After a two-week holiday recess, Congress has returned to Capitol Hill and directed its attention to the looming government funding deadline. Meanwhile, Treasury and the Internal Revenue Service (IRS) continue to focus on the implementation of Public Law (P.L.) 119-21, commonly known as the “One Big Beautiful Bill Act” and the upcoming filing season.
Government Funding
The bipartisan compromise to end the record 43-day shutdown included three year-long appropriations bills and a continuing resolution (CR) that funded the remaining nine appropriations bills through January 30, 2026.
Congress appears eager to avoid another shutdown and is actively advancing bipartisan funding packages. Below is a chart detailing the status of appropriations bills as of the date of publication:
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Passed in November 2025 |
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Passed in January 2026 |
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Advancing for Likely Passage in January 2026 (Passed House) |
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Negotiations Ongoing (Has Not Passed Either Chamber) |
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Any bills not adopted before the funding deadline are likely to be wrapped up in a short-term CR. Negotiations over Homeland Security funding have become challenging amid Immigration and Customs Enforcement (ICE) operations and may require funding through a year-long CR.
Potential Legislation
The pivotal question for 2026 is: Can any significant tax legislation be enacted ahead of the midterm elections?
Prospects for Bipartisan Tax Legislation
A number of proposed tax provisions enjoy bipartisan support, including, among others, an extension of the work opportunity tax credit and reverting to pre-P.L. 119-21 gambling loss limitations. However, a pre-midterm bipartisan tax extender bill currently seems unlikely.
Last week, Andrew Grossman, the Ways & Means Committee’s chief tax counsel for Democrats, told reporters, “A deal on health care is going to have to unlock before there is a meaningful tax vehicle.” Despite multiple bipartisan attempts, lawmakers have yet to reach an agreement on the Affordable Care Act (ACA) Premium Tax Credits (PTCs), which expired at the end of 2025.
There is potential for agreements on digital taxation and/or new limitations for credit card companies; however, the prospects for any near-term deals remain uncertain.
Prospects for a Second Reconciliation Bill
Republican interest in pursuing a second reconciliation bill remains inconsistent, with supporters advocating for action and skeptics doubting its feasibility.
Last week, the Republican Study Committee unveiled a framework for a second reconciliation bill titled “Making the American Dream Affordable Again,” and Speaker Mike Johnson (R–LA) has signaled his intent to pursue a House-driven reconciliation package.
However, Johnson will face a significant challenge in uniting his conference, with some members already expressing uneasiness; given Republicans’ razor-thin margins, he will need near-unanimous support.
Implementing Tax Reform
Our December Tax Policy Review summarized the P.L. 119-21 guidance issued through mid-December 2025. Since then, Treasury and the IRS have issued several additional pieces of guidance, including:
- Bonus Depreciation: IRS Notice 2026-11 provides interim guidance on P.L. 119-21’s additional first-year depreciation (100% bonus depreciation) deduction. The notice also states the Treasury’s intent to propose regulations under Sec. 168(k), which will be consistent with the interim guidance.
- The notice did not address the new Sec. 168(n) provision, which provides additional first- year depreciation for “qualified production property.”
- Car Loan Interest: Treasury and the IRS issued proposed regulations related to the new, temporary deduction for interest paid on applicable passenger vehicles (with final assembly in the U.S.). Public comments on the proposed regulations will be accepted through February 2.
- Business Interest Expense Limitation: The IRS updated its frequently asked questions on the business interest expense limitation.
- Notably, no option was provided to use EBIT, rather than EBITDA, to determine adjusted taxable income (ATI) in 2025, an accommodation some large taxpayers were seeking in light of the corporate alternative minimum tax (CAMT).
Additional guidance is needed on both the P.L. 119-21 retroactive and prospective provisions. We will continue to provide updates as developments occur.
Tax Litigation
The Fifth Circuit Court of Appeals delivered a major tax decision in Sirius Solutions LLLP v. Commissioner (Sirius) last week. The taxpayer-favorable ruling overturns the U.S. Tax Court’s application of a “functional analysis” test to determine whether state-law limited partners qualify for an exemption from self-employment tax.
Background
Prior to Sirius, the Tax Court ruled in Soroban Capital Partners LP v. Commissioner (Soroban) that the Sec. 1402(a)(13) exclusion for limited partners only applies to “passive investors” that can pass a multi-factor test. The IRS audited Sirius Solutions and applied this standard, finding "none of Sirius’s limited partners counted as ’limited partners’ for purposes of the statutory exception."
Sirius contested the IRS’s determination, petitioning the Tax Court. Citing its decision in Soroban, the Tax Court affirmed the IRS adjustments. Sirius appealed the decision to the Fifth Circuit Court of Appeals — which sided with Sirius — vacated the decision and remanded it back to the Tax Court for proceedings.
The decision stated: “At bottom, in any complex statutory dispute, the best course is to follow the statute’s plain text. When § 1402(a)(13) says ‘limited partner,’ it is referring to a limited partner in a state-law limited partnership that has limited liability.”
Other Cases
Other cases addressing the Sec. 1402(a)(13) exemption are currently pending, including Soroban’s appeal to the Second Circuit Court of Appeals and Denham Capital Management LP v. Commissioner’s appeal to the First Circuit Court of Appeals. The IRS will likely continue to pursue these cases, which could result in split-circuit decisions.
For more information, please see our alert Fifth Circuit Rules SECA Exclusion Applies to State Law Limited Partners. We will continue to provide updates on the Sec. 1402(a)(13) limited partner exception as developments occur.
IRS Updates
The 2026 filing season begins next week on January 26, although the IRS began accepting certain e-filed business returns as early as January 13. This filing season will incorporate the P.L. 119-21 retroactive provisions, including changes to key business deductions and new individual tax incentives.
IRS Funding
The IRS is facing a notable funding reduction this year. H.R. 7006, a bipartisan “minibus” covering the Financial Services and State-Foreign Operations appropriations bills, passed the House last week by a vote of 341-79. If enacted in its current form, the bill would reduce IRS funding by 9% in fiscal year (FY) 2026.
H.R. 7006 would provide $11.2 in annual appropriations for the IRS, a $1.1 billion decrease from the $12.3 billion allocated in FY25. However, the bipartisan compromise is significantly closer to current funding levels than proposals from House Republicans or the White House, which were $9.5 billion and $9.8 billion, respectively. Rep. Steny Hoyer (D-MD), top Democrat on the Appropriations Financial Services Subcommittee, said, “While far from perfect, this compromise bill could have been much worse.”
Additionally, if enacted, a bipartisan “minibus” proposal released on January 20 would strip another $11.6 billion from the IRS funding previously provided by the Inflation Reduction Act (IRA). The IRA originally provided the IRS with $80 billion in supplemental funding, an amount Republicans have slowly been clawing back in recent years.
Economic Outlook
As economic data is typically reported shortly after each month ends, the December releases were issued last week, providing us with a full picture of 2025, which is detailed below. The outlook for 2026 remains generally positive but clouded by some uncertainty and potential risks. For a more detailed look at predictions from the Federal Open Market Committee (FOMC) and Congressional Budget Office, visit our December Tax Policy Review.
Inflation
Annual inflation has shown only modest improvements over the past year, decreasing from 3.0% at the beginning of 2025 to 2.7% at the year’s end. During that period, rates fluctuated between a high of 3.0% to a low of 2.3%. Heading into 2026, inflation remains sticky, with rates above the FOMC target of 2.0%.
Employment
The domestic labor market cooled markedly in 2025. The unemployment rate has steadily risen from 4.0% at the beginning of 2025 to 4.4% at the year’s end, with a high of 4.6% reported in November. According to the Bureau of Labor Statistics, increases in nonfarm payroll slowed from an average (after revisions) of 83,000 new jobs per month in the first half of the year to just 15,000 new jobs per month in the second half.
Federal Funds Rate and FOMC Succession
The employment situation discussed above was a key factor in the FOMC’s decision to reduce the federal funds rate three times during 2025. The year began with a target range of 4.25% – 4.50% and ended with a range of 3.50% – 3.75%. The federal funds rate is currently projected to stay above 3% over the next few years; the dot plot from the most recent FOMC report shows a median expectation of just one interest rate cut this year.
Federal Reserve Chairman Jerome Powell’s term as chair expires in May, and President Trump is expected to announce his successor in the coming days. While many of Trump’s nominees have moved smoothly through the confirmation process, the confirmation of a new FOMC chair may prove more challenging than initially anticipated.
A recently launched investigation into Powell, widely viewed as a pressure tactic, has drawn criticism from Republicans, and one key member of the Senate Banking Committee has vowed to block all FOMC nominations until the matter is resolved.
Global Tax Negotiations
On January 5, 2026, the Organization for Economic Co-operation and Development (OECD) Inclusive Framework released details on a highly anticipated “side-by-side” arrangement (SbS system) that alters how U.S. Multinational Enterprises (MNEs) are impacted by Pillar Two’s global minimum tax rules.
Once in effect, U.S.-headquartered MNEs will qualify for an exemption from both the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR). That is because the package includes, among other provisions, a new safe harbor (SbS safe harbor) that will allow NMEs headquartered in jurisdictions that meet certain criteria to treat the top-up tax under IIR and UTPR as zero. Currently, the United States is the only jurisdiction with a qualified SbS regime.
The agreement, consistent with the G7 framework established in June 2025, follows months of intense negotiations driven in part by U.S. threats of retaliatory measures — most notably Republicans’ Section 899 proposal. The OECD agreement is not self-executing; rather, each of the 147 countries must implement the new system before it takes effect. Key lawmakers have noted a failure to adopt the new OECD framework could result in a reintroduction of Section 899.
Finally, while the package has largely been celebrated by conservatives, some are concerned it limits the United States tax sovereignty, as changes to U.S. tax law could endanger the U.S. MNE’s ability to claim the SbS safe harbor.
Trade Policy
International Emergency and Economic Powers Act (IEEPA)
Many are eagerly awaiting the Supreme Court’s decision on challenges to President Trump’s use of the International Emergency and Economic Powers Act (IEEPA) to impose sweeping reciprocal tariffs. While the decision is due by the end of the Court’s term in June, experts anticipate an earlier release given the case was heard on an expedited basis.
Should the Court rule against the Trump administration, it could open the door to significant refund claims. The Court of International Trade is likely to have jurisdiction over the process, which could be procedurally complex. As of mid-December, U.S. Customs and Border Protection estimated it had collected $133.5 billion in IEEPA tariffs.
Other Trade Measures
In 2025, we saw a significant expansion of Section 232 tariffs, product-based levies aimed at protecting U.S. national security. Last week, the president implemented a 25% tariff on certain high-performance semiconductors and ordered trade agencies to pursue new trade agreements on critical minerals. As discussed in our December Tax Policy Review, numerous active Section 232 investigations remain open.
The 2020 U.S.-Mexico-Canada Agreement (USMCA) will undergo a mandatory review in July. All three countries must agree to renew the pact for another 16 years. If any country objects, the agreement will expire in 2036 unless an agreement is reached during subsequent annual reviews over the following 10 years.
Control of Congress: 2026 Midterms
There are fewer than 300 days until the 2026 midterm elections, which will determine control of the 120th Congress. Primary season, which will determine which candidates will run in the general election, will begin in just 40 days, starting in Texas, North Carolina and Arkansas.
Stay tuned for more comprehensive coverage of the midterm elections.
Your Guide Forward
Cherry Bekaert’s Tax Policy group is committed to bringing you information on the latest tax developments and opportunities.
Related Insights
- Newsletter: Tax Policy Review: December 2025 Updates
- Newsletter: Tax Policy Review: November 2025 Updates
- Newsletter: Tax Policy Review: October 2025 Updates
