New R&D Credit Requirements, Digital Currencies vs. U.S. Sanctions, and the Future of the Employee Retention Credit

Tax Policy:

October 16: Democrats face growing storm over IRS reporting provision

Democrats are facing a firestorm of criticism over a proposal to increase the amount of bank account information reported to the IRS, posing a challenge as they craft their wide-ranging social spending bill. The proposal is a top priority of the Biden administration, which argues it will help the IRS go after wealthy tax cheats.  Congressional Democrats are expected to make changes to the administration's initial proposal but are generally supportive of the idea.

The Treasury estimated that the administration's proposal would raise about $460 billion over 10 years, and has said that a narrower proposal could raise $200 billion to $250 billion over a decade.

Republican lawmakers, who have a long history of disliking the IRS, have also frequently been criticizing the IRS bank-reporting proposal in congressional hearings, speeches, and op-eds.

Provisions to get taxpayers to pay the taxes they already owe could be appealing to Democrats if they face pushback within their caucus on proposals to raise taxes. Democratic lawmakers and administration officials have been emphasizing that the proposal would not direct banks to give the IRS details about specific transactions after some Republicans have inaccurately suggested that the IRS would receive this type of information.

October 15: IR-2021-203, IRS sets forth required information for a valid research credit claim for refund

The IRS has set forth the information that taxpayers will be required to include for a research credit claim for a refund to be considered valid. Existing Treasury Regulations require that for a refund claim to be valid, it must set forth sufficient facts to apprise the IRS of the basis of the claim. The Chief Counsel memorandum will be used to improve tax administration with clearer instructions for eligible taxpayers to claim the credit while reducing the number of disputes over such claims.

Effective tax administration entails ensuring taxpayers understand what is required to support the claim for the research and experimentation (R&E) credit. Each year, the IRS receives thousands of R&E claims for credits in the hundreds of millions of dollars from corporations, businesses, and individual taxpayers. Claims for research credit under IRC Section 41 are currently examined in a substantial number of cases and consume significant resources for both the IRS and taxpayers.

The Chief Counsel's legal advice released today is the result of ongoing efforts to manage research credit issues and resources in the most effective and efficient manner. By requiring taxpayers to provide the information referenced below, the IRS will be better able to determine upfront if an R&E credit claim for refund should be paid immediately or whether further review is needed.

Specifically, the opinion provides that for a Section 41 research credit claim for refund to be considered a valid claim, taxpayers are required to provide the following information at the time the refund claim is filed with the IRS:

• Identify all the business components to which the Section 41 research credit claim relates for that year.

• For each business component, identify all research activities performed and name 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 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 a 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 a refund prior to the IRS’ final determination on the claim. Further details will be forthcoming; however, taxpayers may begin immediately providing this information.

Biden's Agenda:

October 18: Build Back Better items on the chopping block

Democrats remain in limbo in Congress, eager to enact big changes before next year’s midterms but tied in regional and ideological knots over two separate measures that the party decided would be sequenced together. Approval of $1 trillion for roads, bridges, ports, and broadband remains in limbo until progressives and moderates iron out their separate differences over budget priorities that can attract sufficient Democratic votes in the Senate, as well as a narrow majority in the House. 

Among provisions reportedly on the chopping block is $150 billion included to push for increased use of clean energy sources by utilities, a program that is opposed by Sen. Joe Manchin (D-W.Va.) (The New York Times). A push by progressives to lower the cost of prescription drugs via negotiations with Medicare has also drawn the ire of Sens. Bob Menendez (D-N.J.) and Kyrsten Sinema (D-Ariz.) and a group of centrist House Democrats, threatening its inclusion in a final proposal (The Wall Street Journal).  

While no agreement on a multi-trillion-dollar package is expected by the end of the month, there is an urgency to get something done, as the short-term extension of highway funding expires on Oct. 31. And as the old adage has it, Congress works best on deadlines.

Meanwhile, there is an electoral impetus to pass the larger reconciliation bill as Democrats argue not only that their push is good policy but also that it will be politically beneficial. As lawmakers put it to The Hill’s Mike Lillis and Scott Wong, the programs will aid millions of children and families, employees, and students, putting the GOP in a tough spot as it tries to kill off these programs. 

October 17: Debate Weighs Price of Biden’s Big Plan vs. Not Acting

Mr. Biden has proposed fully paying for this with a series of tax increases on businesses and the wealthy - including raising the corporate tax rate, increasing taxes on multinational corporations, and cracking down on wealthy people who evade taxes - along with reducing government spending on prescription drugs for older Americans.

The debate about what the United States can afford used to be pegged to its growing budget deficits and warnings that the government, which spends much more than it brings in, could saddle future generations with mountains of debt, sluggish economic growth, runaway inflation, and enormous tax hikes.

The budget deficit has swelled in recent years, reaching $1 trillion in 2019 from additional spending and tax cuts that did not pay for themselves, before topping $3 trillion last year amid record spending to combat the coronavirus pandemic.

A few economists agree with Mr. Manchin, warning that even fully offsetting spending and tax cuts could fuel inflation.

Michael R. Strain, a centrist economist at the conservative American Enterprise Institute who supported many of the pandemic spending programs, said in an interview this year that additional spending that stoked consumer demand would "Exacerbate pre-existing inflationary pressures."

Republicans used the tactic to minimize the cost of their 2017 tax cuts by setting all their tax cuts for individuals to expire in 2025. In order to extend their own programs and tax cuts or make them permanent, Democrats would need to either add to the deficit or find additional tax increases or spending cuts beyond the ones they are hoping to pass this year.

Mr. Biden has said repeatedly that Americans earning $400,000 a year or less will pay nothing for that bill, and that the entirety of new spending and tax cuts will be offset.

Spending Bill: 

October 14: House progressives lay out priorities for spending negotiations

House progressives are laying out their priorities in negotiations over Democrats' massive social-spending package, as lawmakers seek to trim its size to get more moderates on board. Democrats are working to reduce the size of their spending package from the $3.5 trillion figure backed by progressives since key centrists Sens. Joe Manchin (D-W.Va.) and Kyrsten Sinema (D-Ariz.) think that number is too high. In a meeting with House Democrats earlier this month, President Biden suggested lawmakers should consider a top-line number in the range of $1.9 trillion to $2.3 trillion.

Progressives in their letter reiterated their desire for the package to include five of their key agenda items: investments in the care economy, investments in affordable housing, Medicare reforms, addressing climate change, and immigration reform.

CPC leaders said they would prefer the spending package to include "Robust investments" over a shorter period of time. Progressives said they want programs in areas such as child care and education to be universal. In contrast, Manchin and some House moderates have said they would prefer spending programs be targeted to lower-income households.

October 13: Democrats struggle to gain steam on Biden spending plan

Democrats are struggling to break through on their sweeping social spending bill amid a laser-like focus on the price tag and high-profile squabbles. The effort to show momentum comes as congressional Democrats and Biden have seen their poll numbers slip as they creep deeper into the year.

Speaker Pelosi asked if Democrats need to do a better job selling the spending package, said the news media should do a better job of explaining it. Democrats argue part of their problem is an intense media focus on the price tag for the reconciliation bill, rather than the potential benefits for residents.

Democrats aren't just struggling to drive home the details of their plan to voters; they've also been unable to secure breakthroughs with each other that would put Biden's bill on a glide path.

Congressional Democrats previously cleared a budget resolution that allows them to pass a spending bill of up to $3.5 trillion without needing to break a 60-vote legislative filibuster in the Senate, meaning they can bypass Republicans. Biden and congressional leaders are trying to find a way to bridge a multitrillion-dollar gap between the $3.5 trillion ceiling for how high Democrats and moderates can go.

Debt Ceiling:

October 18: Yellen Says Debt-Limit Deal Will Keep Government Funded Through Dec. 3

Treasury Secretary Janet Yellen on Monday said the debt-limit deal enacted by Congress last week will allow the government to keep paying its bills through Dec. 3. 

In a letter to Capitol Hill leaders, Ms. Yellen said the deal "Provides only a temporary reprieve" and urged lawmakers to take further action to ensure that the government can continue to borrow money. "It is imperative that Congress act to increase or suspend the debt limit in a way that provides longer-term certainty that the government will satisfy all its obligations," she wrote.

On Thursday, President Biden signed a bill raising the debt ceiling by $480 billion that the House and Senate had approved along party lines. The bill was based on a proposal by Senate Minority Leader Mitch McConnell to temporarily allow the government to keep borrowing money.

Raising the debt ceiling doesn't authorize new spending but rather allows the government to meet existing obligations, such as sending Social Security checks and making payments on the debt. If Congress doesn't raise the debt ceiling, the government would have to suspend payments to beneficiaries or delay interest payments, which would constitute a government default. Voting to raise the debt limit has become a political fight in recent years as Democrats and Republicans argue over how much the government should be spending.

Crypto News:

October 18: Treasury Warns That Digital Currencies Could Weaken U.S. Sanctions

The Biden administration warned on Monday that digital currencies posed a threat to America's sanctions program and said in a new report that the United States needed to modernize how sanctions were deployed so that they remained an effective national security tool.

"Technological innovations such as digital currencies, alternative payment platforms, and new ways of hiding cross-border transactions all potentially reduce the efficacy of American sanctions," the Treasury report said.

The use of sanctions surged to record levels during the Trump administration, which averaged more than 1,000 new designations per year, according to the law firm Gibson, Dunn & Crutcher.

A senior Treasury official told reporters on Monday that one important measure to prevent the evasion of sanctions was greater coordination with other countries to make it more difficult for cryptocurrencies to be converted into government-issued money.

Last month, the Biden administration cracked down on the growing problem of ransomware attacks, expanding its use of sanctions to cut off digital payment systems that have allowed such criminal activity to flourish and threaten national security.

The sanctions review was led by Wally Adeyemo, the deputy Treasury secretary. The Treasury Department also said sanctions needed to be more targeted so that "Potential negative impact on others is minimized."

October 18: Bitcoin Comes to the Big Board

Tomorrow morning, ProShares will launch a long-awaiting exchange-traded fund on the New York Stock Exchange linked to Bitcoin futures, the firm and the exchange told DealBook. Investors who are curious about crypto but hesitant to engage with unregulated crypto exchanges want "Convenient access to Bitcoin in a wrapper that has market integrity," Michael Sapir, the C.E.O. of ProShares said.

For nearly a decade, crypto entrepreneurs and traditional finance firms have sought permission to launch a Bitcoin E.T.F. in the U.S., but their applications have been delayed or denied by the S.E.C. Many remain pending. Bitcoin futures E.T.F. falls short of what some purists want: a fund that holds crypto directly.

Gary Gensler, the S.E.C. chair, recently suggested that the agency might allow crypto E.T.F.s based on futures - bets on Bitcoin's price fluctuations rather than the underlying crypto itself - that trade on a highly regulated exchange.

Approval for the ProShares E.T.F., which is based on Bitcoin futures that trade on the Chicago Mercantile Exchange, won't be announced by the S.E.C., but the firm's final prospectus met with no opposition ahead of its effective deadline, and the N.Y.S.E. is readying for launch tomorrow. Many analysts believe that futures prices on the Chicago exchange are the most accurate reflection of Bitcoin market sentiment.

Employee Retention Credit: 

October 14: Former lawmakers press Congress not to end ERC early

Former Reps. Rick Lazio, R-New York, and Joe Crowley, D-New York, and former Sens. Heidi Heitkamp, D-North Dakota, and Mike Johanns, R-Nebraska, released an open letter last week expressing bipartisan opposition to proposals to retroactively end the Employee Retention Credit before the end of the fourth quarter of 2021, as well as calling for more education for business owners about the ERC. The former representatives and senators argue that at a time when worker shortages are one of the main causes behind supply chain issues, it's more important than ever to educate small and midsize businesses about the ERC and to ensure they have time to access the tax benefit.

"For these reasons, we would encourage the Treasury and IRS to consider putting on their website updated current information that educates businesses about the ERC and its benefits and urge Treasury and the IRS to coordinate with the SBA on making sure businesses are informed about this tax credit," they wrote.

They've talked to many employers who have claimed the ERC and been able to keep employees on payroll, reinvest in their businesses and cope with the pandemic.

"Looking to curtail the Employee Retention Credit when it is really needed and when we're already in the fourth quarter and businesses are already documenting and making plans for claiming it is just the wrong thing to do." He sees the provision as doing little to offset the overall cost of the package.

"The issue is that many of these businesses were confused when the law changed the employee retention qualifications, even to the point that the IRS website itself was outdated and gave incorrect information for a long period of time," said Lazio.

For Fun:

October 14: Miami mayor wants to pay city workers with bitcoin

Miami Mayor Francis Suarez (R) says he is moving forward with a proposal to pay city workers in bitcoin.

During an interview on Bloomberg Technology on Tuesday, Suarez said the city will request a proposal this month to allow employees to get paid in bitcoin, and even allow residents to pay fees and even taxes in bitcoin if the county allows.

Suarez said it was a “major priority” for him as he wants to differentiate the city as a “crypto capital of the United States or of the world.”