Summer is usually a quiet time in Washington, DC, but the Treasury Department and the Internal Revenue Service are hard at work drafting guidance on numerous topics and Congressional Republicans are planning to vet nominations and introduce legislation for "round two" of tax reform. This year, the usual expectation that Washington empties out in August won't hold true.
Lawmakers, businesses, and tax professionals are still eagerly awaiting guidance from Treasury and the IRS on key provisions of the December 2017 Tax Cuts and Jobs Act (TCJA). Treasury has issued several notices regarding section 965 of the Internal Revenue Code, known as the transition or repatriation tax. Most recently, it issued guidance establishing a number of anti-avoidance rules and per-se transactions. We expect Treasury and the IRS to issue proposed regulations shortly, to address the treatment of accrued foreign income taxes and the application of the constructive ownership and anti-avoidance rules, among other applications. Taxpayers will have the opportunity to comment on the proposed regulations when they are published.
Treasury is also expected to issue guidance later this month on the 20 percent deduction for income from pass-throughs. Professional organizations and Congress have been pressing Treasury for guidance on this topic since the TCJA went into effect in January. This guidance is highly anticipated, given the complexity of the deduction and resulting uncertainties facing many small businesses about how best to plan for these changes. Additionally, while Treasury's focus over the coming months will be on implementing the TCJA, Treasury indicated it may also issue further guidance on taxation of cryptocurrency before the end of the year. Earlier in 2018, Treasury issued its only official guidance on the topic, a notice confirming that crypto assets are treated as property for federal tax purposes. In addition, the IRS has also announced a "campaign" for crypto assets.
Treasury is also expected to issue proposed regulations on section 163(j), limiting business interest deductibility, sometime this fall. Earlier this year, the IRS issued a notice on section 163(j) promising to address unanswered taxpayer questions, including the treatment of pre-2018 business interest under the base erosion and anti-abuse tax; the treatment of interest paid or accrued on a CCorporation's debt; and the treatment of affiliated groups that do not file a consolidated tax return as a single taxpayer.
Republicans hope to pass another round of tax cuts this year, following close on the heels of the TCJA. Just seven months after passage of the TCJA, tax reform remains a Congressional prerogative. Ways and Means Committee Chairman Kevin Brady (R-TX) recently announced plans for Tax Reform 2.0 (TR 2.0), a second phase of the TCJA aimed at securing President Trump's legacy by making permanent some of the temporary measures in the TCJA and fine-tuning existing provisions. For example, TR 2.0 is expected to extend or make permanent the temporary individual cuts of the TCJA, which are otherwise set to expire at the end of 2025. Additionally, TR 2.0 is expected to give a second look to areas not fully addressed by the TCJA, such as the provisions on retirement. While TR 2.0 could be used as a vehicle for enacting technical corrections to the TCJA, Congress will likely continue to consider other, "must pass" legislation as more likely vehicles for tax technical corrections.
The House Republicans plan to circulate a draft of TR 2.0 after the July 4 recess, spending the month soliciting and incorporating suggestions by GOP leaders before putting the measure to a vote in the House in early August. Critics view TR 2.0 as political posturing ahead of the midterm elections, because--while the reform package has received a fair amount of press--it is unlikely to survive a vote in the Senate. Chairman Brady himself admitted that steering TR 2.0 through both houses of Congress would be a challenge, because unlike the TCJA, TR 2.0 cannot be ushered through Congress along partisan lines as a budget reconciliation measure. Senate Republicans would need the support of nine Democrats to pass the bill, a seemingly herculean feat given that no Democrats voted in favor of the original reform package.
If TR 2.0 passes the House, it could reach the Senate as early as mid-August. Last month, Senate Majority Leader Mitch McConnell (R-KY) announced plans to cancel the Senate's August recess in order to deal with legislative backlog. Senators will be on break the week of August 6 before returning to Washington the following week. Majority Leader McConnell said he intended to prioritize the passage of a dozen annual spending bills ahead of the September 30 fiscal-year deadline and prioritize confirmations of President Trump's judicial appointments, especially the new nominee for the Supreme Court. The House has made no similar changes to its schedule. In response to pressure from conservative leaders to cancel the August recess in the House, House Majority Leader Kevin McCarthy (R-CA) said he has no plans to cut the hiatus short. The House is scheduled to adjourn on July 26 and stay in recess until after Labor Day.
The Senate is currently considering nominations to fill three vacancies on the Tax Court, including Trump appointees Elizabeth Copeland, Patrick Urda, Courtney Dunbar Jones, and Emin Toro. In addition, Judge Mark Holmes has been nominated for another 15-year term. In late June, the Senate Finance Committee voted unanimously to advance the nominations of Copeland and Urda. Copeland had previously been nominated to the Court by former President Barack Obama, but her nomination was allowed to lapse without a vote before the full Senate. The June vote sends Copeland's and Urda's nominations to the Senate floor for consideration, where Finance Committee Chairman Orrin Hatch (R-UT) expects they will be swiftly confirmed.
The Senate Finance Committee also has before it President Trump's nominee for Commissioner of the IRS, Charles "Chuck" Rettig. Rettig's nomination hearing in late June was generally non-controversial and he pledged to remain independent if confirmed for the position. However, Democratic committee members expressed a desire to defer confirmation proceedings until there was more clarity on issues related to Rettig's personal assets and tax returns. As of yet, no confirmation hearing before the full Senate has been scheduled.
In sum, taxpayers should continue to engage with Treasury and the IRS, particularly as guidance is released implementing the TCJA. Providing comments to Treasury on proposed regulations and their impact on taxpayers will be a critical part of the regulatory process. In addition, it is increasingly fundamental for taxpayers to engage with key members of Congress, particularly as opportunities for technical corrections to the TCJA emerge and tax reform measures continue to evolve.