IRC 174, Government Funding, and AI Lawsuits
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Tax Policy/News:
January 2: IRS Provides Limited Relief Surrounding IRC 174
The IRS issued favorable guidance on December 22nd, providing clarity on the definition of contract research and specifying automatic changes in accounting methods for the 2023 taxable year related to Section 174 research and experimental (R&E) expenditures.
While awaiting congressional legislation for immediate expensing of Section 174 R&E expenditures, the IRS clarification offers relief for software development or research activities under contract arrangements.
The guidance distinguishes scenarios where R&E expenditures will not be deemed Section 174 R&E expenditures, particularly when the contract researcher does not bear financial risk and obtains an excluded product right.
This includes product rights separately bargained for or acquired for the limited purpose of performing R&E activities. Contract researchers can potentially expense R&E activities as trade or business expenses, subject to proposed regulations.
Additionally, Notice 2024-9 provides procedures allowing taxpayers to obtain automatic consent for changing their accounting method in light of the interim IRS guidance issued in Notices 2023-63 and 2024-12. This includes addressing Section 174 automatic method changes, waiving the general five-year restriction, and allowing taxpayers to file for automatic changes in accounting methods until the extended due date of the tax return.
The impact of the guidance is limited to specific areas of the research industry, and the hope remains for congressional recognition of the importance of Section 174 R&E immediate expensing through a potential tax extender bill in the coming weeks.
January 2: 2024 Snapshot: Potential TCJA-CTC Deal in Play Ahead of Filing Season, Tax Pro Says
Amidst the uncertainty surrounding tax legislation ahead of the 2024 elections, Rohit Kumar, Co-Leader of PricewaterhouseCoopers Washington National Tax Services, anticipates the possibility of a bipartisan deal focusing on three provisions of the Tax Cuts and Jobs Act (TCJA) and the child tax credit (CTC) as tax season begins.
There is reported progress on negotiations related to the TCJA Big Three and a partial revival of the expanded CTC under the American Rescue Plan Act of 2021.
House Republicans seek legislation addressing research and development amortization, bonus depreciation rate phaseout, and business interest expense deduction.
Democrats aim to make temporary changes to the CTC during the COVID-19 pandemic permanent, tying it to the TCJA components. Kumar suggests that an agreement affecting 2023 could influence the filing season, pressuring swift action.
Despite potential standalone legislation, challenges exist in deciding procedural mechanisms. Kumar emphasizes that any CTC action will not reach the scale of the expanded version under ARPA due to budget constraints.
December 27: IRS updates guidance on EV tax credits
The Internal Revenue Service (IRS) has provided additional guidance on the components eligible for tax credits in electric vehicles (EVs) under the Commercial Clean Vehicle Credit.
The guidance addresses the mineral and battery component requirements, particularly focusing on reducing reliance on Chinese components.
The IRS has updated its frequently asked questions (FAQs) to offer clarification on eligibility rules for the New Clean Vehicle Credit. It emphasizes that vehicles placed in service after December 31, 2023, with battery components manufactured or assembled by a "foreign entity of concern" are not eligible for any portion of the new clean vehicle credit.
The IRS also requires qualified manufacturers to make an attestation under penalties of perjury in their written reports, confirming compliance with the foreign entity of concern requirements.
These updates aim to align with the goals of the 2022 law to enhance U.S. manufacturing capacity for EV batteries.
December 26: IRS plans rules to clarify R&D expensing
The Internal Revenue Service (IRS) and the Treasury Department have issued Notice 2024-12, indicating their intention to propose regulations addressing the capitalization and amortization of specified research and experimental expenditures.
The notice clarifies rules issued earlier in Notice 2023-63 and modifies reliance rules by removing the requirement for taxpayers to rely on all of the rules in sections 3 through 9 of Notice 2023-63.
It also removes the requirement for a taxpayer to obtain the specified contractual assurances under section 6 of Notice 2023-63.
Additionally, it addresses concerns that taxpayers raised regarding the interaction of the Notice 2023-63 rules with section 41 regulations.
The notice provides examples illustrating how taxpayers should apply the principles in the earlier notice and explains that taxpayers can apply a reasonable, consistent approach to identify gross receipts from sales of property and services that are eligible for the payroll tax credit and research credit.
The latest notice aims to provide further clarification and guidance on the capitalization and amortization of specified research and experimental expenditures, particularly those performed under a contract.
Economic News/Policy:
December 28: 5 big funding questions awaiting Congress in January
With less than a month remaining until the first government shutdown deadline, Congress faces escalating risks as lawmakers have not reached an agreement on overall spending levels, a crucial step for negotiating a broader funding deal.
Disagreements persist over issues such as the severity of non-defense spending cuts and the handling of controversial riders.
Lawmakers have only two weeks upon their return before the Jan. 19 deadline, which could lead to a partial government shutdown, and an additional two weeks before a complete shutdown on Feb. 2.
Complicating matters are the unresolved issues of border security and Ukraine aid. Unlike previous shutdown threats, a short-term patch is not a clear solution, as Democrats and some Republicans reject a plan to extend a stopgap spending bill through the fiscal year, citing funding limits from a summertime debt deal.
The ongoing negotiation stalemate revolves around defense funding, cuts to non-defense funding, disagreements over emergency cash categorization, poison pill riders, and the challenge of packaging spending bills, with time running out before the looming deadlines.
December 22: Inflation finally dips below 3 percent as U.S. economy nears ‘soft landing’
The annual Personal Consumption Expenditures (PCE) price index in November fell to 2.6 percent, below the Federal Reserve's 2 percent target, indicating a potential soft landing from high inflation.
The October PCE index was also revised down to a 2.9 percent annual gain. Excluding volatile food and energy prices, the core PCE dropped to 3.2 percent annually in November.
The decline in gas prices is seen as a positive development for consumers, contributing to increased confidence in the economy.
The latest consumer confidence survey from The Conference Board hit a five-month high in December. Some analysts suggest that the favorable inflation report might lead the Fed to consider cutting interest rates sooner than anticipated, especially as unemployment remains low.
The central bank had raised interest rates to 22-year highs in the past two years but signaled a potential end to the aggressive rate hikes in its recent meeting.
The report is viewed as positive for the economy, with PCE remaining high and prices showing signs of disinflation, according to Raymond James chief economist Eugenio Aleman.
Technology:
December 27: The New York Times sues OpenAI and Microsoft for using its stories to train chatbots
The New York Times has filed a federal lawsuit against OpenAI and Microsoft, alleging that the companies are jeopardizing its business by using its stories to train chatbots without permission.
The lawsuit, filed in federal court in Manhattan, contends that OpenAI's ChatGPT has been using Times' material, including verbatim excerpts, thereby diverting web traffic and potentially costing the newspaper advertising revenue.
The Times argues that these AI chatbots, by competing with the content they are trained on, reduce the likelihood that users will visit the original source.
OpenAI expressed surprise and disappointment over the legal action, stating that ongoing conversations with The New York Times had been productive.
The lawsuit is part of a broader trend as OpenAI faces multiple copyright infringement lawsuits from writers and increased scrutiny over its AI models' use of copyrighted materials, with The Times seeking unspecified damages and the destruction of AI models or datasets incorporating its work.
For Fun:
January 1: ‘Strongest’ solar flare since 2017 detected: Here’s what to know
On New Year's Eve, a substantial solar flare, the most significant in years, was observed on the sun, prompting a caution for high-frequency radio users.
The flare, categorized as an X5, peaked just before 5 p.m. ET on Sunday, making it the most powerful since September 2017.
Although smaller than the 2003 flare, it surpassed the recent X2.8 solar flare reported in December.
The flare's potential impacts include temporary signal degradation for high-frequency radio users and a minor geomagnetic storm watch for Tuesday. While the flare may cause auroras, the chances of significant disruptions to Earth systems are low, with built-in resiliencies in electrical grids and communication systems.
Solar activity is expected to increase in 2024 as the sun progresses through Solar Cycle 25, bringing more frequent solar events like flares and coronal mass ejections. Despite occasional concerns, such solar occurrences are part of natural solar cycles and do not pose catastrophic threats to Earth.