AICPA weighs in on Inflation Reduction Act

The American Institute of CPAs has sent comments to lawmakers in the House and Senate about the tax proposals in the Biden administration’s climate, tax and spending bill, which could be seeing a vote as soon as this weekend in the Senate.

Last night, one key holdout senator, Kyrsten Sinema, D-Arizona, agreed to a modified version of the deal struck last week between Senate Majority Leader Chuck Schumer, D-New York, and Sen. Joe Manchin, D-West Virginia, whose opposition to last year’s larger Build Back Better Act doomed it in the Senate, where it faced unanimous opposition from Republicans in the evenly divided chamber. (see story). Sinema, like Manchin, had also resisted agreeing to the larger package.

The Inflation Reduction Act unveiled by Manchin and Schumer, represents a scaled-back version that includes a minimum 15% “book tax” for corporations tied to the taxes they report on their financial statements rather than what they claim when they file their taxes with the Internal Revenue Service. Sinema, however, opposed another provision that would eliminate the so-called “carried interest” tax break that allows hedge fund managers and private equity fund partners to be taxed at lower capital gains rates rather than ordinary income rates. She also insisted on allowing corporations to continue to deduct accelerated depreciation on equipment purchases and it will now be exempted from the 15% minimum tax. Instead there will now be a 1% excise tax on stock buybacks by corporations.

The AICPA comment letter pertains to the earlier version of the bill introduced July 27 by Manchin and Schumer, but it highlights some of the key issues the AICPA has identified, including the corporate alternative minimum tax, carried interest, and the enhancement of IRS resources, as the bill also provides $45.6 billion in funding for IRS enforcement.

In a letter to leaders of Congress’s main tax committees, the House Ways and Means Committee and the Senate Finance Committee, the AICPA said it believes the corporate alternative minimum tax proposal violates a number of elements of good tax policy and could lead to unintended consequences that should be carefully considered. 

“Imposing tax according to financial statement income takes the definition of taxable income out of Congress’ hands and puts it into the hands of industry regulators and others,” said the AICPA in a news release. “Among the many key conceptual differences between financial income and taxable income is the concept of materiality. Public policy taxation goals should not have a role in influencing accounting standards or the resulting financial reporting.”

However, if the tax is enacted, the AICPA recommends the effective date be delayed until after the later of taxable years starting after Dec. 31, 2023, or the date Treasury issues proposed regulations to provide taxpayers with the needed time to fully analyze and comply.

The AICPA said it wasn’t taking a position on the carried interest provision, but had several technical clarifications and modifications. It has now been dropped at Sinema’s insistence, but she said she would be working with Sen. Mark Warner, D-Virginia, on a revised version of the proposal.

On the subject of IRS funding, the AICPA would like to see more of the money going to taxpayer service rather than enforcement efforts.

“The AICPA believes that the Internal Revenue Service should be funded at necessary levels to allow it to handle all the duties required of it by Congress, including properly administering and enforcing our nation’s tax laws as well as providing needed assistance to taxpayers and their advisors in a timely and professional manner,” said the institute. “However, the AICPA also believes that enforcement actions must be in balance with the services the IRS provides to taxpayers. Given the historic low levels of IRS taxpayer services, the AICPA is concerned about a possible imbalance between the funding for taxpayer services and enforcement.”

In its letter, the AICPA urged Congress to commit, on a bipartisan basis, to determine the appropriate level of service necessary for the IRS and provide adequate resources for the agency to meet those goals, either as part of a reconciliation package or in a separate vehicle.

“The AICPA is committed to the administrability of our tax system and to exposing the challenges to Congress and the IRS,” said AICPA vice president of tax policy and advocacy Edward Karl in a statement Friday. “The proposed tax provisions in the reconciliation legislation require further consideration and alterations, and we encourage Congress to thoughtfully consider our comments on this.”