IRS Budget Cuts, Smith v. Commissioner, and the R&D Expensing Bill
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Tax Policy/News:
March 17: IRS suffers another $20B budget cut
The continuing resolution signed by President Trump included a $20.2 billion rescission in the IRS's budget, further reducing the $80 billion initially allocated by the Inflation Reduction Act of 2022.
This cut comes amid ongoing layoffs and voluntary buyouts at the IRS, with plans to reduce the workforce by up to 20% by May 15. Despite these cuts, the IRS has spent relatively little of the Inflation Reduction Act funding, with the largest expenditure being $3.7 billion for employee compensation. The agency is pausing its technology modernization efforts and reviewing its Direct File program.
Additionally, the IRS faces questions over data security and privacy following DOGE's demands for access to taxpayer data, leading to a preliminary injunction against such access. The IRS's ability to collect revenue and provide taxpayer services may be impacted by these budget cuts and staff reductions.
March 17: Are Wages for Research Credit Purposes Limited to “Reasonableness?”
Smith v. Commissioner, a pending research credit case in the United States Tax Court, presents an issue of first impression: Is a partner’s self-employment income in a partnership allowable as a qualified research expense only to the extent that the amount is reasonable within the meaning of former IRC Section 174(e)?
The petitioners in Smith are partners in a partnership that provides architectural design services for extremely large and uniquely designed buildings. For the taxable years in issue, each partner calculated their federal income tax credits for research expenses from the tax attributes that the partnership passed through to them.
The IRS argues that the amount taken into account is limited to the self-employment income that reasonably relates to the partner’s performance of qualified research, relying on Section 174(e) to limit the amount to a reasonable expense. The partners argue that the reasonableness requirement logically applies only to research expenses deductible under Section 174 and not to earned income from self-employment.
The IRS’s approach might never allow research credits, as the timing of self-employment income from qualified research might always be out-of-synch with the performance of qualified research. Congress did not require a partner to show that their self-employment income reflects what would be their wages if they were an employee, instead making self-employment income a substitute for wages. The IRS has no authority to challenge this policy choice, which approximates wages.
March 16: Why IRS upheaval has not slowed tax season
Despite the turmoil within the Internal Revenue Service (IRS) caused by the Department of Government Efficiency's (DOGE) involvement during tax filing season, the electronic filing process for 2024 returns has been relatively smooth.
Tax professionals report that they have been able to submit clients' returns electronically and obtain refunds in a timely manner, thanks to critical investments made with resources from the Inflation Reduction Act over the past two years.
However, there have been delays in handling compliance disputes and audits, with long wait times for setting up installment agreements and obtaining power of attorney approvals. Further staff cuts could impact taxpayer services and reduce overall revenue collection, potentially worsening the deficit.
As of March 7, the number of returns received and processed was down about 2% compared to the same period last year, but the IRS issued 1.5% more refunds, with the average amount paid up nearly 6% from 2024.
March 14: ‘Not quite yet beautiful’: Republicans at odds over spending cuts after meeting Trump
Senate Republicans are at odds with their House colleagues over spending cuts needed to pay for the extension of the 2017 Trump tax cuts.
GOP members of the Senate Finance Committee met with President Trump on Thursday to discuss tax and spending issues after the House passed a budget resolution outlining $4.5 trillion in tax cuts and between $1.5 and $2 trillion in spending cuts. The resolution requires the Energy and Commerce Committee to find nearly $900 billion in spending cuts, likely affecting Medicaid funding. Trump wants his agenda passed in "one big, beautiful bill," while Senate Republicans prefer two separate bills.
Senate Finance Committee member Steve Daines criticized the House resolution, emphasizing the need for alignment between the House and Senate. Senate Republicans must match or exceed the $1.5 trillion in cuts sought by the House for their resolution to be viable. Senate Finance Committee Chair Mike Crapo and member James Lankford stressed the desire to make the 2017 Trump tax cuts permanent, which would add more to the deficit than a temporary extension.
The cost of extending the expiring cuts is estimated at $4.7 trillion, while making them permanent could result in $7.7 trillion in federal revenue losses. Republicans seek to ignore nearly $5 trillion of these losses using an accounting method that disregards their legal expirations.
March 13: IRS swaps its chief counsel for a lawyer friendly with DOGE, AP sources say
The Internal Revenue Service’s acting chief counsel, William Paul, has been removed from his role and replaced by Andrew De Mello, an attorney in the chief counsel’s office who is supportive of Elon Musk’s Department of Government Efficiency (DOGE).
Paul was reportedly demoted due to clashes with DOGE’s push to share tax information with multiple agencies. This change comes as the IRS plans to cut its workforce by up to half through layoffs, attrition, and incentivized buyouts as part of President Donald Trump’s efforts to reduce the federal workforce. Approximately 7,000 probationary IRS employees were laid off in February.
Paul is not the first government official to be demoted for voicing concerns about access to sensitive systems and taxpayer data. Government officials across various departments have faced retirements, resignations, and demotions for similar reasons. Michelle King, the SSA’s acting commissioner, stepped down in February after refusing to provide DOGE access to Social Security recipient information. Chye-Ching Huang, executive director of the Tax Law Center at New York University School of Law, praised IRS officials who have resisted unlawful attempts to weaponize taxpayer data and systems.
March 12: Lawmakers reintroduce R&D expensing bill
A bipartisan group of lawmakers has reintroduced the American Innovation and R&D Competitiveness Act, which aims to allow immediate expensing of research and development costs, retroactive to 2022 when the tax break expired.
The bill would eliminate the five-year amortization requirement for research and experimental expenditures, allowing continued expensing in the taxable years in which the expenditures are incurred. The Tax Cuts and Jobs Act of 2017 ended immediate expensing of R&D costs, requiring them to be amortized over five years starting in 2022.
Efforts to repeal or delay the requirement have stalled in the past, but Congress has another chance as Republicans put together a reconciliation bill to extend the expiring provisions of the TCJA while adding new tax breaks. The bill, introduced by Reps. Ron Estes (R-Kansas) and John Larson (D-Connecticut), has received support from industry groups such as the National Association of Manufacturers and the Association of Equipment Manufacturers.
Larson emphasized the importance of R&D in creating good-paying jobs and strengthening economic competitiveness, while Estes highlighted the bipartisan support for immediate expensing of R&D costs to advance innovation and maintain the U.S. as a leader in innovation.
Economic News/Policy:
March 17: Trump signs funding bill to avert shutdown
President Donald Trump signed a stopgap funding bill to keep the government open for the remainder of the fiscal year, allowing Republican lawmakers to focus on border and tax bills in the coming months.
The bill was signed while Trump was in Florida for the weekend. Congress narrowly passed the GOP spending plan with the help of Senate Democratic leader Chuck Schumer and a few party members, creating a rift among Democrats.
Schumer argued it was essential to avoid blocking government services, while others saw the legislation as a chance to impose constraints on Trump's and Elon Musk's mass firings of federal workers and elimination of government agencies. Trump praised Schumer for his support.
Trump aims to extend and expand his first-term tax cut package, which can be passed without Democratic votes, but faces opposition from budget hawks in the Republican Party wary of his plans to eliminate taxes on tipped wages, Social Security, and overtime pay.
March 12: A government program made tax filing free and more efficient. Musk and DOGE may get rid of it anyway
The IRS Direct File program, an electronic tax return filing system, has made tax filing free and efficient for many Americans.
Despite its popularity, the fate of IRS Direct File remains uncertain as Elon Musk and the Department of Government Efficiency (DOGE) review federal programs. Treasury Secretary Scott Bessent has committed to maintaining the program for this tax season, but its future beyond that is unclear. Critics argue that the IRS never received congressional authorization to create Direct File, and some believe it is a waste of taxpayer dollars.
However, supporters highlight the program's ease of use and accessibility, noting that it benefits both taxpayers and the IRS. Former IRS Commissioner Daniel Werfel emphasized the importance of considering taxpayer preferences when deciding the program's future. While some taxpayers prefer the convenience and security of Direct File, others are concerned about data privacy and the potential elimination of the program.
Democratic lawmakers have urged the preservation of Direct File, arguing that ending it would hurt everyday Americans. The decision on whether to keep or cut the program remains in the hands of Musk and his team of computer programmers.
March 11: Trump doubles down on tariffs threat amid market downturn
President Trump is intensifying his tariff threats despite a stock market downturn that has raised concerns about a potential recession.
On Tuesday, Trump announced increased tariffs on steel and aluminum in response to an electricity surcharge imposed by Ontario, leading Ontario Premier Doug Ford to retract the threat.
The White House defended the tariffs as necessary for fair trade practices and dismissed recent stock market declines as temporary. Trump plans to implement reciprocal tariffs on April 2 for countries with duties on U.S. products, following a 25 percent tariff on imports from Canada and Mexico. The Dow Jones and S&P experienced significant losses, and markets are bracing for further impacts with the upcoming consumer price index report.
Despite criticism from economists and some GOP lawmakers, the White House maintains that the tariffs are essential to address economic issues inherited from the previous administration. Trump's approval rating has dropped, and experts warn that the tariffs could lead to a recession. However, Republicans remain hopeful that the long-term benefits will outweigh the short-term economic challenges.
March 11: Small business uncertainty about the economy spikes to the second-highest level since 1973
The Trump administration’s fluctuating tariff policies are causing significant concern among America's small businesses, leading to increased uncertainty about the future of the US economy.
The National Federation of Independent Business’ Uncertainty Index reached its second-highest level on record in February, with a notable decline in the number of respondents who believe it is a good time to expand. President Trump's unpredictable trade policy has sparked fears of rising inflation and a potential recession, further unsettling business decision-makers. The survey indicates that small business optimism has decreased since Trump's election, despite initial gains.
With over 33 million small businesses employing nearly half of all private-sector workers, the looming global trade war and signs of economic instability are causing businesses to reassess their strategies. Concerns about higher costs due to tariffs are prompting small businesses to scrutinize their cash flow and financial statements. Trump's recent imposition of tariffs on Mexico, Canada, and China, along with plans for reciprocal tariffs, has added to the uncertainty.
Additionally, the administration's strict stance on immigration is affecting labor costs in industries like construction and agriculture. The NFIB survey highlights that labor costs are becoming a significant issue for small businesses, further contributing to the economic uncertainty.
Energy and Environmental Policy/News:
March 17: Conversation on 45Z continues
The future of the Inflation Reduction Act (IRA) and its energy policies remains uncertain, but there is confidence in the 45Z clean fuel production credit.
Debbie Gordon, principal leader of clean energy incentives at RSM US LLP, expressed optimism about the 45Z credit during a sustainable fuel conference in Cook County, citing bipartisan support for biofuels among farmers, airlines, investors, and developers. The 45Z credit, introduced during the Biden administration, supports transportation fuels that reduce greenhouse gas emissions and is set to be in effect from 2025 to 2027.
The IRA, projected to cost around $369 billion over 10 years, includes multiple tax credits and incentives for clean energy. Conversations on Capitol Hill are shifting from extending the 45Z credit to modifying it, as the credit is not yielding the expected benefits under current models.
Efforts to modify these credits aim to encourage more investment in the renewable fuel industry. The Department of Energy released a 45ZCF-GREET model to help producers measure lifecycle GHG emissions, but concerns have been raised about its implementation. Changes to the credit are anticipated as industries push back on certain definitions and requirements.
Citibank revealed in court filings that the FBI, EPA, EPA inspector general, and Treasury Department have requested the bank to freeze accounts of several nonprofits and state government agencies.
The accounts, frozen in February, were part of the $27 billion Greenhouse Gas Reduction Fund created by the Inflation Reduction Act. The EPA received $14 billion for a National Clean Investment Fund to provide grants to green banks, which finance clean technology projects. Citibank, selected as the financial agent, held the funds in accounts under the names of the awardees.
The FBI requested 30-day administrative freezes on accounts held by nonprofits and state agencies, including Habitat for Humanity and United Way. Three nonprofits that received green bank funds have sued Citibank to release the money. EPA administrator Lee Zeldin cited concerns about fraud but provided no evidence.
A judge questioned the Justice Department attorney representing the EPA, demanding credible evidence of fraud. The court has ordered the Justice Department to provide details about the alleged fraud.
March 11: 21 House Republicans oppose cutting clean energy credits to pay for tax cuts
House Republicans' plans to extend the 2017 Tax Cuts and Jobs Act have become more complicated as 21 GOP representatives publicly opposed the wholesale repeal of the Inflation Reduction Act’s clean energy tax credits.
Led by Rep. Andrew Garbarino, the members requested that any changes be done in a targeted and pragmatic fashion. The letter emphasized the importance of prioritizing energy affordability for American families and maintaining the current path to energy dominance.
The Inflation Reduction Act contained over $369 billion in clean energy incentives, which have been utilized by American companies to make significant investments in domestic energy production and infrastructure. The representatives warned that premature credit phase-outs or restrictions could endanger capital allocations and planning based on these credits, potentially sparking an energy crisis and increasing utility bills.
Clean Energy for America President Andrew Reagan highlighted the transformative impact of energy tax credits on local economies, creating jobs, lowering energy costs, and securing America's energy dominance. Renewable energy projects have paused due to uncertainty about the future tax environment, with industry stakeholders lobbying Congress to maintain the credits.
Technology:
March 17: AI industry sends wish list to Trump: 4 takeaways
The AI industry is urging the Trump administration to create a federal framework for AI regulation that avoids stifling innovation, with companies like OpenAI advocating for voluntary partnerships and exemptions from state-level AI bills.
Concerns about overregulation are shared by "middle tech" companies, which fear it could hinder their growth. Strengthening export controls, particularly against China, is another priority, with firms like Anthropic and OpenAI pushing for tighter restrictions on semiconductors.
The industry also wants the government to adopt AI tools in federal agencies to streamline operations and modernize technology. Additionally, AI firms support increased investment in AI infrastructure to meet growing energy demands, with Trump already announcing a $500 billion investment in this area.
March 17: Small Business Administration launches ‘Made in America’ manufacturing effort
The U.S. Small Business Administration (SBA) announced its Made in America Manufacturing Initiative, aimed at reducing regulatory costs for manufacturers.
The initiative includes cutting $100 billion in regulations through the Office of Advocacy and launching a Red Tape Hotline for small business owners to share feedback on unnecessary regulations. The SBA also plans to expand financing options for small business loans, including for real estate, construction, and equipment purchases.
This initiative is part of President Donald Trump’s agenda to create jobs and reshore manufacturing, leveraging tariffs to entice companies to invest in U.S. facilities. Vice President JD Vance highlighted the administration’s efforts during a visit to a plastics manufacturing facility in Michigan, noting the creation of 10,000 manufacturing jobs in Trump’s first full month in office.
The SBA aims to make it easier and more affordable to manufacture in the U.S., with plans to expand access to the SBA’s 504 loan program and the 7(a) Working Capital Pilot program. Vance emphasized the administration’s commitment to rewarding businesses that invest in America and penalizing those that build outside the country.
For Fun:
March 14: Did Mars harbor life? One of the strongest signs yet is spotted in a peculiar rock
NASA’s Perseverance rover has found possible hints of ancient life on Mars, with dark-rimmed ‘leopard spots’ in a rock studied by the rover last year potentially indicating Martian microbial activity.
While the spots resemble those produced by microbes on Earth, researchers caution that they might have formed without the help of living organisms. The discovery currently ranks as a 1 on the scale for evaluating claims of extraterrestrial life, with further confirming measurements needed to move it up the scale.
The rock, located in Jezero Crater, contains dark peppery spots and larger dark-rimmed blobs, with chemical analysis showing enrichments in iron, phosphorous, iron, and sulfur. These chemical reactions, which could have been initiated by microbes, suggest the spots formed when carbon-containing compounds reacted with iron and sulfate minerals.
Researchers emphasize the need for additional laboratory, field, and modelling studies to investigate these features further and ultimately bring the samples back to Earth for analysis. NASA faces pressure to revamp its plans to bring Perseverance’s samples to Earth, with sophisticated analyses potentially revealing whether microbes were involved in forming the spots.