ERC Withdrawal Process, New House Speaker, and Interest Rates
Probity Tax Recovery is a tax consulting firm specializing in tax credits and incentives for small to mid-sized businesses. We work with business owners and their CPAs to identify tax credits and incentives while saving you time and money. Schedule a free consultation with a member of our team here.
Tax Policy/News:
October 27: What comes next in the IRS's ERC withdrawal process?
The Internal Revenue Service (IRS) has introduced a mechanism for businesses to retract incorrect claims for the Employee Retention Credit (ERC) if they haven't been paid yet.
This move comes in response to the rise of "ERC mills" that have aggressively marketed the pandemic tax break as an easy financial gain. The IRS's withdrawal process is available to businesses whose claims have not been paid or those who have received but not yet cashed or deposited their refund checks.
However, this leaves a significant number of businesses uncertain about their next steps if they've already deposited their refunds. Eric Hylton, a former IRS official, highlighted the complexities and potential pitfalls of the ERC, especially when businesses have also availed of the Paycheck Protection Program.
Accounting firms have reported a surge in inquiries about the ERC, with many clients concerned about potential penalties for claiming the tax credits.
The IRS's withdrawal process aims to ease these concerns, but it's limited to specific scenarios. Devin Tenney of Baker Tilly's Washington National Tax Office emphasized the urgency of the withdrawal program, as it's restricted to claims currently under review or checks not yet cashed or deposited.
The IRS's Criminal Investigation division is actively investigating cases of fraud related to the ERC, especially those promoted by ERC mills. The IRS has also announced a temporary halt on processing new ERC claims and is developing further guidance for businesses that have already received and used their ERC payments.
October 24: A Tax Rule Change Is Threatening the Survival of Some Businesses
A recent change in the tax code affecting how companies account for research and development (R&D) costs is significantly impacting businesses, both large and small.
The new provision, part of the 2017 Tax Cuts and Jobs Act, requires companies to amortize R&D costs over several years, leading to reduced immediate deductions and consequently higher tax costs.
While large corporations face substantial increases in their tax liabilities, small and medium-sized businesses, which cannot easily borrow to cover these bills, are particularly hard-hit. Many of these smaller entities are slowing growth, laying off workers, or even using personal savings to meet their tax obligations.
The tax code alteration has sparked widespread concern and criticism. Major U.S. companies have urged Congress to repeal the law, highlighting its potential to stifle innovation, lead to job losses, and create competitive disadvantages.
For instance, Lockheed Martin anticipates an increase of about $575 million in its 2023 tax liability due to this law. Smaller businesses share these apprehensions but face greater challenges, as they often lack the resources to easily cover the increased tax bills.
While there's bipartisan agreement on the need to reverse the law, political disagreements have stalled progress. The hope for a repeal diminishes as time progresses, leaving businesses grappling with the financial implications of the change.
Economic News/Policy:
October 31: The Fed probably won't cut interest rates just yet — but its next move is expected to be good for Americans
The Federal Reserve's stance against inflation seems to be softening as the year concludes. The Federal Open Market Committee is anticipated to announce its next interest rate decision soon, with the likelihood of a rate hike appearing minimal.
The CME FedWatch Tool, which predicts interest rate changes based on derivatives prices, estimated a 98% probability that the Fed will maintain its current rates. Positive economic data has been consistent, with the US adding 336,000 jobs in September and the Consumer Price Index indicating a 3.7% year-over-year growth in the same month.
Nick Bunker from the Indeed Hiring Lab suggested that the Fed might believe the labor market can aid in controlling inflation, as evidenced by September's 3.8% unemployment rate and stable wage growth.
Despite the encouraging economic indicators, many Americans continue to feel financial pressures. Federal student loan repayments resumed in October after a prolonged hiatus, impacting the disposable income of millions. Additionally, credit card debt reached a record $1 trillion, as reported by the New York Federal Reserve.
While Fed Chair Jerome Powell hasn't hinted at an imminent interest rate reduction, Greg McBride from Bankrate emphasized the importance of managing debts, especially with interest rates likely to remain elevated.
On a positive note, administration officials remain optimistic about avoiding a recession in 2024, with Treasury Secretary Janet Yellen and Joelle Gamble from the White House National Economic Council highlighting strong economic growth indicators. However, global events, such as conflicts in Israel and Ukraine and potential government shutdowns, introduce elements of uncertainty.
October 30: House Republicans propose to rescind IRS funding for Israel aid
House Republicans, led by Speaker Mike Johnson, introduced a $14.3 billion aid plan for Israel, diverging from the Biden administration's approach to the conflict's assistance.
The proposal separates Israel's aid from the broader emergency funding request by Biden, which encompasses aid for Ukraine and Taiwan. Additionally, it excludes the humanitarian aid for civilians in Gaza and Israel that the White House had sought.
To finance the Israel aid, Johnson's plan proposes a $14.3 billion cut in funding for the IRS, a move that counters Biden's Inflation Reduction Act. This approach of offsetting costs deviates from the usual practice, as Congress generally doesn't reduce other programs for emergency spending.
The package, one of Speaker Johnson's initial significant legislative endeavors, is set for a House vote soon. However, detaching Ukraine's funds from the widely supported aid for Israel might jeopardize continued assistance for Ukraine, especially if House Republicans demand changes to US immigration laws in exchange for Ukraine's funding.
While Johnson's strategy might gain favor among House conservatives, it's expected to face opposition from Democrats. The Senate, led by Majority Leader Chuck Schumer, has expressed concerns over the proposed IRS cuts and the omission of aid to Ukraine and Taiwan. Bipartisan discussions in the Senate are ongoing to address the entire $106 billion request by Biden, which includes a significant portion for Ukraine.
October 25: As Mike Johnson becomes House speaker, analyst puts risk of government shutdown at 20% to 30%
The lengthiness of the House Republicans' struggle to install a new speaker has helped bring down the chances for a shutdown when federal funding runs out Nov. 17, according to Terry Haines, founder of Pangaea Policy.
The GOP-run House has been consumed with working on settling on a new speaker since Oct. 3, when the chamber voted for the historic ouster of former Speaker Kevin McCarthy, a California Republican.
"Provided a speaker is elected this week, a shutdown on Nov. 17 seems unlikely; even the House GOP chaos agents who have pushed for a shutdown are exhausted," said Chris Krueger of TD Cowen’s Washington Research Group .
The federal government is funded until Nov. 17 because McCarthy, the former speaker, worked with House Democrats to pass a 45-day funding bridge on Sept. 30 that averted a partial shutdown.
In Wednesday's interview, Haines also said that "What markets need to know about Mr. Johnson is that they don't need to know very much about Mr. Johnson." He said he didn't mean to be unkind to the Louisiana lawmaker, but there can be "a situation where speakers exist to be elected by coalitions within their own party, and the party structure ends up being more important than who the speaker is, and I think that's where we are now."
Technology:
October 30: Biden executive order imposes new rules for AI. Here's what they are.
President Joe Biden has issued an executive order aimed at mitigating the risks associated with artificial intelligence (AI), emphasizing the need to prevent its misuse in creating harmful weapons or potent cyberattacks.
The order establishes a federal role in the AI industry, which involves major companies like Google and Amazon. It mandates AI companies to conduct safety tests on their products and share the results with the government before releasing them to the public. The order also introduces industry standards, such as watermarks for AI-driven products, to enhance transparency and security.
While the guidelines are advisory rather than compulsory, the order represents a significant move towards AI safety and regulation.
The executive order further directs various government agencies to modify their AI usage, positioning federal entities as models for best practices that the private sector might adopt.
For instance, federal benefits programs and contractors will implement measures to ensure AI doesn't amplify racial biases. The Department of Justice will set guidelines for investigating AI-related civil rights violations, while other departments will address AI's potential threats to critical infrastructure.
While experts and advocates acknowledge the importance of this executive order, some express concerns about its enforceability and see it as just the beginning of a longer regulatory journey.
Energy and Environmental Policy/News:
October 25: Regulators take first steps to head off a climate financial crisis
U.S. federal financial regulators have taken a significant step to address the potential risks of a climate-related financial crisis. On Tuesday, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation jointly issued guidelines for banks to prepare for climate-related threats to their financial stability.
The regulators highlighted two primary concerns: physical damages from climate events like floods and fires, and the "transition risk" associated with economic shifts away from fossil fuels. Both scenarios were identified as emerging risks to the financial stability of the U.S. The regulators advised banks to conduct "scenario analyses" to forecast the potential impact of extreme climate disruptions on their investments and deposits.
The new guidelines received mixed reactions. Progressive watchdog group Public Citizen praised the principles but emphasized the need for more specific guidance on climate scenarios and decarbonization strategies. Meanwhile, some Republicans, including Sen. Kevin Cramer (R-N.D.), criticized the proposal, arguing that banks shouldn't be arbiters of public policy and that environmental activists are influencing financial regulators.
The agencies responded by clarifying that they had not promoted a transition to a lower carbon economy, emphasizing that their role is not activist. They stated that banks could continue funding oil and gas, provided the associated risks are adequately accounted for.
ICYMI:
October 24: IRS faces long-term challenges despite extra funding
The Internal Revenue Service (IRS) is working to address various challenges with the additional funding received from the Inflation Reduction Act, though the issues won't be entirely resolved.
IRS Commissioner Danny Werfel, during a congressional oversight hearing, emphasized his commitment to enhancing the agency's operations. He highlighted that the IRS collects approximately $4 trillion in revenues annually, accounting for about 96% of the federal government's operational funding.
The Inflation Reduction Act's funding has enabled the IRS to enhance its services, including phone support and in-person assistance during the 2023 filing season. Werfel believes that consistent multi-year funding will further transform the IRS by improving taxpayer services, enhancing enforcement measures, upgrading technology, and bolstering data security.
In relation to the hearing, Jessica Lucas-Judy, the director of strategic issues at the Government Accountability Office (GAO), discussed a report detailing the IRS's challenges.
The report emphasized the IRS's role in assisting taxpayers and the importance of safeguarding their personal and financial information. The IRS has faced persistent challenges in areas like taxpayer service, return processing, data protection, and updating outdated IT systems.
The GAO report provided several recommendations to the IRS, including digitizing information, workforce planning, and enhancing contractor oversight. While the IRS has acted on many of these recommendations, some remain unaddressed. Rep. Kweisi Mfume stressed the importance of consistent funding for the IRS, warning that further budget cuts could hinder the agency's transformative efforts.
For Fun:
October 31: Nuclear winter: Dinosaurs were likely killed by dust
Researchers from the Royal Observatory of Belgium have posited that the primary cause of the dinosaur extinction 66 million years ago was not the direct impact of an asteroid but the massive amount of dust it propelled into the Earth's atmosphere.
This dust, estimated to be around 2,000 gigatons, blocked sunlight and disrupted plant photosynthesis, leading to a global nuclear winter that lasted up to 15 years.
The resulting environmental changes caused a significant loss of vegetation, leading to the starvation and extinction of many herbivorous species, including certain dinosaurs. In total, this catastrophic event wiped out approximately 75% of Earth's living organisms.
While the Chicxulub Crater's discovery in 1978 provided evidence of an asteroid impact, it did not conclusively link the event to the extinction of dinosaurs. Recent theories had focused on sulfur from the asteroid's impact or soot from global wildfires as potential causes for the prolonged darkness.
However, this new study, using particles from a significant fossil site, suggests that atmospheric dust was the primary agent of the nuclear winter. The research indicates that the dust particles were of the right size to remain in the atmosphere for an extended period.
The study's findings have been acknowledged by experts as a significant step in understanding the cause of the nuclear winter, emphasizing the need to study past extinction events to prepare for potential future crises. The research was published in Nature Biosciences.