Government funding complicates year-end tax deal

Contentious negotiations over an extension of government funding are creating significant uncertainty for the prospects of a year-end deal on bipartisan tax priorities.

Lawmakers must extend government funding through by Sept. 30 to avoid a government shutdown, but there is disagreement over energy permitting provisions championed by Sen. Joe Manchin, D-W.V. Democratic leaders pledged to advance the permitting legislation in exchange for Manchin’s support for the Inflation Reduction Act, but lawmakers in both parties are objecting.

The contentious negotiations make tax priorities unlikely to be attached to any continuing resolution (CR) lawmakers craft to beat the Sept. 30 deadline. If lawmakers do get a deal, its length will be important. A CR that extends funding into 2023 may rob the tax provisions of one last potential vehicle to move in 2022. If the CR is shorter, it would force Congress to return after the Nov. 8 election for a lame duck session to again address government funding. This would give lawmakers at least one more opportunity to address lingering tax law priorities before year-end.

The most pressing tax issue is a popular bipartisan provision that would retroactively restore full expensing of research and experimentation (R&E) costs under Section 174. Lawmakers are also looking for a vehicle to pass a bipartisan package of retirement incentives (see our prior story for more on the various retirement bills currently under consideration). In addition, there is some bipartisan support for extending 100% bonus depreciation, which is scheduled to revert to 80% for property placed in service in 2023, and other “extender” tax provisions.

Last-minute tax extender bills have become a routine bipartisan process in recent years, but the prospects of a deal this year are growing more uncertain. The list of extenders has been steadily shrinking as many of the most popular provisions have become permanent or given longer-term extensions. Democrats have less driving them toward a deal this year with many of the temporary energy tax provisions they favor already extended and enhanced under the Inflation Reduction Act.

Democrats are pushing for expensive enhancements to the child tax credit, which may be too steep a price for Republicans in exchange for narrow business tax relief. Republicans would like to soften the limit on interest deductions under Section 163(j), but this alone may not be enough of a priority to exchange for child tax credit enhancements. Republicans are less likely to make major concessions for other business tax priorities that are already supported by Democrats, like bonus depreciation and R&E relief. The results of the election could also complicate the process, especially if Republicans win back one or both chambers of Congress and want to wait for January to secure a better deal. Delaying passage of relief until 2023 could be an issue for 2022 financial statements.

While a deal remains very possible, the outlook is uncertain enough that taxpayers should be considering how a failure to reach an extender deal could affect their estimated tax payments, financial statements and business plans. Taxpayers should be assessing the impact of amortizing R&E costs. They could also consider accelerating investments to place property in service before the scheduled expiration of 100% bonus depreciation.

Contact:

Tax professional standards statement

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.