2020 IRS Regulatory Plan Focuses on Wrapping Up Tax Law Work

IRS and Treasury’s overarching regulatory goal for this year is to complete guidance implementing the 2017 tax law.

Having guidance out by fall for every provision in the law is the government’s aim—an “ambitious goal,” David Kautter, assistant secretary for tax policy at the Treasury Department, told Bloomberg Tax in December at a conference in Washington.

To meet that objective, IRS and Treasury would have to release about 100 more guidance items on the 2017 tax law before fall 2020, according to an estimate from IRS Chief Counsel Michael Desmond, who spoke at the same conference.

The remaining agenda covers a wide range of issues affecting both businesses and individuals, including a limit on business interest expense deductions and restrictions on a favorite tax break of hedge fund managers.

The government will have to juggle its tax law workload with other pressing projects, such as implementing the Taxpayer First Act (Pub. L. 116-25), which President Donald Trump signed into law in July 2019.

Interest Write-Off Cap

The IRS is expected to soon complete regulations on the tax law’s cap on corporate write-offs of debt interest payments under Section 163(j). The White House Office of Management and Budget is currently reviewing the rules, typically the last hurdle a regulation must clear before it is released.

The tax law set a limit on deductions of interest payments equal to 30% of adjusted taxable income for businesses with more than $25 million in annual gross receipts. Regulated utilities are exempt, and lawmakers gave certain real estate and farming businesses the chance to opt out. The rules will predominantly affect private equity funds and capital-intensive industries like manufacturing and telecommunications.

Proposed rules issued at the end of 2018 (REG-106089-18) drew criticism from tax professionals and the business lobby over what they described as an expensive definition of interest. In addition, language that would effectively shrink the income measure—and therefore the cap on deductions—a few years early for some industries spurred a flurry of letters and the creation of “working groups” dedicated to reversing the agency’s stance.

High-Tax Exclusion

Multinational corporations anticipate getting final guidance during the first half of 2020 on how they can opt out of a tax on a new category of foreign income.

The 2017 overhaul created the global intangible low-taxed income, under tax code Section 951A, which is designed to ensure companies pay a minimum tax on offshore profits in low-tax countries. A corresponding 10.5% levy is intended to hit companies when their controlled-foreign corporations are paying less than 13.125% in taxes offshore.

The tax has been catching companies paying more than the threshold because of the way domestic expenses are allocated. The IRS in a June proposal (REG-101828-19) offered multinationals the choice to elect out of the GILTI measure if they’re paying at least 18.9% offshore in taxes.

Businesses and groups, including HanesBrands Inc., Goodyear Tire & Rubber Co., and the Alliance for Corporate Taxation are pushing Treasury to make sure that a GITLI tax isn’t imposed on income subject to foreign tax rates above 13.125%.

Carried Interest

The IRS is working on rules intended to close an apparent loophole in the tax law that would allow hedge fund managers to avoid paying higher taxes on their investments.

The IRS said in March 2018 that it would issue regulations stamping out a workaround of the law’s new requirement—that investments must be held for three years rather than one to get preferential tax treatment for the portion of profits paid to managers, known as carried interest.

Kautter said in November to expect the rules by early 2020.

The administration could be wading into a tricky legal fight with the rules: the Federal Circuit’s October ruling in Charleston Area Medical Center v. U.S. suggested that the IRS may struggle to defend the rules in court.

Passive Foreign Investment Companies

U.S. shareholders with stakes in foreign insurance companies are hoping to see final rules this year that would let them avoid classification as a passive foreign investment company—and duck a related tax hit.

The rules are intended to close a loophole in which some U.S. taxpayers use offshore hedge funds or other investment vehicles to shelter their money. The tax overhaul expanded the number of foreign companies caught under the PFIC rules and caused shareholders to question their investments in foreign insurance companies with active insurance businesses.

Insurance companies, including ABR Reinsurance Ltd., Harrington Holdings Limited, and Resolution Re., have been critical of an IRS proposal (REG-105474-18) that explains how offshore entities would be considered legitimate insurance businesses. Companies have said the requirements incorrectly assume how reinsurance companies operate and invest their capital.

Meals and Entertainment

The IRS is expected to propose rules following the tax law’s limit on a tax break for business meals and expenses.

Prior to the tax law, the deduction was limited to 50% of the cost of meal and entertainment expenses. The law repealed the deduction for entertainment expenses. The rules under Section 274 are meant to clarify when business meals are non-deductible entertainment expenses, and when they qualify for a 50% deduction.

The biannual regulatory agenda released Nov. 20 listed the guidance as potentially being released in December, suggesting the rules could come soon.

Coach Tax

Universities, charities, and other nonprofits with highly compensated employees—such as college football coaches at public universities—are eagerly anticipating a set of proposals for a new levy on those payments created in the 2017 tax law.

The 21% excise tax applies to compensation over $1 million for a nonprofits’ five highest-paid employees and to large exit packages. The rules, for added Section 4960, are expected to include some anti-abuse provisions, as well as definitional guidance.

The guidance could also come soon—the regulatory agenda listed it for a December 2019 release.

Cloud Computing Transactions

Tech companies are waiting for the IRS to push out detailed rules for how their cloud computing transactions will be taxed.

Cloud computing allows buyers to use a network of remote servers hosted on the internet to store, manage, and process data. Proposed rules (REG-130700-14) under tax code Section 861 guide companies whether cloud transactions and digital content access should be classified as a provision of services or a lease of property. That classification determines where the transactions are taxed.

Business groups, including the Tax Executives Institute and the Software Finance and Tax Executive Council, have said the rules create “substantial and burdensome data storage costs” and interfere with local data privacy laws.

Unrelated Business Income

The agency needs to finish a proposal to help nonprofits calculate the taxes they owe on income earned from activities departing from their primary mission.

The 2017 tax law under new tax code Section 512(a)(6) requires nonprofits to calculate unrelated business income tax (UBIT) separately for each trade or business. UBIT applies to any activities a nonprofit engages in that aren’t related to the tax-exempt purpose of the organization.

The IRS in 2018 released (Notice 2018-67) interim guidelines and requested comments on how best to implement the new requirement.

Some groups have complained that the policy will be especially burdensome for small nonprofits. The American Institute of CPAs in a November letter to the IRS asked that the agency exclude such entities from the provision.

Foreign-Derived Intangible Income Deduction

Companies are waiting for the IRS to finalize rules that allow for a deduction on foreign-derived intangible income (FDII).

Proposed regulations (REG-104464-18) for the Section 250 foreign-derived intangible income (FDII) deduction, released March 4, require companies to provide documentation that substantiates the export and source of income.

The export deduction is meant to offset a tax on GILTI and encourage companies to manufacture domestically. But the proposed documentation rules are so onerous that some companies may bypass the rules by migrating IP assets to their offshore subsidiaries.

Industry groups like the U.S. Chamber of Commerce and the Information Technology Industry Council say the rules require companies to begin collecting information beyond what is available during the ordinary course of business. Limiting the requirements would prevent the potential shift of IP assets overseas.