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Article | Tax alert

Congress increases debt limit to avoid U.S. default

Over the weekend, President Joe Biden signed the Fiscal Responsibility Act of 2023 (FRA), which suspends the debt ceiling through Jan. 1, 2025.

 IRS budget funding

 The FRA does not include any specific tax-related provisions; however, it does include an immediate recession of $1.3 billion of the $80 billion in Internal Revenue Service (IRS) funding provided for in the Inflation Reduction Act (IRA). In addition, it’s reported there is a side agreement between the White House and the Speaker of the House on a further removal of another $20.1 billion in IRS funding.

 Even with decreased additional funding, the IRS budget is still substantially larger than in prior years and some of that funding is directed toward enforcement efforts. While it is not clear which areas will be targeted, expect to see increased scrutiny of Employee Retention Credit (ERC) claims as the IRS continues to send warnings to taxpayers and tax professionals to watch for aggressive positions. We continue to urge you to utilize reputable CPA firms for ERC studies and avoid boutique promoters that base their fee structure on a contingent basis in relation to the amount of the credit.

 Potential tax legislation

 Now that the FRA has been signed into law, Congress will shift its focus to passing an omnibus spending bill to fund the federal government’s fiscal year 2024, which begins on Oct. 1, 2023. The omnibus bill is made up of 12 appropriations bills, any of which could include tax provisions. We’re specifically watching the defense authorization bill. Sens. Chuck Schumer (D-N.Y.) and Mitch McConnell (R-Ky.) have indicated defense spending may exceed the agreed-upon amounts in the debt ceiling bill, which could create a need for tax offsets.

 Also, numerous tax bills have been proposed over recent months. With a divided Congress, the odds of a major piece of tax legislation advancing are generally low, particularly heading into a presidential election year. A few areas where the parties are more likely to find common ground include: 

  • Reinstating expensing for research and development costs; immediate expensing expired in 2021 and now these costs are amortized for at least five years
  • Expanding the $10,000 cap on the state and local tax deduction (SALT cap)
  • Providing “last in, first out” (LIFO) relief for auto dealers
  • Extending the qualified business income deduction (expires after 2025) in exchange for enhancements in the child credit
  • Increasing the reporting threshold required by third-party organizations (Form 1099-K) to $5,000 instead of the current $600

Whether any of these provisions are passed as stand-alone pieces of legislation or rolled into one of the 12 appropriations bills next on the negotiating table remains to be seen. Expect both parties to convey their tax positions in upcoming budget discussions as the 2024 election cycle heats up.

For more information on this topic, or to learn how a Baker Tilly specialist can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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