A&M Tax Advisor Weekly
As discussed in our prior alert, the Treasury Department last Friday released its general explanation of tax proposals included in President Biden’s fiscal year 2022 budget submission to Congress (the “Green Book”). In this alert, we focus on some of the Green Book’s proposals that were not covered by our prior alert.
Specifically, the following topics are covered in this alert:
Proposals Impacting the Oil & Gas Industry
With the Administration’s focus on green energy and the President’s pledge to end all fossil fuel subsidies, it is not a surprise that the Green Book contains numerous proposals that will drastically impact the oil and gas industry. The proposals, which are estimated to generate over $35 billion in revenue over the next 10 years, cover a wide range of topics, including:
A&M Insight: The Green Book includes 13 specific proposals designed to eliminate fossil fuel subsidies, which are generally proposed to be effective for taxable years beginning after December 31, 2021. If these proposals are enacted, they would discourage future investment and growth. On February 3, 2021, Senator Manchin, chair of the U.S. Senate Energy and Natural Resources Committee and a key Democratic vote in the Senate, stated, “Although fossil fuel consumption is dropping in the U.S. power grid, the global trends in fossil fuel use should make us all recognize that fossil fuels aren’t going anywhere anytime soon ….” Instead, he supports technological innovation to reduce or capture emissions. As a result, it is unclear to what extent any of these proposals will be enacted. If you are in the oil and gas industry and would like to discuss these proposals, or other tax incentives, including the credit for carbon oxide sequestration, please reach out to our National Tax Office.
Proposals Encouraging Green Energy
As noted above, the Administration is focused on green energy. To encourage the necessary investments in green energy, the Green Book includes numerous proposals, consisting of expansion of existing tax credits as well as new incentives. The following are highlights of some of the green energy provisions.
Expansion of Existing Credits
New Green Energy Credits
A&M Insight: As promised, the Administration has proposed tax reform initiatives that incentivize clean energy and energy transmission. These proposals touch on many industries – from energy producers and energy infrastructure to jet fuel producers and residential housing. Industries with large fleets of vehicles, particularly medium- or heavy-duty vehicles, could see significant benefits. The direct-pay option also presents unique benefits – such as the potential for more easily accessible financing from financial institutions. There are, of course, concerns with the direct-pay option. We will be monitoring these credits closely as they move through Congress, so as to identify areas of opportunity across these various industries.
The Green Book proposes to significantly limit the benefits of the section 1031 like-kind exchange (which after TCJA only applies to exchanges of real estate), by allowing a deferral of gain only up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing a joint return) each year. The limit on the section 1031 benefit is proposed to be effective for exchanges completed in taxable years beginning after December 31, 2021.
Increased Reporting Requirements
As a means to close the tax gap (i.e., the amount of tax actually collected vs. the amount expected to be collected), the Administration has shifted focus to reporting obligations. Beginning for tax years beginning after December 31, 2022, the Green Book proposes several new reporting mechanisms, including new reporting obligations associated with various types of assets. For example, financial institutions would be required to report on all bank, loan, and investment accounts, with the exception of accounts below a gross flow threshold of $600 or a fair market value of $600. For each account (individual and business), that must be reported, the financial institution must report gross inflows and outflows, transfers of physical cash, transactions with foreign accounts, and transfer to and from accounts of the same owner. The proposal would also expand existing income reporting by financial institutions to include payments to certain corporations. The Green Book also proposes to impose reporting requirements on accounts similar to financial institution accounts (such as payment settlement entities) and cryptocurrency asset exchanges and custodians.
The Green Book proposes further reporting with respect to the use of cryptocurrency assets. Specifically:
Lastly, the Green Book proposes to extend the time for the IRS to assess and review listed transactions. The proposal would extend the statute of limitations on assessment in the case of listed transactions from 3 years to 6 years. The proposal would also increase the existing extension of the statute of limitations for failure to report a listed transaction to three years after the transactions is required to be reported (one year currently. The extensions would be effective on the date of enactment.
A&M Insights: In its effort to increase tax revenue, the Administration has consistently identified the tax gap as an area ripe for improvement. Further, the Administration has asserted (although not all policymakers agree) that increased reporting leads to better compliance. It will be interesting to see how the increased reporting proposals, which provide the IRS and Treasury broad regulatory authority, are drafted by Congress – particularly in light of the CIC Services decision. In CIC Services, a recent SCOTUS decision, the Court said the Anti-Injunction Act did not prohibit a taxpayer from challenging penalty regulation in a pre-enforcement suit against the IRS where the penalty was not on a tax underpayment.
A&M Taxand Says:
Our two alerts have highlighted many of the significant proposals made in the Green Book. However, there may be additional proposals that may be relevant, for example providing the IRS with additional resources for enforcement against taxpayers with income in excess of $400,000. As previously noted, the Green Book does not reflect all of the proposals President Biden supported on the campaign trail. Additionally, the Green Book suggests that there may be further tax proposals from the Administration. For example, in discussing FDII, the Green Book highlights the importance of encouraging R&D activities, but other than green energy credits, there are no R&D-type credits in the Green Book. One possible proposal is the repeal of the five-year amortization of R&D expenditures that is scheduled to go into effect for tax years beginning after December 31, 2021. In the end, the Green Book is helpful in that it provides some insights into the Administration’s thinking. However, it also shows the importance of taxpayers working with their trusted advisors to evaluate proposed tax law changes. A&M will continue to monitor the latest legislative developments and will be happy to discuss your particular fact pattern and any concerns you may have.