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TAX TAKE: New Year, New Reality: Divided Congress Means Divided Agendas and Focus on Guidance

Tax Alert

Happy New Year! As we turn to 2023, let's take a first look at the themes developing for this year's tax legislative agenda.

Divided Government. To say that having a Republican-controlled House and a Democrat-controlled Senate will temper tax legislation in 2023 is a vast understatement. It is unclear what tax legislation the parties will be able to agree to, if any. Even if there is an agreement on some potential tax relief, revenue offsets will certainly be an issue with Republicans favoring spending cuts and Democrats favoring tax increases.

Election Season Starts Early. Any tax legislation will be considered through the lens of the 2024 presidential and congressional elections. Look for messaging bills from both parties laying out their tax agendas – Republicans will focus on repeal of Inflation Reduction Act (IRA) provisions and extension of the Tax Cuts and Jobs Act (TCJA) relief provisions for individuals set to expire at the end of 2025. Democrats will likely continue proposing social spending programs funded by tax increases on the wealthy and large corporations. 

Unfinished Business. Hopes for a tax title on the year-end Consolidated Appropriations Act (CAA) were dashed as Democrats and Republicans could not agree on an extension of the expanded child tax credit in exchange for legislation addressing expiring TCJA provisions affecting corporate taxpayers – namely the expensing of research and development (R&D) expenditures, interest expense deductibility, and bonus depreciation. Supporters of these provisions will be looking for opportunities where they can be addressed (hopefully with retroactive effect) in 2023.

Looking for Vehicles. A stand-alone tax bill or reconciliation bill is unlikely under divided government, so any potential tax legislation will need to find a moving legislative vehicle – legislation addressing the debt limit, an anticipated farm bill, or a Federal Aviation Administration (FAA) reauthorization bill may be targeted to add a tax title. 

Waiting on the Blue Book. Given the lack of contemporaneous legislative history, all eyes will be on the Joint Committee on Taxation's (JCT) Blue Book to provide an explanation of the tax provisions included in the IRA and the CAA. This will not only guide the administrative guidance process but also identify potential technical corrections. It is expected to be published soon.

Guidance Dominates. Given the anticipated lack of legislative activity, focus will turn to the administrative guidance process. The Internal Revenue Service (IRS) has already issued initial guidance on the IRA's corporate alternative minimum tax, stock buyback excise tax, and green energy provisions. We anticipate a robust guidance process to continue as the formal regulatory process begins on these provisions and as the IRS considers guidance related to the retirement provisions of the CAA and the advanced manufacturing investment credit enacted under the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act.

Trump Tax Returns. Policy and political fallout from the public release and contents of former President Trump's tax returns will reverberate in 2023. The impact on the former president personally, as well as the potential for House Republicans to push for the disclosure of other public officials' tax returns, are yet to be seen.

Focus on the IRS. Republicans will place the IRS under tremendous scrutiny, considering the significant funding increase it received in the IRA. We are likely to see this play out in the confirmation hearings for the new IRS Commissioner and Chief Counsel, in oversight hearings, and in the annual appropriations process. 

While the prospects for robust tax legislation during the upcoming year are rather dim, interested taxpayers should direct their efforts toward providing critical input on the many significant tax provisions that were enacted last year. As Treasury and the IRS pour substantial resources into drafting proposed regulations, the importance of submitting thoughtful comments and proposed solutions to any perceived shortcomings to the legislative text should not be underestimated. #TaxTake

Upcoming Speaking Engagements and Events

On January 23, Loren will present, "The Future of Tax Policy," at the USC Gould School of Law 2023 Tax Institute in Los Angeles.

Loren will moderate a panel titled, "The OECD & Global Tax Policy: What's Next?" at the DC Bar 2023 Tax Legislative and Regulatory Conference on January 26.

On February 10, Loren will speak at the ABA Section of Taxation 2023 Midyear Meeting in San Diego. She will participate in a panel discussion entitled, "Riding the ICAP and APA Wave."

In the News

Marc discussed the pending release of the JCT's Blue Book in Bloomberg Tax. Marc questioned whether technical fixes needed for the IRA could spur a deal on correcting both parties' tax laws, including some corrections left over from the Affordable Care Act. He said the politicization of the process has slowed down what had been a bipartisan effort. "There just hasn't been one in such a long time that, perhaps they could strike a deal, but it's unclear."

In Tax Notes, Marc said the IRS and Treasury will want to carefully weigh the pros and cons of issuing a FAQ fact sheet providing guidance on the new corporate alternative minimum tax (AMT). He said the government is facing lots of regulatory authority challenges under the Administrative Procedure Act while also trying to be inclusive and transparent about this guidance. Providing short-term guidance on corporate merger issues and procedural problems, coupled with penalty relief, could ease the pressure to expedite corporate AMT regulations but, Marc added, the more formal the guidance, the better.

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