Congress is nearing its goalpost for finalizing fiscal year (FY) 2026 appropriations ahead of the looming Jan. 30, 2026, government funding deadline. Lawmakers have made significant bipartisan, bicameral progress this month since punting the issue last December into the new year.
“The Senate will clear all remaining spending bills next week,” a senior Senate aide told Baker Tilly National Tax on Jan. 21, 2026. “It’s a tall order, but there is no room to fail.” The White House, too, has signaled its support for concluding the FY 2026 appropriations process.
This welcome news comes less than a week before the IRS’s slated kickoff of the 2026 tax filing season. But with a major snowstorm in the forecast this weekend here in Washington, D.C., whether senators make a timely return to Capitol Hill after the upper chamber’s recess this week remains to be seen.
FY 2026 appropriations
To date, Congress has cleared six of the annual FY 2026 appropriations bills needed to keep the lights on through Sept. 30, 2026. Notably, the conferenced, bipartisan FY 2026 Financial Services and General Government Appropriations bill, which allocates annual funding for Treasury and the IRS, passed the House last week.
The FY 2026 funding bill would cut the IRS’s annual budget to $11.2 billion, down from $12.3 billion for FY 2025. Top Democratic and Republican lawmakers, however, are calling this a “compromise.”
Additionally, the IRS is likely to see a $11.6 billion cut to operations support for FY 2026 from supplemental funding originally provided under the Inflation Reduction Act. The bipartisan rescission introduced on Jan. 20, 2026, separately from the IRS’s base funding, can be found within the FY 2026 Labor, Health and Human Services, Education, and Related Agencies Appropriations bill.
Bipartisan tax priorities
Although various bipartisan tax priorities have taken a back seat to government funding over the last several weeks, lawmakers remain focused on driving certain provisions forward. Most notably, the ongoing bipartisan, bicameral discussions aimed at addressing the enhanced Affordable Care Act (ACA) premium tax credit, which expired at the end of 2025, could pave the way for other limited, bipartisan tax extenders and priorities. These include but are not limited to the expired Work Opportunity Tax Credit and expensing for qualified production costs for film and sound recording or repealing the limitation on the deduction of gambling losses under recent tax reform legislation commonly known as the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21).
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Reconciliation round two
Looking ahead, it remains to be seen whether enough intraparty support could be garnered for Republicans’ second bite of the reconciliation apple in 2026. Currently, there are mixed views amongst leadership as to the requisite appetite for tackling another partisan, tax-heavy reconciliation bill.
And while the Republican Study Committee has unveiled its framework for a second reconciliation bill, top tax writers (and their staff) remain skeptical if not weary – particularly, ahead of the 2026 midterm elections.
At this time, it appears more likely that a healthcare-focused, tax-related policy pursuit could be the prime target if round two comes to be.
Tax controversy and litigation
On Jan. 16, 2026, the U.S. Court of Appeals for the Fifth Circuit held in Sirius Solutions, L.L.L.P vs. Commissioner, No. 24-60240 (5th Cir.), that the definition of a limited partner for federal self-employment tax purposes is controlled by state law, reversing the U.S. Tax Court’s interpretation requiring the partner to be a passive investor. Under section 1402(a)(13) of the Internal Revenue Code (IRC), “the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments” are excluded from self-employment taxes for Social Security and Medicare. The IRS argued the “as such” modifier narrowed the scope of the limited partner exception; therefore, the limited partner must be a passive investor.
The Fifth Circuit rejected the IRS’s functional analysis pursuant to Soroban Capital Partners LP et al. v. Commissioner, 161 T.C. 310 (2023), instead, relying on textual analysis indicating the meaning of “limited partner” under the IRC simply depends on whether the partner has limited liability under state law and determining the “as such” language exists to clarify how individuals holding both limited and general partner interests should be taxed.
Notably, this decision applies only within the Fifth Circuit, which comprises Texas, Louisiana and Mississippi. Moreover, the Tax Court could maintain a functional analysis within its interpretation of pending cases occurring outside of the Fifth Circuit. Further, depending on related rulings currently pending in the First and Second Circuits, this issue could lead to a circuit split, potentially arriving before the U.S. Supreme Court.
OECD “Side-by-Side” agreement
The Organisation for Economic Co-operation and Development (OECD) has released a comprehensive package creating a “side-by-side agreement” exempting U.S. multinational corporations from key provisions of the Pillar Two Global Minimum Tax. The agreement does this by creating four new safe harbors through administrative guidance, including a new Simplified Effective Tax Rate (ETR) safe harbor, a new Substance-based Tax Incentive safe harbor, and two safe harbors related to a Side-by-Side System, and extending by one year the Transitional Country-by-Country Reporting (CbCR) safe harbor.
The National Tax professionals at Baker Tilly will continue to share additional insights in the weeks ahead.
Treasury and IRS guidance
If 2025 was the (most recent) year of tax reform, 2026 is the year of implementation. To that end, despite leadership shakeups and a significantly reduced workforce, the IRS has maintained a steady rollout of OBBBA-related guidance since the law’s enactment and is expected to do so through much of 2026.
Baker Tilly’s Policy Pulse space will continue to highlight monthly important guidance issued by Treasury and the IRS. Recently released key guidance includes:
Bonus depreciation: The IRS has issued interim guidance in Notice 2026-11 to apply favorable section 168(k) bonus depreciation amendments under the OBBBA, which permanently restored full expensing for certain qualified property. The IRS states that it intends to issue proposed regulations consistent with the Notice provisions. As anticipated, the preliminary guidelines align with existing bonus depreciation rules provided under the Tax Cuts and Jobs Act, which should facilitate timely implementation of the new law in the upcoming tax filing season.
Note. Notice 2026-11 does not provide guidance for taxpayers looking to implement the temporary and time sensitive amendment that permits full expensing for certain qualified production property under section 168(n), such as factories. However, an IRS official this week indicated that the IRS is “actively working” on this guidance, although no release date is known at this time. Baker Tilly National Tax is closely monitoring the situation and will provide updates as developments occur.
Retirement plan administrators. Treasury and the IRS issued Notice 2026-13 providing revised safe harbor explanations, one applying to non-Roth accounts and the other applying to Roth accounts, that may be used by retirement plan administrators when they provide written explanations to retirement plan participants about eligible rollover distributions to satisfy requirements under section 402(f). The notice reflects changes made by the SECURE 2.0 Act (P.L. 117-328), and also addresses, among other items, changes to the 10% additional tax on early withdrawals from retirement plans, the required minimum distribution (RMD) rules for surviving spouses, and the increased age for determining the required beginning dates for RMDs.
Vehicle loan interest deduction. The IRS and Treasury issued proposed regulations (REG-113515-25) on the new tax deduction under section 163(a) and (h)(4) for qualified passenger vehicle loan interest created under the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). The guidance addresses key eligibility criteria for taxpayers and outlines new information reporting requirements for lenders receiving interest on vehicle loans. For taxpayers, the regulations define important terms, such as applicable passenger vehicle and personal use, and reiterate the maximum deduction and modified AGI phaseouts. For lenders, the regulations create reporting requirements for businesses receiving $600 or more in interest on a qualified vehicle loan, including the furnishing of a statement to the taxpayer and filing of new Form 1098-VLI (Vehicle Loan Interest) with the IRS, and retain the transitional relief announced in Notice 2025-57 allowing lenders to satisfy 2025 reporting obligations utilizing a simplified statement.
Backup withholding by TPSOs. Treasury and the IRS have issued proposed regulations (REG-112829-25) to amend and align the regulations for backup withholding under section 3406 with the amendments made to section 6050W by the OBBBA on Third Party Settlement Organization (TPSO) “reportable payments.” Specifically, the legislation makes a payment reportable and subject to backup withholding if payments exceed $20,000 and 200 transactions per calendar year.
Updated FAQs on limitation on deduction for business interest expense. The IRS issued Fact Sheet 2025-09 to address changes made to the section 163(j) business interest expense deduction limitation by the OBBBA. The law amended the limitation by, among other items, allowing taxpayers to add back deductions for depreciation, amortization, or depletion when calculating Adjusted Taxable Income, expanding the definition of floor plan financing interest, and clarifying that business interest expense subject to section 163(j) includes any interest incurred or capitalized during the tax year, except for interest capitalized under sections 263(g) and 263A(f).
Updated FAQs on Premium Tax Credit. The IRS issued Fact Sheet 2025-10 to address changes made to the Premium Tax Credit under the OBBBA. The law made a number of amendments to the credit, including removing limitations on repayment of excess advance payments of the credit for years beginning after Dec. 31, 2025.
New procedures for obtaining exemption letters on group basis for 501(c) organizations. The IRS released Revenue Procedure 2026-08 updating the procedures for a central organization to obtain tax-exempt status for itself and its affiliated subordinate organizations under section 501(c). The new procedure incorporates feedback on a 2020 proposal under Notice 2020-36 for obtaining group exemption letters that was outlined in Notice 2026-08. As a result of this guidance, the IRS resumed accepting group exemption applications as of Jan. 21, 2026. Additionally, organizations with preexisting group exemption letters will have a one-year transition period, ending on Jan. 22, 2027, to comply with certain requirements.
2026 midterm elections
Looking ahead, the 2026 midterm elections will undoubtedly influence the political environment on Capitol Hill and overall tax policy landscape in Washington D.C. Baker Tilly National Tax will continue to monitor the situation as the fate of the 120th Congress begins to take shape. Stay tuned for a comprehensive Tax Policy Outlook for 2026 as well as key indicators and data related to our ongoing coverage of the midterm elections.
