Congress Returns to Face Fight Over Funding, Tax Priorities

Congress returned to Washington, D.C., this week to a spending fight that could delay action on any tax priorities until much later in the year. Lawmakers have only a few weeks before government funding is set to expire on September 30, and IRS funding is only one of a handful of contentious issues that could make a deal difficult.

The outcome of negotiations will be important for many issues, including IRS funding, new income tax disclosure rules, and the prospects for a tax extenders package.


Government Shutdown

Little progress has been made on the annual appropriations bills, and lawmakers will almost certainly need a short-term continuing resolution to keep the government funded past September 30. 

The outlook for a long-term agreement remains unclear. Republicans have discussed offering Democrats a “clean” extension of government funding at current levels. This would rob conservatives of an opportunity to make deeper cuts, but would allow them to use rescissions on more targeted cuts. Democrats may be reluctant to agree to any deal unless they receive assurances that it won’t be undermined later by rescissions. A government shutdown is possible if both sides dig in on their positions.


IRS Funding

A government shutdown could be very damaging to the IRS as it prepares to implement the One Big Beautiful Bill Act (OBBBA) in time for the coming filing season. In the event of a shutdown, only “essential” IRS employees would continue to work. The IRS has changed its shutdown plan several times in recent years, and it is unclear how much of the agency would be considered essential if the government shuts down at the end of the month. A shutdown would likely slow down the guidance issuance process.

A broad agreement to fund the government at current levels could spare the IRS from further cuts. The House subcommittee responsible for IRS funding approved a bill on July 21 that would cut the IRS budget from $12.3 billion in fiscal year 2025 to just $9.5 billion in 2026.

The IRS has lost thousands of employees and billions in funding over the last year. It has also suffered a major exodus of top officials in recent months, including former IRS Commissioner Billy Long. Long served for less than two months before leaving, and the administration has not offered a concrete explanation for his departure. 

Treasury Secretary Scott Bessent is currently serving as IRS commissioner, and recently said no further reductions in the IRS workforce are anticipated. The IRS has posted as many as 3,500 job listings for contract representatives after pushing out more than 5,000 earlier this year.


Income Tax Disclosures

Several Republicans are seeking to use the appropriations process to prevent the implementation of new disclosure requirements for income taxes under Accounting Standards Update 2023-09. The current House spending bill covering the Financial Accounting Standards Board (FASB) would withhold FASB’s funding until it rescinds the rules. A similar legislative effort failed last year.

Policy riders like this are typically very difficult to pass as part of the appropriations process, and are even more unlikely this year given the contentious spending fight and the possibility of a “clean” extension of government funding. Companies should be preparing to comply with the new rules as scheduled until any change is enacted. For more information, see BDO Knows ASC 740: New Income Tax Disclosures (ASU 2023-09).

Tax Priorities

With the spending fight likely to spill past September 30, enacting tax legislation will be difficult. There are several tax priorities that could be considered as part of a bipartisan year-end tax extenders package if it comes together, including:

  • Extending the work opportunity tax credit
  • Restoring the itemized deduction for gambling losses to 100%
  • Extending expensing of racetracks
  • Extending Affordable Care Act premium credit enhancements
  • Conferring tax treaty-like benefits on Taiwan
  • Enacting another round of retirement changes
  • Raising or eliminating the cap on the exclusion for capital gains on the sale of a primary residence 

Passing a second Republican reconciliation bill would be even more difficult, but Republican lawmakers have discussed several potential provisions, including:

  • Increasing the Section 199A deduction to 23%
  • Resurrecting the reciprocal tax on “unfair foreign taxes” under Section 899 
  • Creating “tariff refunds” for individuals

President Trump is also reportedly considering regulatory action to index the basis of assets for inflation for purposes of calculating capital gains. He weighed this idea in his first term before ultimately abandoning it.

Please visit BDO’s Corporate Tax Services page for more information on how BDO can help.