Tax News Archives - Page 5 of 21

Framework For Biden’s Build Back Better Infrastructure Plan Announced

Posted on November 2021November 2021 by info

After months of negotiations, the White House has announced a framework for Biden’s Build Back Better infrastructure plan, a $1.75 trillion package of social infrastructure measures paid for by tax increases. The measures are in addition to those previously approved by the Senate in the transportation-related $1 trillion bipartisan infrastructure bill. In reaching the framework, both moderate and progressive Senate and House Democrats have been forced to compromise on certain priorities.

Spending Measures

Framework for President Biden’s Build Back Better infrastructure plan includes the following spending measures:

Extension of the childcare tax credit for one year (through 2022)
Extension of the refundable earned income tax credit and other investments in affordable housing
Universal and free preschool for three and four-year olds and additional childcare funding
Expanded home care for older Americans and people with disabilities
Expanded healthcare coverage, Medicare hearing benefits and lower healthcare premiums for certain Americans
Clean energy tax credits and certain climate change provisions
Expanded access to affordable high-quality education beyond high school
Provisions for immigration system reforms

Key provisions excluded from the announced framework include paid family leave and Medicare coverage for dental and vision benefits. The framework also does not include key climate change measures that would reward electricity plants that use clean energy instead of fossil fuels, nor does it include provisions that would allow Medicare to negotiate lower prices for prescription drugs.

Tax Measures

To pay for the social spending measures, the agreement includes the following tax increases:

A 15% corporate minimum tax on companies reporting over $1 billion in financial statement profits
A 1% surtax on corporate stock buybacks
A 15% country-by-country minimum tax on foreign profits of U.S. corporations, which would bring the U.S. in line with the recent global agreement announced by the OECD
A 5% surtax on individual incomes over $10 million, an additional 3% surtax on incomes over $25 million and expansion of the 3.8% Net Investment Income Tax
Increased IRS funding to support additional enforcement resources focused on pursuing unpaid taxes of wealthy taxpayers (those with incomes of at least $400,000 per year)

IRS Outlines Requirements For Research Credit Refund Claims

Posted on October 2021October 2021 by info

The IRS Office of Chief Counsel publicly released a memorandum [1] on October 15, 2021 highlighting the information that taxpayers need to provide when filing a refund claim involving the research credit under Internal Revenue Code Section 41 in order to meet the “specificity requirement” under Treas. Reg. § 301-6402-2(b)(1).

As a result of the memorandum, effective January 10, 2022, claims for refund based on the research credit must meet the IRS’ minimum validity standards or face a significant risk of rejection. Further, given the IRS’ current resource constraints and resulting lag time in initiating research credit claim reviews, the IRS may deem a claim for refund as invalid only after the statute of limitations for perfecting such a claim has expired.

Why this new guidance?

According to a related IRS release (IR-2021-203 dated October 15, 2021), the legal advice “is the result of ongoing efforts to manage research credit issues and resources in the most effective and efficient manner.” The release highlights that claims for the research credit comprise a substantial number of examined cases and consume significant resources for both the IRS and taxpayers.

Additionally, the Chief Counsel memorandum states, “requiring that certain specific facts be included with a claim allows the Service to screen for the likelihood of the taxpayer’s right to the refund being sought. This information helps the Service avoid paying refunds to taxpayers who have no factual support for their claim and helps the Service effectively allocate its limited resources to determining which procedurally compliant claims to examine.”

Requirements

The Chief Counsel memorandum provides that for a research credit claim for refund to be considered a valid claim and satisfy the specificity requirement, the taxpayer must, at a minimum, at the time the refund claim is filed with the IRS:

Identify all the business components to which the research credit claim relates for that year.
For each business component, identify all research activities performed and the names of the individuals who performed each research activity, as well as the information each individual sought to discover.
Provide the total qualified employee wage expenses, total qualified supply expenses and total qualified contract research expenses for the claim year (this may be done using Form 6765, Credit for Increasing Research Activities).

The memorandum also instructs taxpayers to identify “in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof.”

Significantly, the identification of the legal grounds and factual basis for a taxpayer’s credit claim is not considered conclusive proof that the taxpayer is entitled to the research credit. Although formal documentation is not required to be submitted, according to the memorandum, if a taxpayer does provide documents (including a credit study) with the claim, the taxpayer must specifically identify where in the documents the facts responsive to each of criteria listed above can be found. According to the memorandum, “[a] mere volume of documents will not suffice to meet a taxpayer’s obligation.”

The memorandum recommends that the Service reject as deficient any claim for refund relating to the research credit that does not include the information described above or that is not signed under penalty of perjury. According to the memorandum, these measures should eliminate the possibility that a court will find that the Service has waived the specificity requirement under Treas. Reg. § 301.6402–2(b)(1).

The IRS will provide a grace period (until January 10, 2022) before requiring the inclusion of this information with timely filed Section 41 research credit claims for refund. Upon the expiration of the grace period, there will be a one-year transition period during which taxpayers will have 30 days to perfect a research credit claim for refund prior to the IRS’ final determination on the claim.
However, the memorandum indicates that a rejection of a refund claim may preclude a taxpayer from amending or perfecting its claim if it did not satisfy procedural requirements and the statute of limitations to file a new refund claim expires prior to perfection of the claim.
Further details will be forthcoming; however, taxpayers may begin providing this information immediately.

Insights

The Chief Counsel memorandum has already generated significant controversy within the U.S. taxpayer community and will likely be challenged at the administrative level. However, Chief Counsel’s guidance here cannot be disregarded until such time it is modified or withdrawn.

Tax professionals should be aware that strict adherence to IRS minimum standards for research credit claims is critical to ensure claims are properly processed and not rejected without potential for future resolution. More than ever, thorough documentation of a taxpayer’s research activities is necessary to support research credit claims for refund and avoid costly future litigation.

Please contact your tax advisors to determine how this new guidance impacts pending research credit claims that: (i) have not yet been filed with the IRS; or (ii) have already been filed but that the IRS has not yet accepted or examined.

(1) Chief counsel memoranda are issued by the Office of Chief Counsel to Internal Revenue Service personnel who are national program executives and managers. The memos are issued to assist IRS personnel in administering their programs by providing authoritative legal opinions on issues. However, the memos cannot be used or cited as precedent.

SALT Deduction Cap, States Have No Constitutional Claims To Challenge

Posted on October 2021October 2021 by info

Salt Deduction Cap

On October 5, 2021, the United States Court of Appeals for the 2nd Circuit affirmed a New York federal district court and rejected four states’ constitutional challenges to the $10,000 limitation on the federal income tax deduction for state and local taxes paid by individuals. This was enacted as part of the 2017 Tax Cuts and Jobs Act (the SALT deduction cap).

Four states – Connecticut, Maryland, New Jersey and New York – argued that the SALT deduction cap is unconstitutional. This is because because the SALT deduction is constitutionally mandated by the 16th Amendment, and alternatively. Secondly, the cap violates the 10th Amendment because it coerces states to abandon their preferred fiscal policies. While the District Court and 2nd Circuit agreed the states had standing to sue the federal government, the District Court’s dismissal of the case for failure to state a claim on the merits was upheld and affirmed by the 2nd Circuit.

The 2nd Circuit agreed with the District Court that an unlimited or “significant” SALT deduction is not constitutionally mandated by the 16th Amendment. After a lengthy discussion on the history of income taxation in the United States, as well as the history of SALT deduction, the court determined that nothing in the text of the Constitution (specifically under the 16th Amendment) or the history of the SALT deduction mandates a full deduction.

Further, the 2nd Circuit concluded that the SALT deduction cap does not unconstitutionally infringe on state sovereignty. The states argued the cap coerces them to abandon their preferred fiscal policies. The 2nd Circuit responded that it “agree[s] with the District Court that ‘the bare fact that an otherwise valid federal law necessarily affects the decisional landscape within which states must choose how to exercise their own sovereign authority hardly renders the law an unconstitutional infringement of state power.’” States failed to prove that their taxpayers’ total federal tax burden is so high that states cannot fund themselves.

Finally, the 2nd Circuit dismissed the states’ claim that the SALT deduction cap violates the independent constitutional principle of equal sovereignty. The 2nd Circuit reasoned the cap had no effect on state sovereignty. This is because the SALT deduction cap applies to all states, and the plaintiff states benefitted most from the pre-TCJA SALT deduction.

Insights

It is unknown whether the four states will petition for a writ of certiorari to ask the U.S. Supreme Court to accept an appeal of their case. Many states have enacted elective pass-through entity tax workarounds. This is to mitigate the SALT deduction cap’s impact on partners and shareholders of closely-held businesses.
The SALT deduction cap is also being negotiated in Congress as part of the $1.5 trillion infrastructure bill. It is uncertain whether a provision related to the cap will be included in the final bill.