Tax Beat: Tax Law Updates, Government Shutdown Impact and Economic Outlook

HOST: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters.

HOST: Welcome to this edition of the Cherry Bekaert Tax Beat podcast. Today we are talking with Kasey Pittman, our firm's managing director for tax policy.

HOST: One might think there has not been much to talk about since the government's been shut down for roughly 45 days now, but there is always something going on and Kasey is here to share an update with us. How's it going today, Kasey?

KASEY PITTMAN: Good. It's a potentially very busy day with the House coming back together to vote on potentially reopening the government.

HOST: We can only wish.

HOST: Also joining me as always is Sarah McGregor, my partner in crime. How's life treating you, Miss McGregor?

SARAH MCGREGOR: Life is good. Here in Greenville we had a cold snap this week and I'm ready for it to get back to the upper 60s and 70s.

HOST: Good luck with that one.

HOST: I'm joined from Richmond today as usual. All right, let's start at the beginning. Kasey, why don't you talk a little bit about the One Big Beautiful Bill and what the status is right now.

KASEY PITTMAN: The law often referred to as OB3 is Public Law 119-21. That is not the bill's actual name; the name was stripped before it was passed.

KASEY PITTMAN: This law was signed into law on July 4th after a tumultuous couple of months in Congress. The package cost $3.4 trillion in direct spending and contained $4.5 trillion of net tax cuts over ten years.

KASEY PITTMAN: The package was focused on tax, with a few healthcare and food benefit provisions that reduced the net cost. This is not simplification; Congress has made things more complicated again.

KASEY PITTMAN: The $4.5 trillion figure is a Congressional Budget Office score over ten years. Because many provisions are permanent, the real cost will be higher.

KASEY PITTMAN: Collectively, taxpayers should expect to pay $4.5 trillion less over the next decade than they would have if this law had not passed. Taxpayers should consult with their advisers and review the bill to determine what is helpful for them.

KASEY PITTMAN: We got the bill on July 4th and we are in great need of guidance. Some provisions are straightforward or continuations of current policy and do not require much guidance.

KASEY PITTMAN: Some provisions are novel and will require guidance to enact. Many taxpayer-favorable provisions are retroactive to the beginning of 2025. Changes that are not taxpayer-favorable are usually prospective and hit in 2026.

KASEY PITTMAN: Because many favorable provisions apply in 2025, the next month and a half is the window to act. Those changes will start being reported on forms in filing season.

SARAH MCGREGOR: Filing season usually starts in late January, and we are hoping the IRS will be able to start tax season and accept tax returns on schedule. The government shutdown might have delayed that, and the IRS has not officially announced a date yet.

HOST: It'll be about the time that nice 80-degree weather shows up again.

KASEY PITTMAN: There's a lot of guidance needed because we could start filing returns in about two and a half months. Many clients will not be ready, but some simple filings can be done then.

KASEY PITTMAN: There are provisions that are retroactive, such as research and experimental expenditures, which had a special true-up mechanism. We received some guidance there, but more is needed.

KASEY PITTMAN: There are a number of individual provisions like no tax on tips and no tax on overtime. We have received guidance on tipped income but nothing substantive on overtime aside from some penalty abatements for employers.

KASEY PITTMAN: W-2s and 1099s are not changing this year. We still do not have anything on certain accounts that were discussed, and for many provisions that are already in effect, taxpayers could be acting now but are effectively flying in the dark.

SARAH MCGREGOR: Most of the guidance we have seen so far is subregulatory. We received a proposed set of regulations on tipped income, and many comments were submitted. Because required reporting has been effectively postponed until 2026, that will likely push finalization out.

SARAH MCGREGOR: The IRS will need to finalize withholding tables and other guidance before employers start withholding federal income tax for compensation beginning January 1.

KASEY PITTMAN: They are under the gun to get that going.

HOST: That is a lot of work for the government. Kasey, the most recent news involves the government shutdown and questions about when it might open back up. Can you share your thoughts?

KASEY PITTMAN: For context, we are recording this on November 12th. Two days ago the Senate passed a compromise deal after the longest shutdown in U.S. history.

KASEY PITTMAN: None of the 12 appropriations bills that fund the government annually had been passed, so this was a full government shutdown for over 40 days. For a long time people assumed Congress would pass the package the House sent—a clean continuing resolution that would continue funding at current levels through November 21st—but the Senate was unable to find a deal.

KASEY PITTMAN: Senators finally passed three of the appropriations bills where there was consensus and did a continuing resolution through January 30th for the other nine bills.

KASEY PITTMAN: That January 30th date is about 78 or 79 days away, so we are staring down another potential showdown on those other nine bills. Democrats insisted on negotiations because they were worried about the Affordable Care Act premium tax credits established under ARPA in 2021.

KASEY PITTMAN: Without an extension, about 20 million Americans could see higher health care costs, averaging roughly 75% more depending on the state. Many Republicans do not want to see the credits expire, but politics has made this difficult.

KASEY PITTMAN: Ultimately, the people holding out did not fully get what they wanted. Democrats succeeded in reversing reductions in force and secured a moratorium on additional reductions through January 30th. The farm bill items for USDA and FDA are included, and federal workers who were furloughed are guaranteed back pay.

KASEY PITTMAN: There was nothing in the deal on ACA premium tax credits other than Senate Majority Leader John Thune promising a vote on the floor at the 60-vote threshold, which will be difficult. Speaker Johnson has made no such assurances in the House.

KASEY PITTMAN: If the issue does not resolve, a good chunk of Americans could see increased health care costs for 2026 and there could be another potential partial government shutdown on January 30th.

KASEY PITTMAN: The House was back in session today after 54 days and was scheduled to vote at 7:00 p.m. It is expected to pass the package and reopen the government for roughly 70 days.

HOST: I'll be watching C-SPAN tonight to see how it all turns out.

KASEY PITTMAN: It does seem likely the government will reopen shortly, though I hope people act more responsibly next time. There are implications for the economy whenever you shut down something as massive as the federal government.

HOST: Wrapping that in with everything else, what do you see for the economic outlook?

KASEY PITTMAN: We've been delving into this as monetary policy has changed over the last few months. The shutdown impacted GDP production and the availability of data on key metrics such as inflation and the unemployment rate.

KASEY PITTMAN: We are in a transition period with monetary policy. Inflation spiked in 2021–2022 and the Federal Open Market Committee increased the federal funds rate from essentially zero to a range around 5.25% to 5.5% to combat that inflation.

KASEY PITTMAN: The Fed has kept rates elevated to bring inflation down toward its 2% target while also seeking to maximize employment. Recently we have seen worsening labor market conditions and the Fed has reduced rates in two consecutive meetings.

KASEY PITTMAN: The Fed sets the overnight interbank rate, which influences short-term lending rates and indirectly affects longer-term rates such as the 10-year Treasury, which most commercial rates are tied to.

KASEY PITTMAN: We expected the two rate reductions and had been pricing in another reduction in December, but at its last meeting the Fed indicated it might not cut further. The shutdown has left us flying blind because the Bureau of Labor Statistics was not considered essential and data releases were delayed.

KASEY PITTMAN: The Fed's decisions impact mortgages, corporate lending, and individual decisions about moving or investing. As rates come down, people may be more willing to move and companies may be more willing to borrow and invest.

SARAH MCGREGOR: Falling interest rates can influence estate and gift planning decisions, such as whether to fund a charitable lead trust, a charitable remainder trust, or to make loans or gifts to family members.

KASEY PITTMAN: For those invested in the stock market, appreciation coupled with lowering interest rates is an opportunity to consider transferring family wealth in a planned direction.

KASEY PITTMAN: Corporations also benefit as borrowing costs fall. We had a taxpayer-favorable change in Section 163(j) that allows more interest to be deductible, which should help spur growth.

KASEY PITTMAN: Inflation concerns remain. It was 3% in January, dipped to 2.4% in March, and has risen back to around 3.3%. Tariffs can be inflationary in the short term and have contributed to price pressures.

KASEY PITTMAN: We have seen decreasing job growth and a reduction in GDP this year, exacerbated by the shutdown. The Fed faces the risk of stagflation—low growth combined with inflation—which we want to avoid.

KASEY PITTMAN: All eyes will be on the Fed at their December meeting and we expect the Bureau of Labor Statistics to resume regular data releases once the government reopens.

HOST: Now that the House and Senate are back in session for a few more weeks, are there bills introduced this year that might see movement before year end?

KASEY PITTMAN: We are watching government funding and the January 30th deadline for the nine outstanding appropriations bills. The political vibe on Capitol Hill affects the ability to pass additional legislation.

KASEY PITTMAN: The fate of the ACA premium tax credits will be interesting. The Senate has a guaranteed vote, and in the House a discharge petition with 218 votes could force a vote and split the Republican caucus.

KASEY PITTMAN: Cryptocurrency is a key item for Q1 next year. Bipartisan support will be necessary for market structure and taxability. Currently crypto assets are taxed as property, and many want to avoid burdensome reporting for small everyday transactions.

KASEY PITTMAN: The de minimis rule is a major point of debate—how to exclude small transactions like using crypto to buy a coffee from burdensome tax accounting requirements.

KASEY PITTMAN: We often look for a bipartisan tax extender bill at year end, but that seems unlikely this quarter. Some items that had bipartisan support—such as the Work Opportunity Tax Credit—did not make it into OB3.

KASEY PITTMAN: The thinking on Capitol Hill is that there is until the end of 2026 to address many of these issues, which means taxpayers will be filing returns without complete certainty for a long time.

KASEY PITTMAN: We also discussed the new limitation on gambling expense deductions. Now that those changes have been enacted, many Republicans agree it was not a good policy and there is bipartisan support to repeal it, potentially in 2026.

KASEY PITTMAN: As we approach midterm elections, the political landscape will shift. There are 33 senators up for election and the entire House is up every two years, which affects the legislative calendar and the ability to pass bipartisan measures.

KASEY PITTMAN: We are watching a provision sometimes referred to as Section 8.99, the retaliatory tax that would increase rates for entities parented in countries with perceived unfair tax practices. That provision was dropped at the last second in exchange for a G7 agreement.

KASEY PITTMAN: If the OECD or the G7 deal does not hold—if a country increases a digital services tax, for example—the retaliatory provisions could resurface, possibly via reconciliation.

KASEY PITTMAN: Ways and Means Chairman Jason Smith is collecting ideas for tax provisions for potential reconciliation, bipartisan bills, or a tax extender bill. The 119th Congress used up reconciliation opportunities for FY25, and we are now in FY26 with another possible shot at revenue or spending reconciliation.

KASEY PITTMAN: In the short to medium term, we are watching those items and then turning to the midterms, which will shape the 120th Congress and future tax legislation.

HOST: Any final remarks, Kasey?

KASEY PITTMAN: The IRS continues to face difficulties exacerbated by the shutdown. About half of IRS staff were furloughed and even now the agency has seen an almost 28% reduction in staff—from roughly 102,000 employees in January to about 74,000 now.

KASEY PITTMAN: That reduction in capacity makes the IRS more difficult to navigate. Treasury is moving forward with the president's executive order to transition to electronic payments and away from paper checks for issuing and receiving payments.

KASEY PITTMAN: Taxpayers should ensure they have electronic means for making tax payments and receiving refunds. There is not much clarity about the cutoff for paper check issuance, but Treasury slowed paper check issuance considerably during the shutdown.

KASEY PITTMAN: Treasury announced that electronic deposit of refunds would continue even during the shutdown, while paper checks would be delayed. Not every taxpayer can handle electronic payments immediately, which Treasury will need to address.

SARAH MCGREGOR: They are still accepting paper checks for the moment. The American Bankers Association submitted a letter to Treasury arguing Treasury does not have the right to refuse any form of payment, and they provided feedback to the IRS.

KASEY PITTMAN: Another matter is the Supreme Court hearing a case on the president's authority to impose tariffs under IEEPA. We have multiple tariff authorities in play, including Section 232 tariffs on specific products.

KASEY PITTMAN: The oral arguments raised skepticism about the national emergency basis for certain reciprocal tariffs and their implementation. If the Court finds those tariffs unconstitutional, the administration could rely on other mechanisms such as Section 232, but the litigation could be complex.

KASEY PITTMAN: If the tariffs were found unlawful and had to be returned, the process for addressing collected tariffs would be complicated and could have broad balance-sheet and market effects.

KASEY PITTMAN: The Supreme Court typically issues decisions by June when the Court's term ends, but this case was scheduled on an expedited timeline and could be decided sooner.

HOST: If anything, hopefully it brings some certainty. It's been frustrating that the goalposts keep moving for businesses and consumers.

KASEY PITTMAN: When everything is moving, it complicates sourcing decisions, transfer pricing, and other business decisions. We are hopeful the legal and policy outcomes will bring more certainty.

SARAH MCGREGOR: Nothing further from me today.

KASEY PITTMAN: There are very few periods with so many moving parts and uncertainties, but there are also opportunities that come with that.

HOST: Thank you for listening. A quick disclaimer: we are not providing tax advice on this podcast. Please consult with your tax advisor, preferably at Cherry Bekaert, regarding specific tax issues or information from today's podcast.

HOST: Check out the firm's website at cbh.com for the latest guidance materials on OB3 and other tax and business topics, including economic and policy updates.

HOST: This concludes today's podcast. Please like, share, and subscribe. Thank you, Kasey, and thank you to our listeners for spending your time with us.