Taxes and Regulatory Concerns on the Horizon
Taxes: While, the omnibus spending bill that passed at the end of 2022 included a number of provisions (good and bad). In particular, the bill did not address a number of expiring and expired tax provisions. Notably among these is the deduction for research and development (R&D) investment. Under the Tax Cuts and Jobs Act (TCJA), the ability of business to immediately deduct R&D cost expired on December 31, 2021. Until and unless the deduction is extended or made permanent, companies will be required to amortize the costs of these investments over five years. There remains some hope that lawmakers will be able to strike a deal to extend the R&D deduction in exchange for an extension of the expanded child tax credit. Such efforts are most likely to find their start in the House Ways & Means Committee. Whether legislation such as extending the deduction for the R&D investment can make it through the House will give us a good indication of how and if the House will be able to function. On the other hand, we might see changes in the House leadership occurring on a regular basis, causing the House to become dysfunctional. The next few months will be very telling as to how productive the House will be for the next two years.
- FCT Attempt to Ban Non-Competes: On January 5, 2023, the Federal Trade Commission (FCT) issued a proposed rule which, if enacted in its current form, would prohibit businesses from entering into or attempting to enforce non-compete agreements with their workers (including employees, contractors, and interns). The proposed rule broadly defines non-competes as any contractual term which “prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The proposed rule emphasizes that the prohibition would extend to contractual provisions that have the functional effect of preventing a worker from seeking or accepting other employment, such as excessively broad non-disclosure agreements. Comments on the proposed rule will be due 60 days after the FCT publishes the proposed rule in the Federal Register. Significant push back from a wide range of interested parties is expected. Should the proposed rule be enacted in its current form, litigation is sure to follow with a focus on whether the issuance of such a rule exceeds the FCT’s authority.
- DOL Independent Contractor Rules: On October 11, 2022, the Department of Labor (DOL) issued proposed rules to modify the test used for determining worker classifications under federal wage and hour laws. The DOL eschewed pressure to adopt a stringent ABC test for independent contractor classification (as is in use in California and a handful of other jurisdictions) and would instead reinstate the economic realities test that was in use prior to 2021 (when the DOL under the Trump Administration modified the test to emphasize certain factors over the other). The DOL’s stated goal with the proposed regulations was to bring the regulations back in line with existing case law and standards that employers have become accustomed to. The deadline for comments on the proposed rules closed in December.
- DOL Eyes Overtime Rules: On January 4, 2023, the Biden Administration issued its latest regulatory to do list. Among the items scheduled for action is another proposal by the DOL to update the overtime rules (the rules that govern which employees must be paid overtime and which employees are exempt). These rules have gone through a rollercoaster of changes and litigation over the last decade. It is not yet clear what types of changes the DOL will be eying this time.
- SEC Anticipated Final Rules on Climate Change Disclosures: Also in the latest regulatory agenda, the Securities and Exchange Commission estimated that it will be releasing its final climate disclosure regulations by April 2023 (the final rules were originally expected to be released in late 2022 but comments were reopened after a technical glitch was discovered). The new rules are expected to require companies to report greenhouse gas emissions and other climate risks when they make filings with the SEC. While these requirements will only apply to publicly traded companies, private companies may see an impact as they are required by their public company partners to share information necessary for the public company to satisfy the disclosure requirement.