Shortly before noon on 10 August 2021, the Senate passed the bipartisan infrastructure bill (H.R. 3684, Infrastructure Investment and Jobs Act of 2021), with a vote of 69-30. The bill provides USD 1.2 trillion to rebuild the nation's infrastructure including: highways; bridges; public transit systems; railways; broadband networks; and electric grids. From a tax practitioner's perspective, the bill contains only a few provisions impacting the Internal Revenue Code. We discuss those here, as well as certain provisions that were dropped from the bill in the intense and prolonged negotiation process.
No new taxes - Almost
The Joint Committee on Taxation released its estimated revenue effects of the bill on 2 August. JCX-33-21 (2 August 2021). Only three tax provisions are listed as revenue raisers for the infrastructure initiatives. Two of the provisions affect specific industries. While the other applies more generally, it is a savings measure rather than a revenue generator.
The bill raises USD 8.2 billion by terminating the COVID-19 employee retention credit for most employers for wages paid after 30 September 2021; this change is effective across industries. Other provisions—relating to digital assets and Superfund excise taxes—are industry-specific. During the amendment process, Senators considered whether to narrow the parties subject to new reporting requirements that would broadly affect this fairly new industry. This provision, expected to raise USD 28 billion over a ten-year period, remains in the approved version without change and, as a result, the debate over scope now shifts to the House. Another industry directly affected by the bill is the chemical industry. The temporary reinstatement of excise taxes on certain chemicals under Code Sections 4661 and 4671 is expected to raise USD 14.5 billion over ten years.
Termination of employee retention credit for employers subject to closure due to COVID-19
The bill includes a provision that would terminate the Employee Retention Credit (ERC) early for employers other than Recovery Startup Businesses.
The ERC was introduced by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), modified and extended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, and codified under Section 3134 of the Internal Revenue Code ("Code") under the American Recovery Plan Act in 2021. The ERC generally allows eligible employers to take a credit against applicable employment taxes in an amount equal to 70% of qualified wages, limited to USD 10,000 per employee per calendar quarter in 2021. For larger employers, the credit is only available for wages paid to employees when they are not working.
Although the ERC was due to expire at the end of 2021, Section 80604 of the bipartisan infrastructure bill precludes employers, other than employers qualifying as Recovery Startup Businesses, from claiming the credit for wages paid after the end of the third quarter of 2021. For purposes of Section 80604, a Recovery Startup Business is defined as any employer which began carrying on any trade or business after 15 February 2020, and for which the average annual gross receipts for the three-taxable-year period ending with the year that precedes the calendar quarter for which the credit is determined do not exceed USD 1 million. Pursuant to Section 80604, Recovery Startup Businesses continue to be allowed to claim the ERC for the entire 2021 calendar year.
As a result of the early termination of the ERC, the maximum expected credit available for calendar year 2021 for employers other than Recovery Startup Businesses will be USD 21,000 (i.e., 70% of USD 10,000 for each of the three available quarters of 2021), while Recovery Startup Businesses may claim up to USD 28,000 for 2021, limited to an aggregate USD 50,000 per quarter by Code Section 3134(b)(1)(B). The remaining provisions of the ERC remain unchanged by the bipartisan bill.
Observation: According to the Joint Committee on Taxation's revenue estimate in JCX-33-21 (2 August 2021), terminating the ERC early is expected to generate USD 8.22 billion in savings. The rationale proffered for ending the ERC early is that fewer taxpayers have claimed the ERC than Congress anticipated and, therefore, it is no longer necessary. However, the revenue estimate raises questions about this rationale. It is unclear why the ERC would be terminated early if it is expected that USD 8.22 billion in credits would be claimed and available for the fourth quarter of 2021. Companies are only able to claim the credit if their operations are suspended by government order or their gross receipts have declined dramatically. If companies still meet these criteria for the fourth quarter of 2021, it seems odd that the credit should be terminated for that quarter. By contrast, if the ERC is no longer needed because companies no longer qualify for the ERC under these criteria, it seems odd that the revenue raised by eliminating it should be so high.
Information reporting for digital assets
The bill amends the information reporting requirements in section 6045 that require "brokers" to furnish written statements to their customers. The bill expands those who are required to report by amending the definition of a "broker" to include "any person who (for consideration) is responsible for providing any service effectuating transfers of digital assets on behalf of another person." Further, the bill also expands what is required to be reported by amending the definition of "covered securities" to include "digital assets". The bill defines a "digital asset" as "except as otherwise provided by the [Treasury] Secretary . . . any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary." At a minimum, this definition includes cryptocurrencies.
Existing regulations accompanying section 6045 of the IRC provide that brokers must use an IRS Form 1099 to provide the required information to their customers, and file the Form 1099 with the IRS. Penalties may be imposed when a broker fails to fulfill their reporting obligations under section 6045.
When the bill was initially proposed, some observers contended that the definition of broker was overly broad because it captured not only parties that conduct transactions where customers buy, sell and trade digital assets (such as digit asset exchanges) but also other parties that validate digital asset transactions (such as miners or stakers) and entities that sell hardware or software that customers use to control their private keys—which are used to manage digital assets. These observers argued that miners, stakers, hardware and software companies would not be able to fulfill the reporting requirements imposed by section 6045 because these parties do have access to the requisite information about individuals engaged in digital asset transfers.
In response to these concerns, amendments were offered that would revise the definition of "broker", including an amendment that would exclude parties such as validators and hardware and software companies from the definition. Ultimately, the Senate was unable to amend the bill and the original definition of the broker remained in the final bill passed by the Senate.
It is possible that the House may define "broker" differently when it considers the bipartisan infrastructure bill.
Hazardous substances superfund excise taxes
In 1980, the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) was enacted to hold responsible parties financially liable for contamination from their operations and clean up hazardous waste sites. Generally, responsible parties fund and conduct the work, but the Environmental Protection Agency steps in certain circumstances, using public funds from the Hazardous Substances Superfund Trust ("Superfund"), which provides the federal government with resources to respond to environmental threats like the dumping or spilling of dangerous substances.
The bill reinstates certain excise taxes to replenish the Superfund that expired more than two decades ago. Section 9507 allocates resources to the Superfund from several sources. A portion of the Superfund's funding is authorized from an excise tax on any manufactured taxable chemical under section 4661, and an excise tax on any imported taxable chemical under section 4671. The bill:
- reinstates the taxes under sections 4661, 4662, 4671, and 4672;
- increases the rate of tax per ton on taxable chemicals under section 4661(b), as proposed:
- increases the rate of tax to 10% of the appraised value of the imported taxable chemical where importer does not properly report to the Secretary of the Treasury; and
- lowers the threshold for imported substances to be treated as taxable chemicals from the 50% threshold to 20% of the weight (or more than 20% of the value) of the materials used to produce such substance (determined on the basis of the predominant method of production).
Over 10 years, these initiatives are expected to raise USD 14.4 billion, which would be specifically directed to the Superfund.
There were other changes to the Code included in the bill. For example, certain highway-related taxes would be extended until 30 September 2028, and a five year extension would be added under section 430(h)(2)(C)(iv) to reach the target interest rate stabilization range in relation to minimum funding standards for single employer plans.
The bill now goes to the House of Representatives, which is currently out for recess, for its consideration. It is unclear when the House will take the bill up for consideration; Speaker Pelosi has repeatedly said that the House will not vote on the bipartisan infrastructure bill until the Senate votes on the reconciliation bill that is expected to include "soft" infrastructure investments and more comprehensive changes to the tax code. While some Democrats in the House have objected to Speaker Pelosi's plan, to date, these objections do not appear to have changed Speaker Pelosi's plans.
Instead, both the House and the Senate will likely focus on a budget resolution and the related reconciliation bill in the near term. The Senate passed a USD 3.5 trillion budget resolution on 11 August 2021, by a vote of 50-49, and has instructed Senate committees to prepare their portions of the reconciliation bill by 15 September. The House will return from recess during the week of 23 August to take up its own budget resolution.
Reaching consensus between House and Senate Democrats on a reconciliation bill and voting on the bipartisan infrastructure bill in the House means that Congress has a heavy workload this fall.