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