Legislative Lowdown
Congress Weighs FY2026 Funding for IRS, OECD and DOJ Tax Division: As Congress returns this week, lawmakers face a four-week window to resolve differences over government funding for fiscal year 2026 (FY2026). This includes disputes regarding Internal Revenue Service (IRS) funding, U.S. contributions to the Organisation for Economic Co-operation and Development (OECD), and the Justice Department’s plan to reorganize its Tax Division. House appropriators have proposed significant cuts to IRS funding, elimination of OECD funding, and redistribution of Tax Division lawyers across other divisions, while Senate appropriators appear more inclined to maintain current funding levels and keep the Tax Division intact. The Trump administration has also proposed substantial IRS budget reductions alongside increased user fees to offset enforcement cuts. The House Appropriations Committee is scheduled to mark up the FY2026 Financial Services and General Government Appropriations bill on Sept. 3. This bill includes funding for the Treasury Department and additional government agencies.
Any final agreement will require bipartisan support due to the Senate’s 60-vote threshold, with negotiations taking place against the backdrop of the recent rescission of foreign aid funds by the Trump administration. Lawmakers have until Sept. 30 to reach an agreement before a government shutdown.
The Path Forward for Reconciliation 2.0: Following the passage of the One, Big, Beautiful Bill Act (OBBBA, Public Law 119-21), Congress faces a range of additional tax proposals upon returning from recess. The impending expiration of enhanced Affordable Care Act premium tax credits at the end of 2025 could prompt legislative action, with Democrats seeking to maintain the credits to prevent increased health care costs. Several options are under consideration, including a second reconciliation bill, a bipartisan standalone bill or a year-end extenders package. Potential measures may also include restoring the full gambling loss deduction, revising double taxation on Americans abroad, expanding retirement plan tax incentives for nonprofits, adjusting capital gains treatment for home sales, clarifying tax treatment for digital assets, and extending the advanced manufacturing credit for semiconductors.
During the August recess, House leadership tasked each committee chair to compile a wish list of potential items for a second bill. Similarly, the Republican Study Committee (RSC) received briefings from various stakeholders on health care, education and tax issues that could be included in a second bill. Brian Blase from the Paragon Health Institute briefed the RSC on potential deeper reductions to Medicaid, ACA premium tax credits, Medicare payment reforms and expanded Health Savings Accounts, as part of efforts to identify new spending cuts.
No legislative action is expected to occur until after the appropriations process is completed.
Energy-Tax Mainlines
IRS Releases Guidance on Clean Energy Credits: On Aug. 15, the Treasury Department and Internal Revenue System (IRS) issued Notice 2025-42, setting new rules for determining when construction begins on wind and solar projects seeking tax credits under Sections 45Y and 48E of the One Big Beautiful Bill Act (OBBBA). The guidance allows developers to establish the “beginning of construction” date solely based on the Physical Work Test, which requires measurable on-site or off-site construction of a “significant physical nature” (e.g., foundation work, racking installation or customized component manufacturing under binding contracts), eliminating the previous 5% safe harbor except for limited small-scale solar projects. Developers must also satisfy a continuity requirement, either demonstrating consistent progress based on the facts and circumstances, with certain excusable delays, or completing the project within four years. The guidance is effective for projects beginning on or after Sept. 2.
1111 Constitution Avenue
Billy Long and Michael Faulkender Depart IRS and Treasury: In August, Internal Revenue Service (IRS) Commissioner Billy Long was removed less than two months after Senate confirmation amid significant leadership turnover and workforce reductions. Treasury Secretary Scott Bessent was appointed acting commissioner, while Deputy Treasury Secretary Michael Faulkender, who briefly served as acting IRS commissioner, also departed amid ongoing administrative changes.
Former IRS Employees May Rescind Deferred Resignations to Address Vacancies: The Treasury Department is permitting certain Internal Revenue Service (IRS) employees who participated in the deferred resignation program to retract their resignations to fill critical vacancies. This follows substantial workforce losses, with approximately 25% of the IRS’ 100,000 employees departing recently. Employees have five days to express interest; approval to rescind is not guaranteed. The IRS is also hiring thousands of seasonal contact representatives for the 2026 filing season to replace nearly 6,000 departures. These staffing challenges coincide with leadership turnover, with key positions vacant or filled on an acting basis, while Treasury Secretary Scott Bessent oversees the agency following Commissioner Long’s departure.
IRS to Release Guidance on No Tax on Tips: Reportedly, the Treasury Department will publish a list of 68 occupations that would qualify for a new tax deduction under President Trump’s “no tax on tips” proposal. The list covers a wide range of tipped and service-based jobs in eight categories:
- Beverage and food service (restaurant and food prep staff)
- Entertainment and events (performers, DJs, gambling workers, ushers)
- Hospitality and guest services (hotel clerks, bellhops, cleaners)
- Home services (electricians, plumbers, landscapers, repair and cleaning workers)
- Personal services (pet care, tutors, nannies, photographers, event planners)
- Personal appearance and wellness (barbers, cosmetologists, massage therapists, fitness instructors, tattoo artists)
- Recreation and instruction (golf caddies, tour guides, sports and recreation teachers) Transportation and delivery (drivers, delivery workers, valets, movers, boat operators)
IRS Releases Updated Guidance on R&E Expensing: On Aug. 28, the Internal Revenue Service (IRS) published “Revenue Procedure 2025-28,” providing procedural guidance for taxpayers transitioning to the restored permanent deduction for research and experimental (R&E) costs under Section 174A. The procedure details methods for taxpayers, notably small businesses, to utilize transition benefits, such as immediately deducting eligible domestic research expenses for tax years beginning after Dec. 31, 2021, and the option to amortize expenses over at least 60 months. Special provisions allow eligible small businesses to apply deductions retroactively through amended returns or administrative adjustment requests, subject to time limits. The guidance also clarifies accounting method changes and includes relief provisions to enable companies to comply with the new rules enacted as part of the One Big Beautiful Bill Act (OBBBA).
The Joint Committee on Taxation estimated that OBBBA provisions will provide corporations with $67 billion in retroactive tax breaks in 2026 by permitting immediate expensing of past R&E costs.
Tax Worldview
OECD Drafts Proposal for Global Tax Agreement: The Organisation for Economic Co-operation and Development (OECD) is reported to have proposed adjustments to the global minimum tax framework to address U.S. concerns about its impact on American companies. A draft proposal from Aug. 13, which has not been released publicly, purports to outline how U.S. multinationals could be exempt from certain enforcement rules if their profits are already subject to robust taxation, effectively creating a “side-by-side” system that treats the U.S. tax regime and the global minimum tax separately. The proposal is reported to explain how U.S. rules, including the Net CFC Tested Income regime (formerly known as the Global Intangible Low Tax Income (GILTI) rules) and the corporate alternative minimum tax (CAMT), operate and estimates that U.S. companies’ effective tax rates on foreign income could decline modestly under the side-by-side system. Eligibility criteria for this approach are reported to include comprehensive taxation of domestic and foreign income, taxation of parent companies on controlled foreign corporation income, and provisions regarding foreign tax credits. The draft also suggests simplified reporting procedures and adjustments to tax credit treatment for jurisdictions with high effective tax rates.
EU Digital Service Tax Stirs Trouble for Tariffs: President Trump said that the United States may take actions such as imposing tariffs or export restrictions in response to European countries implementing digital services taxes (DST), which the United States has determined disproportionally and adversely affect large American technology companies. European officials responded by affirming their position that DSTs are applied to all major digital firms operating within the European Union (EU), regardless of country of origin, and that such measures reflect policies on fair taxation. Spain and Poland, in particular, confirmed that their tax measures target large digital companies as part of efforts toward effective economic regulation, while additional European countries are moving forward with similar proposals. Stéphane Séjourné, the executive vice-president for prosperity and industrial strategy of the European Commission, responded by saying that the trade deal between the European Union and the United States will need to be reviewed if the United States proceeds with demands for the EU to deregulate its tech sector.
Hearings and Events
House Ways and Means Committee
The House Ways and Means Committee does not have any hearings scheduled this week.
Senate Finance Committee
The Senate Finance Committee does not have any tax hearings scheduled for this week.
