductions in addition to the debt limit increase.

Both Democratic leaders lined up behind Biden, criticizing the spending reductions and tax increases proposed in the House debt-limit bill and calling on Republicans to support a clean increase in the federal debt limit.

The House Republicans’ bill includes a number of spending and policy initiatives that would reduce the federal deficit. Brownstein provides odds on whether each proposal is likely to be included in any final legislation.

Senators Introduce Taiwan Tax-Treaty Legislation. Sens. Bob Menendez (D-NJ), Jim Risch (R-ID), Chris Van Hollen (D-MD) and Mitt Romney (R-UT) introduced legislation, (S. 1457), that would allow for congressional consideration of a tax agreement between the American Institute in Taiwan (AIT) and the Taipei Economic and Cultural Representative Office (TECRO) and would authorize President Joe Biden to sign a tax treaty with Taiwan. Semiconductor manufacturers currently face double taxation from business operations in the United States and Taiwan. A tax treaty between the two countries would address that issue and, presumably, create a formal mechanism for resolving disputes. No immediate action is planned on the legislation. This legislation follows the CHIPS Act of 2022, which included a broad range of incentives to support the domestic manufacture of semiconductors.

Pillar Two Implementation Developments. The implementation of the Organisation for Economic Co-operation and Development (OECD) Pillar Two global-minimum tax regime continues with numerous countries in the European Union, including Germany, beginning to consider enacting legislation. However, the OECD is still considering various aspects of Pillar Two. John Merrick, senior counsel with the IRS Associate Chief Counsel (International) Office, said at the American Bar Association Tax Section Meeting last week that the OECD is reconsidering its proposed rule on intercompany loans under Pillar Two. Currently, the proposed rule disallows any interest expense for a loan made by a multinational from a business unit in a high-tax country to a business unit in a low-tax country. In addition, the high-tax entity’s income remains the same. According to Merrick, who is also a delegate to the OECD group that works on Pillar Two, the rule is meant to be more narrowly applied than taxpayers are reading it.

Additional Interim Guidance Expected on Corporate AMT. Treasury Department and IRS officials appearing at the American Bar Association Tax Section Meeting on May 5 indicated that additional interim guidance is likely on depreciation issues and accounting-method changes under the new 15% corporate alternative minimum tax (AMT) adopted last year as part of the Inflation Reduction Act. Timothy Powell, tax policy advisor at the Treasury Department, offered that the guidance may provide additional clarity on the treatment of certain dispositions, noting that “I do think it probably ought to follow the tax disposition event because that’s when you stop depreciating it for tax.”

According to Jo Lynn Ricks, with the IRS Office of Associate Chief Counsel (Income Tax and Accounting), the agency is also working to address certain changes in accounting methods, such as adjustments under section 481 of the tax code, to address the differing treatment under financial-statement and tax accounting rules. The guidance would supplement two prior notices—Notice 2023-7 and Notice 2023-20—that the IRS issued earlier this year on the new minimum tax. Proposed regulations are expected later this year.

Guidance on Amortization of R&E Expenses Possible This Year. Treasury Department officials confirmed on May 5 that guidance on the amortization of research and experimentation (R&E) expenses under section 174 of the tax code is in the works. The 2017 Tax Cuts and Jobs Act shifted the immediate deductibility of research expenses to a five-year amortization regime beginning in 2022.

Speaking at the American Bar Association May Tax Section Meeting, Timothy Powell, with the Treasury Department’s Office of Tax Policy, also indicated that the department and IRS are considering guidance that would address the interaction of the new R&E amortization requirement and the treatment of long-term contracts under section 460 of the tax code. Industries with long manufacturing and construction lead times (e.g., aerospace and defense) typically use the long-term contract method to align income and expenses with the percentage of the project’s completion, rules that predated the 5-year amortization of R&E expenses.

The timing for guidance on the R&E amortization requirement remains unclear but appears unlikely before the Oct. 16 deadline for filing calendar year 2022 tax returns.

Second Round of Advanced Energy Project Credit Allocations Expected in 2024. Jennifer Bernardini, an attorney-advisor in the Treasury Department’s Office of Tax Policy, indicated that the second round of allocations under the section 48C advanced energy project tax credit is expected to be made in 2024. The tax credit program, which requires interested parties to apply for a portion of the credit allocation, was originally enacted in 2009. The program was revitalized as part of the Inflation Reduction Act with $10 billion of credits allocated to qualifying taxpayers, of which $4 billion is set aside for advanced energy projects in designated energy communities.

Speaking at the May American Bar Association Tax Section Meeting, Bernardini noted that concept papers for the first round of the 30% tax credits are due between May 31 and July 31 of this year, with $4 billion of credits projected to be allocated, including $1.6 billion for projects in qualifying energy communities. The Treasury Department and IRS issued initial guidance on applications for the program in Notice 2023-18 on Feb. 13, with allocations for the program expected to be made in two tranches through next year.

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