NOL Carryback Claims, Business Tax Refunds, and 2022 Tax Planning
Tax Policy:
September 7: IRS approving most NOL carryback claims with little vetting
The report, released Tuesday by the Treasury Inspector General for Tax Administration, examined the IRS's efforts to administer a provision in the COVID-19 relief package that Congress passed in March 2020 giving companies a special five-year carryback period for net operating losses for tax years beginning in 2018, 2019 and 2020, with some exceptions. To get the tax refunds, corporations only had to file Form 1139, Corporate Application for Tentative Refund, with the IRS. The provision provided a boon to companies trying to cope with the economic fallout from the COVID-19 pandemic, but like many of the other relief provisions, it was also exploited as the federal government rushed trillions in relief out the door.
"Despite the large volume of Forms 1139 submitted, the business tax returns selected for examination represent a relatively low percentage of net operating loss tax years claimed on the Form 1139," said the report. "From March 27, 2020, through July 26, 2021, the Small Business/Self-Employed Division selected a total of 12,760 Forms 1120, U.S. Corporation Income Tax Return, for examination of which 36 involved a 'loss' year claimed on the Form 1139. Similarly, the Large Business and International Division selected a total of 5,214 Forms 1120 for examination of which 406 involved a 'loss' year claimed on the Form 1139. Further, the IRS is not assessing the potential risk these CARES Act provisions pose to tax administration in order to determine whether to adjust examination coverage."
The IRS didn't let all of the refund applications go unexamined.
In the report, TIGTA recommended that the Small Business/Self-Employed Division track and monitor the examination results for the 25 open examinations of Forms 1120 with reported net operating losses and an associated Form 1139 presented in its report, excluding Joint Committee Refund cases.
"Between 2018 and 2021, tax laws related to NOL deductions changed three times," wrote Lia Colbert, commissioner of the IRS's Small Business/Self-Employed division. "At the time of this report, CARES Act provisions have expired and TCJA provisions are in place, which limits the deductibility of NOLs for tax years beginning after Dec. 31, 2020." She pointed out that corporations can claim NOL deductions not only on the Form 1139, but also Form 1120-X, the amended corporate tax return, but the IRS prioritized 1139.
Another longstanding tax break, the Work Opportunity Tax Credit, was recently highlighted by the investigative news organization ProPublica, which found the WOTC was often going to temporary employment agencies that hired convicted felons as workers and soon laid them off.
September 6: IRS continued to delay business tax refunds from pandemic
The Internal Revenue Service has been slow in processing employer tax credits and tax refunds that businesses were supposed to receive to cope with the pandemic, according to a new report.
The report, released Tuesday by the Treasury Inspector General for Tax Administration, followed up on a previous audit from July 2021 and found some of the same problems have lingered into this year with tax credits like the Employee Retention Credit and the Paid Sick Leave and Family Leave Credit.
"The IRS did not begin processing claims for qualified Sick and Family Leave Credits and the Employee Retention Credit for 12 months and claims for Social Security tax deferral for 16 months after the pandemic relief legislation was enacted. This was due to a lack of updated programming and procedural guidance. A lack of training erroneously suspended claims, and a lack of prioritization of claims contributed to additional delays processing claims." TIGTA had other concerns with the IRS's processes for implementing retroactive termination of the Employee Retention Credit.
Because of the retroactive termination, some businesses no longer eligible to claim the credit may have already reduced their employment tax deposits in anticipation of claiming the credit for the fourth quarter of 2021, TIGTA noted.
Another problem described in the report was that amended returns with Employee Retention Credit claims were not referred to the IRS's Examination function for review as required. Tax examiners didn't always refer to the amended returns without a refundable tax credit, as required.
TIGTA made nine recommendations in the report to the IRS, including developing plans to prioritize processing backlogged claims, updating Examination referral criteria to include Forms 941-X with refundable credit claims, and developing a systemic process to identify Forms 941-X that meet referral criteria and alerting the employee when processing the claim of the need to refer the return to Examination for review.
Inflation Reduction Act of 2022:
September 12: 2022 tax planning after the Inflation Reduction Act
The Inflation Reduction Act extended many green energy and energy efficiency tax breaks already in the Tax Code and created several new tax breaks as well. The legislation also imposes several new requirements to obtain the largest possible tax break, such as requirements to pay prevailing wages and offer apprenticeship programs, requirements to use domestic content, and requirements to operate in low-income or otherwise distressed communities.
Clean Vehicle Credit: Obtaining the tax credit for an electric vehicle could prove difficult for a while at least. The new credit imposes vehicle price limits, purchaser income limits, and vehicle domestic sourcing tests to be met to qualify for the credit. It is estimated that most electric vehicles will not qualify under these requirements until manufacturers can come up with alternative sourcing for critical minerals and battery components or alternative minerals.
Energy Efficient Home Improvement Credit: The changes made by the Inflation Act to the renamed Energy Efficient Home Improvement Credit for exterior home improvements and certain qualified energy properties are mostly good news. The old $ 500-lifetime credit has been replaced by a $1,200 annual credit and it has been extended through 2032. All of these changes are effective starting after Dec. 31, 2022.
The Alternative Fuel Refueling Property Credit: The Inflation Act extended the Alternative Fuel Refueling Property Credit retroactively to all of 2022 and through 2032. However, starting in 2023, the credit will be limited to property located in a rural or low-income census tract. Although there appears to be some debate about the intent of Congress, it appears that this location limit may apply to individual installations as well as business installations. Individuals can still, however, qualify for the $1,000 credit for an installation placed in service in 2022.
Energy Efficient Commercial Building Tax Deduction: The previous Code Sec. 179D deduction for energy-efficient commercial buildings remains in effect for 2022. The new requirements for the deduction do not go into effect until 2023, but neither do the much higher deduction limits. Contractors will have to decide if it is better to push ahead and go for the lower deduction limits free of restrictions or go for the higher deduction limits with the restrictions
September 7: Inflation Reduction Act Pushes IRS To Pursue Free TurboTax Competitor
"The IRS is completely beholden to the software companies at this point because it just doesn't have anything to replace them," said Nina Olson, who served as the national taxpayer advocate, the IRS's internal consumer rights watchdog, from 2001 to 2019. The commercial tax prep industry is gargantuan, worth $11.9 billion in 2022, according to market research firm IBISWorld; 9 in 10 individual tax returns were filed digitally in 2021, the IRS reported.
The largest players, Intuit TurboTax and H&R Block offer narrowly tailored free e-filing options, and charge $59 and $55, respectively, for their lowest-paid tiers, plus variable filing fees and costs for state tax returns.
Tax experts say a government-backed system could give more Americans access to free and trustworthy services while increasing IRS efficiency by encouraging more taxpayers to file easy-to-process digital returns rather than cumbersome paper ones.
Taxpayers using some firms could only file for free by navigating through the IRS's website; Free File was inaccessible on the companies' web pages. Free File never gained the popularity federal tax officials had hoped: Fewer than 3 percent of taxpayers use the program, according to the Government Accountability Office, Congress's nonpartisan watchdog.
State regulators said that at least one company used deceptive practices to steer low-income earners toward paid products: Intuit settled with eight state attorneys general for $141 million in May after accusations that its ads for free tax prep were misleading and purposefully confused the IRS-supported Free File program with "Freemium products" that begin with no charge but include fees to accomplish even modest tasks.
H&R Block in an emailed statement said qualifications for its free service "Are dependent on how complex each tax situation is. If additional assistance is needed, a taxpayer can choose to connect with a tax professional via chat or online, fees may apply."
Economic News/Policy:
September 13: Stimulus Spending Drove Poverty Lower Again in 2021, Census Bureau Reports
The poverty rate fell to 7.8 percent in 2021, down from 9.2 percent the previous year, according to the Supplemental Poverty Measure, a yardstick that adjusts for geographic differences. The "Official" poverty rate, generally considered outdated because it omits hundreds of billions spent on programs like tax credits, and housing assistance, also did not change significantly from the previous year.
Progressives see the poverty reduction - even if temporary - as evidence that the federal government has the power to give people a better standard of living, and that it should continue to do so in the future. Refundable tax credits, including the expanded child tax credit and the earned-income tax credit, removed 9.6 million from poverty.
“OK, great, like poverty went down a lot, but it didn’t not on a sustained basis,” said Michael R. Strain, director of economic policy studies at the American Enterprise Institute. "If you think of poverty in a broader sense related to issues around self-sufficiency and earnings and upward mobility, then I think a huge reduction in poverty based on a one-time temporary income transfer isn't really a reduction in poverty at all."
Some economists have argued that permanently expanding the child tax credit would over the long term lead some parents to work less, increasing poverty.
"Maybe you will have a few people stop working, but regardless, there's going to be a big decrease in child poverty," said Jacob Bastian, an assistant professor of economics at Rutgers University. “We should encourage people to work as much as we can, but I don’t think that means doesn’t mean we don’t help people.”
September 12: White House Scrambles To Avert Looming Railroad Strike
President Biden made calls to union leaders and rail companies Monday, pressing for a deal to avert a national railroad strike that is days away from shutting down much of the country's transportation infrastructure, according to a White House official. Biden's calls follow unsuccessful emergency meetings at the White House last week, which have been led by the White House National Economic Council and included Labor Secretary Marty Walsh.
The freight industry has warned that the strike would shut down 30 percent of the country's freight and "Halt most passenger and commuter rail services." A freight railroad shutdown could "Devastate" Amtrak operations, according to the Association of American Railroads, with roughly half of commuter rail systems running at least partially on tracks or rights of way owned by freight railroads.
The remaining two unions, which represent 57,000 workers slated to strike, are angry the recommendations don't address a lack of sick days or attendance policies that penalize workers.
Leaders of the two unions that have not reached an agreement with carriers say that Biden's emergency board miscalculated the importance of this quality of life concern to railway workers.
More than 700 union employees have quit since the policy's rollout in February, but the railroads insist that it is necessary to ensure enough train operators are available to work because they have been dealing with labor shortages.
Many of his aides are sympathetic to workers' complaints of poor working conditions and unjust treatment by management and are reluctant to lean too aggressively on labor leaders to end the strike.
September 11: Economy Week Ahead: Inflation and Retail Sales in Focus
Monday: The U.K.’s Office for National Statistics releases gross domestic product data for the three months through July. The British economy shrank in the three months through June as households cut back on spending.
Tuesday: The U.S. Labor Department releases its consumer-price index for August, the last major inflation reading before the Federal Reserve’s Sept. 20-21 meeting. Consumer prices rose 8.5% in July from a year earlier, slower than the 9.1% annual increase in June, which was a four-decade high.
The National Federation of Independent Business releases August data from its monthly survey that gauges optimism among small businesses. The survey’s reading for July improved from the month before but remained below the 48-year average.
Wednesday: The Labor Department releases its producer-price index reading for August, which reflects prices paid to suppliers. The PPI rose by 9.8% in July from a year before, the smallest annual rise since October 2021’s 8.9% increase.
The U.K.’s Office for National Statistics releases inflation data for August. Britain’s consumer prices were 10.1% higher in July than a year earlier, up from an annual increase of 9.4% in June.
Thursday: The Commerce Department releases August retail sales figures, which measure spending at stores, online, and in restaurants. Overall U.S. retail sales were essentially unchanged in July from the prior month, but a measure excluding gasoline and auto sales was up by 0.7% that month from June, reflecting resilient consumer spending on other items.
The Labor Department releases the number of U.S. worker filings for unemployment benefits in the week ended Sept. 10. Initial jobless claims, a proxy for layoffs, have fallen for four weeks in a row after rising earlier in the summer.
The Fed releases August industrial production figures, which measure the output of factories, mining, and utilities. U.S. industrial production increased 0.6% in July from the previous month.
China’s National Bureau of Statistics releases industrial production figures for the 12 months through August. Industrial production rose 3.8% in July from a year before, slower than the 3.9% annual increase in June.
Friday: The University of Michigan publishes its final reading of consumer sentiment for August. The initial estimate for August showed an improvement from July’s final reading.
September 8: Jerome Powell signals interest rates will remain high to fight inflation
The Federal Reserve chair has taken a hawkish tone in recent appearances, seeking to underscore the central bank's commitment to bringing down prices. Jerome H. Powell, the Federal Reserve chair, signaled on Thursday that the central bank will continue raising interest rates to convince the American public that it is serious about bringing soaring price growth back to normal levels, further cementing market expectations of another aggressive rate increase this month.
"The longer inflation remains well above target, the greater the risk that the public sees higher inflation as the norm," Mr. Powell said in a moderated discussion with Peter H. Goettler, the president and chief executive of the Cato Institute in Washington.
Mr. Powell has taken a hawkish tone in recent appearances, seeking to underscore the Fed's firm commitment to bringing down inflation. In a speech in Jackson, Wyo., last month, he signaled that the Fed would continue to raise interest rates - and keep them higher for an extended period - to cool price pressures.
"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance," Mr. Powell said in those remarks. "While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses."
Manchin Permitting Reform/Government Funding:
September 13: ‘Sleazy backroom deal’: Progressives tangle one more time with Manchin
Slamming Schumer and Manchin's agreement to take up permitting reform in exchange for his vote on the party-line bill as a "Sleazy backroom deal."
It’s all shaping up as Democrats’ last big internal fight before the midterms, a rare remaining sore point for a party that’s largely and finally united on everything from abortion to the economy to same-sex marriage. And after nearly an entire Congress defined by the 50-50 Senate, the House is taking a starring role: Sen. Bernie Sanders (I-Vt.) is pledging to vote against the permitting bill if it's linked with government funding, but lower-chamber progressives are offering the main intraparty resistance to Manchin's plan.
Several lawmakers and aides said they believe there is a path to an amended deal that can win over Grijalva and other House Democrats while keeping Manchin on board.
One key motivator: Many clean energy advocates say a permitting deal as envisioned by Manchin's initial framework would benefit renewable projects, including wind and solar generation, even if it would also accelerate some fossil-fuel pipelines, such as the long-stalled Mountain Valley natural gas line that originates in the senator's home state.
Permitting reform, as Manchin put it, means "We're able to have the energy security that our country needs now." Referring to new transmission lines for renewable energy, he added: "And as we move towards the transition, you're able to do that with the infrastructure it's going to take. ... I would like to think people are being practical and not being political."
Manchin said Schumer and Pelosi are standing firm in their commitments to him: "I believe exactly what they've told me they see exactly what this country needs and why we need to make sure that we have to be the superpower of the world." He said he was buoyed by the Monday release of a competing permitting reform bill by dozens of Senate Republicans as a show of bipartisan support for his ideas.
While Democrats cheered their summer's huge climate gains in the Manchin-crafted party-line bill, plenty of progressives feel they owe him nothing on the separate issue of energy permits.
September 9: More than 70 House Democrats join to push against Manchin’s permitting reform
More than 70 House Democrats are signing on to a letter pressing Democratic leaders to not include a side deal with Sen. Joe Manchin on permitting reform in a bill funding the government. The permitting reform language was offered to Manchin to win his vote on the massive climate, tax, and health care bill known as the Inflation Reduction Act that was signed into law by President Biden last month.
Manchin provided the critical support to get that bill through the evenly-divided Senate after winning concessions from Democratic leaders.
In the new letter, the Democratic lawmakers are asking Speaker Nancy Pelosi and House Majority Leader Steny Hoyer not to include the permitting reforms championed by Manchin into a stopgap funding measure that Congress is expected to take up this month.
If the group follows through on the letter, Democrats might not have the votes to pass a government funding bill if it includes the language backed by Manchin.
When they announced the agreement on the major climate, tax, and healthcare bill, Senate Majority Leader Chuck Schumer and Manchin said that they, along with Pelosi and President Biden, had reached a deal to pass permitting reform by October to secure Manchin's vote. Grijalva previously told The Hill that he didn't feel an "Obligation" to vote for the changes since he was not part of the negotiations with Manchin.
September 8: Schumer in tough spot over Manchin promise
Senate Majority Leader Charles Schumer on Wednesday pledged to add permitting reform legislation to a stopgap funding bill that would prevent a government shutdown, but he's in a tough spot as he seeks to deliver on a promise to Sen. Joe Manchin. The permitting reform is a side deal that Schumer struck with Manchin in late July to pass a climate, tax, and health care bill known as the Inflation Reduction Act, which is projected to help reduce that nation's carbon emissions by 40 percent by 2030.
Manchin offered his support for the bill in July after winning significant concessions, and his vote allowed Democrats to pass a major achievement for President Biden. Some Senate Democrats also said they couldn't say whether they would support a short-term government funding bill that includes permitting reform until they review the details of the bill.
"I know there were progressives over in the House that don't like the idea. They swallowed the reconciliation bill, but it's going to be an interesting process to watch," he said, adding jokingly that "This may be a Lucy and the football moment" for Manchin.
Schumer could find a way around the jam by also adding to the government funding measure a bill to codify marriage equality. Schumer says his preference is to bring the marriage equality bill to the Senate floor separately.
September 7: Schumer Pledges To Pass Manchin Deal Despite Democratic Opposition
Senate Majority Leader Charles Schumer promised on Wednesday to pass a side deal on permitting reform with Sen. Joe Manchin to the massive tax, climate, and health care bill despite growing opposition from progressive House Democrats.
Schumer told reporters that passing permitting reform was part of the deal he struck with Manchin in July to pass the tax, climate, and health care bill known as the Inflation Reduction Act, which included hundreds of billions of dollars in federal investments to combat climate change and increase domestic energy production.
"Permitting reform is part of the IRA and we will get it done," Schumer said Wednesday, referring to the Inflation Reduction Act deal he crafted with Manchin in late July.
Schumer's deal with Manchin on permitting reform is getting strong pushback from environmental groups, according to Democratic senators.
"The environmental justice community is very concerned these permitting rules will make it a lot easier to keep the fossil fuel projects that are polluting their communities. So they're pretty torqued," said one Democratic senator who requested anonymity to discuss the political pushback facing the Schumer-Manchin deal.
Schumer told reporters after the Senate passed the Inflation Reduction Act last month that he wasn't thrilled with some of the elements of permitting reform but had to agree to get Manchin's vote for prescription drug reform, climate provisions, and other Democratic priorities.
"In terms of the permitting reform, I didn't like it but it was something that Sen. Manchin wanted," Schumer told reporters last month.
Energy and Environmental Policy/News:
September 9: Wall Street hits back at GOP in ESG war
Wall Street giants are defending a widespread initiative to invest in companies with environmentally friendly policies, moving away from investment in the fossil fuel industry following attacks on the practice from GOP leaders. Asset management giant BlackRock wrote a letter to GOP stating that they are trying to curtail a social movement in the financial sector known as Environmental and Social Corporate Governance, which seeks to move the U.S. economy away from the fossil fuels that contribute to global temperature rise.
The attorneys general said BlackRock is pursuing a political agenda instead of investing solely for the purpose of getting the best return on the company’s investments. “Rather than being a spectator betting on the game, Blackrock appears to have put on a quarterback jersey and actively taken the field,” they wrote. "Blackrock took voting action against 53 companies on climate issues, with 191 companies put on a watch."
The firm responded that it favors companies that support the transition away from fossil fuels not because it's pursuing a political agenda, but because these companies are a better long-term investment. The company said that the attorneys general were wrong about why BlackRock was participating in various ESG initiatives. The Texas state Senate also sent BlackRock a letter in August requesting documents about its ESG practices, which many in the state view as harmful to its economy.
September 8: Climate Change Could Worsen Supply Chain Turmoil
Chinese factories were shuttered again in late August, a frequent occurrence in a country that has imposed intermittent lockdowns to fight the coronavirus. But this time, the culprit was not the pandemic. Instead, a record-setting drought crippled economic activity across southwestern China, freezing international supply chains for automobiles, electronics, and other goods that have been routinely disrupted over the past three years.
Such interruptions could soon become more frequent for companies that source parts and products from around the world as climate change, and the extreme weather events that accompany it, continue to disrupt the global delivery system for goods in highly unpredictable ways, economists and trade experts warn.
One clear trend is that natural disasters like droughts, hurricanes, and wildfires are becoming more frequent and unfolding in more locations. Companies had to scramble to secure trucks to move their goods to Chinese ports, while China's food importers hunted for more trucks and trains to carry their cargo into the country's interior.
China even resorted to using drones to seed clouds with silver iodide in an attempt to trigger more rain, said Zhao Zhiqiang, the deputy director of the Weather Modification Center of the China Meteorological Administration, at a news conference on Tuesday.
"As networks become more connected, and climate change worsens, the frequency and size of supply-chain-related disasters rise," the report said.
Some parts of the world, like Russia, Scandinavia, and Canada, could produce more grains and other food crops to feed countries as global temperatures rise. The Chancellor's Professor of Public Policy at the University of California, Berkeley, and a co-director of the Climate Impact Lab, agreed that trade might simultaneously make the world more resilient to these disasters and more vulnerable.
September 7: Yellen will vow to ‘rid’ US from ‘dependence on fossil fuels in Detroit speech
Treasury Secretary Janet Yellen will call out the fossil fuel industry in a Thursday speech on the Biden administration's economic agenda to be delivered in Detroit, Mich., where oil and gas companies have long held influence in the U.S. auto manufacturing sector.
"Our plan - powered by the Inflation Reduction Act - represents the largest investment in fighting climate change in our country's history. It will put us well on our way toward a future where we depend on the wind, sun, and other clean sources for our energy," her remarks continue. "By mobilizing private capital, the clean energy tax credits implemented by the Treasury will propel our economy and workers to a leadership position in the fastest growing markets and technologies of today and the future, with positive spillovers to the rest of the world. And in the process of boosting domestic clean energy production, the law will support our energy security and insulate us from the type of fossil fuel-driven energy volatility that we've seen in the past year," her remarks say.
Republicans at the state level have been mobilizing to block ESG practices, which they view as harmful to their economies, with various initiatives in states like West Virginia and Texas that include a blacklist of financial firms that "[boycott] energy companies" and a request for documents from certain institutional investors on Wall Street.
"These economists offer no support for increases in public investments in renewable energy and energy efficiency, thereby surrendering the power of the public sector, amounting to 35 percent of GDP in the U.S. and higher shares elsewhere, to push the clean energy transformation forward at the most aggressive possible rate," University of Massachusetts economist Robert Pollin wrote in a 2020 book titled "Climate Crisis and the Global Green New Deal.".
In an interview, Pollin said that the IRA represents a step forward but is still too focused on the private sector. "The IRA is almost entirely geared toward incentivizing private investment. Between federal, state, and local governments, we're talking about $7 trillion of public spending. Why not take a tiny slice of that and do things like investing in, say, retrofitting every single public building to raise energy efficiency standards, investing in 100 percent renewable energy to supply public buildings, or having public-sector purchases of electric vehicles for public transportation significantly?".
Transportation sector emissions reductions resulting from the IRA constitute the smallest segment of reductions overall, beaten out by improvements in agriculture, electricity, industry, and building technology, according to an analysis of the law by climate think tank Energy Innovation Policy and Technology.
For Fun:
Newly released images captured by the James Webb Space Telescope, or JWST, show the Orion Nebula, a star nursery located 1,350 light-years from Earth, in spectacular detail. Situated in the Orion constellation, the Orion Nebula shares a similar environment to that in which our solar system was formed over 4.5 billion years ago.
"We are blown away by the breathtaking images of the Orion Nebula. We started this project in 2017, so we have been waiting more than five years to get these data," said astrophysicist Els Peeters of Western University in Canada, one of the institutions involved in the project, in a statement from the college.
While the hearts of star nurseries like the Orion Nebula are impossible to study due to being shrouded in stardust, the JWST takes in infrared light, which allows researchers to see through the dust clouds.
The images are detailed enough to reveal structures within the nebula at scales similar to the size of our solar system.
In a news release by the University of Michigan, the college's astronomy chair, Edwin Bergin, said he and other researchers hoped to "Gain an understanding about the entire cycle of star birth" from the images. Launched in December, the JWST became operational in July and has since produced spectacular images of the Tarantula Nebula and Jupiter's auroras.