Mexico Increases Textile Sector Tariffs and Amends IMMEX Decree
On Dec. 19, 2024, the “Decree modifying the tariff on the General Import and Export Tax Law and the Decree for the Promotion of the Manufacturing, Maquila and Export Services Industry” (Decree) published in the Official Gazette of the Federation, through which the Mexican government seeks to establish two measures protecting domestic textile production.
Tariff Increases
Through the Decree, the Mexican government made temporary changes in the tariffs on several items included in the General Import and Export Tax Law, which will be effective until April 23, 2026. Such adjustments, which cover 155 items, correspond to the following chapters:
15% Tariff
–
Chapter 52 (cotton)
–
Chapter 55 (synthetic or artificial staple fibers)
–
Chapter 58 (special woven fabrics, textile fabrics, lace, tapestries, trimmings, and embroidery)
–
Chapter 60 (knitted fabrics)
35% Tariff
–
Chapter 61 (articles of apparel and clothing accessories, knitted or crocheted)
–
Chapter 62 (articles of apparel and clothing accessories, not knitted or crocheted)
–
Chapter 63 (other made-up textile articles, sets, worn clothing, worn textile articles, and rags)
–
Tariff item number 9404.40.01 (footmuffs, quilts, comforters, and blankets)
These tariffs apply only to products originating in countries with which Mexico does not have free trade agreements.
Modifications to the IMMEX Program
The Dec. 19 Decree also changes the IMMEX Decree, adding new restrictions to Annex I, which lists “Goods that cannot be temporarily imported under the IMMEX program.” The IMMEX (Manufacturing, Maquiladora, and Export Services Industry Program) program is designed to promote the development of companies engaged in manufacturing and assembly activities for export purposes in Mexico. The changes to the Annex I affect several items under chapters 61, 62, and 63 of the General Import and Export Tax Law, with some exceptions. The government has also added other subheadings from this law to the restricted list.
Conclusion
The increase in tariffs on specific fractions of the textile industry, along with the addition of more restricted tariff items under the IMMEX program, could impact both importers and companies operating under IMMEX. Importers may face higher costs due to increased duties, which could affect their profit margins and competitiveness in the market. Similarly, IMMEX program participants might experience disruptions in their supply chains and increased operational costs, limiting their ability to efficiently import and export goods. These changes highlight the need for careful consideration of the potential consequences on trade and business operations.
Final Regulations for New Clean Energy Production and Investment Tax Credits
Last week, the Internal Revenue Service (“IRS”) and Department of the Treasury issued the highly anticipated final regulations for the Clean Electricity Production Tax Credit set forth in Section 45Y of the Internal Revenue Code of 1986, as amended (the “Code”) and the Clean Electricity Investment Tax Credit set forth in Section 48E of the Code (the “Final Regulations”), which may be found here. The Final Regulations follow the issuance of proposed regulations (the “Proposed Regulations”) last June. The Final Regulations provide clarification regarding the definition of “qualified facility” and the mechanism for calculating the greenhouse gas (“GHG”) emissions rates for qualified facilities, although a full analysis of the GHG requirements is beyond the scope of this blog post. Further, we note that with the incoming administration, the executive branch could review and, potentially, rescind, these Final Regulations, although at this point the Trump administration has not publicly indicated support or a the lack thereof.
The Final Regulations generally apply to facilities placed in service after December 31, 2024, and during a taxable year ending on or after January 15, 2025. However, certain rules relating to the “One Megawatt Exception” under Section 1.45Y-3 of the Final Regulations and relating to qualified facilities with integrated operations have a delayed applicability date that is 60 days after publication of the Final Regulations.
When Sections 45Y and 48E of the Code were initially enacted, we posted a blog describing the new statutes, which is available here. The following is a brief, high-level, summary of the Section 45Y and Section 48E rules, but does not describe every requirement for credit qualification. The rules under Sections 45Y and 48E of the Code apply to qualified facilities that both begin construction and are placed in service, each for federal income tax purposes, on or after January 1, 2025. As such, qualified facilities that either begin construction or are placed in service before January 1, 2025, should still generally look towards the rules set forth in Section 45 of the Code for the production tax credit (the “PTC”) or in Section 48 of the Code for the investment tax credit (the “ITC”), as applicable.
The credits under Sections 45Y and 48E are available with respect to any qualified facility that is used for the generation of electricity, which is placed in service on or after January 1, 2025, and has an anticipated GHG emissions rate of not more than zero. In the case of Section 48E, a qualifying energy storage facility is also eligible for the credit. Qualified facilities also include any additions of capacity that are placed in service on or after January 1, 2025.
The credit under Section 45Y generally mirrors the PTC in that it is a credit that is based on electricity produced by a qualified facility, and the credit under Section 48E generally mirrors the ITC in that it is a credit that is based on a taxpayer’s tax basis in a qualified facility, with several differences in each case. The credit amount for each is generally calculated in the same manner as the ITC or PTC, as applicable. However, the credit amount is phased out (as set forth in the chart below) based on when construction of a qualifying facility begins after the “applicable year.” Under Sections 45Y and 48E of the Code, the applicable year means the later of (i) the calendar year in which the annual greenhouse gas emissions from the production of electricity in the United States are reduced by 75% from 2022 levels, or (ii) 2032.
Year After Applicable Year in Which Construction Begins
First
Second
Third
Thereafter
Percent of Credit Remaining
100%
75%
50%
0%
The Final Regulations apply many of the historical rules of Sections 45 and 48 of the Code, including rules surrounding the base credit amount—0.3 cents per kWh of electricity (subject to inflation adjustments) under Section 45Y and 6% under Section 48E. These credit rates may be increased in either case by satisfying either the 1 MW (AC) exception or the prevailing wage requirements—up to 1.5 cents per kWh of electricity (subject to inflation adjustments) under Section 45Y and 30% under Section 48E. Energy community and domestic content bonus credits may also increase these credit rates, although there are important differences in how these rules apply.
The below highlights several notable aspects of the Final Regulations.
Notable Rules Under Section 45Y
Under Section 45Y, a facility that initially operates with greater than zero GHG emissions (and, therefore, is not eligible for the credit under Section 45Y) may later be treated as a qualified facility—and, therefore, eligible for the credit under Section 45Y—if it meets the requirements in any taxable year during the 10-year period beginning on the date the facility was originally placed in service. For example, if an otherwise qualified facility has greater than zero GHG emissions for its first three years of operation (2025-2027, for example), but then is updated in such a way that it satisfies the zero GHG emissions requirement, then the Section 45Y credit may be claimed for years 4 through 10 of operations (2028-2034, in this example).
Similar to the PTC, electricity produced at a qualified facility must be sold by the taxpayer to an unrelated person. However, in a departure from the rules under Section 45, the statute and Final Regulations provide that, in the case of a qualified facility equipped with a metering device that is owned and operated by an unrelated person, the credit under Section 45Y of the Code is available for electricity produced at a qualified facility and sold, consumed, or stored by the taxpayer. Although this rule provides some flexibility to taxpayers, the IRS declined to adopt the Section 45 rule from IRS Notice 2008-60, which provides that electricity sales will be treated as made to an unrelated taxpayer if the producer of electricity sells electricity to a related person for resale to a person unrelated to the producer.
Notable Rules Under Section 48E
Under the Final Regulations, “qualified facilities” and “energy storage technology” (“EST”) are defined, and treated, separately. Accordingly, Section 48E does not permit combined solar and storage facilities—each facility must claim the credit under Section 48E separately as a “qualified facility” or an “EST,” as applicable. This rule could have implications for application of the prevailing wage and apprenticeship requirements, domestic content adder eligibility, and energy community adder eligibility.
Similarly, the Final Regulations define “unit of qualified facility” to include all components of functionally interdependent property, and the term “qualified facility” to mean a unit of qualified facility plus integral parts. This is significant because satisfaction of the prevailing wage and apprenticeship requirements, domestic content adder eligibility, and energy community adder eligibility are each determined on a “qualified facility” basis. To take an example, this means in many cases that prevailing wage and apprenticeship, domestic content, and energy community eligibility would be measured for a solar facility at the inverter level, rather than on a project-wide basis as is required for the ITC under Section 48 of the Code. Although this rule was in the Proposed Regulations, many commenters asked the IRS to permit some form of aggregation (similar to the energy project rules under Section 48) for purposes of Section 48E. The IRS declined this request, and the rules in the Final Regulations now will require very careful planning for prevailing wage and apprenticeship, domestic content adder, and energy community adder purposes.
In addition, under the Final Regulations, the cost of qualified interconnection property (which is similarly defined under the final regulations for Section 48) is only ITC-eligible for “qualified facilities.” For EST, the cost of interconnection property is not eligible for the credit under Section 48E. Again, this is different from the application of the ITC for qualified interconnection property for energy storage technology that is eligible for the ITC under Section 48 of the Code.
Notable Rules for both Section 45Y and 48E
The Final Regulations adopt the rule from the Proposed Regulations that the following types or categories of facilities may be treated as having an emissions rate of not greater than zero: wind, solar, hydropower, marine and hydrokinetic, geothermal, nuclear fission, fusion energy, and certain waste energy recovery property. For types or categories of facilities not listed above, taxpayers must rely on the annual table that sets forth the GHG emissions rates in effect as of the date the facility begins construction or, if not set forth on the annual table, the provisional emissions rate determined by the Secretary for the taxpayer’s particular facility.
In addition, for the types or categories of facilities not listed above, the Final Regulations confirm that certain emissions of GHGs are excluded from the requirement that the GHG rate be not greater than zero, including, for example, emissions that occur before commercial operation commences and emissions from routine operational and maintenance activities.
Both Section 45Y and 48E rely on the existing prevailing wage and apprenticeship rules contained in Sections 45(b)(7) and (8) of the Code and Sections 1.45-7, 1.45-8 and 1.45-12 and 1.48-13 of the Treasury Regulations except, as noted above with respect to Section 48E, prevailing wage and apprenticeship is measured as the qualified facility level rather than the energy project level (as it has been for the ITC).
For the 1 MW (AC) exception under both Sections 45Y and 48E, the Final Regulations incorporate similar rules for calculating nameplate capacity as provided in the final regulations under Section 48. However, the Final Regulations also provide that the nameplate capacity of a qualified facility with “integrated operations” with any other qualified facility must be calculated using the aggregate nameplate capacity of each qualified facility. A qualified facility will be treated as having “integrated operations” with any other qualified facility if the qualified facilities are of the same type of technology and (1) are owned by the same or related taxpayers, (2) placed in service in the same taxable year, and (3) transmit electricity generated by the qualified facilities through the same point of interconnection, if grid-connected, or are able to support the same end user, if not grid-connected or if delivering electricity directly to an end user behind the meter. These rules have a delayed applicability date of March 16, 2025.
Both Sections 45Y and 48E adopt the familiar 80/20 rule, which states that a facility may qualify as originally placed in service even if the unit of qualified facility contains some used components of property provided the fair market value of the used components of the unit of qualified facility is not more than 20% of the total value of the unit of qualified facility (which is determined by adding together the cost of the new components of property plus the value of the used components of property included in the qualified facility).
New Antidumping and Countervailing Duty Petitions on Temporary Steel Fencing from China
On January 14, 2025, ZND US Inc (Petitioner or ZND), domestic producer of temporary steel fencing, filed petitions with the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC) seeking the imposition of antidumping duties (AD) and countervailing duties (CVD) on temporary steel fencing from China. Such structures include fencing for construction sites, security perimeters, events, and animal kennels. The scope does not include permanent steel fencing.
Under U.S. law, a domestic industry may petition the United States government to initiate an AD investigation into the pricing of an imported product to determine whether it is sold in the United States at less than fair normal value prices. For market economies (which China is not), normal value is home market or third-country price, or actual cost plus reasonable profit of the foreign producer/exporter. For deemed non-market economy China, normal value is a constructed cost plus deemed reasonable profit based on surrogate values in a market economy deemed of comparable level of economic development to China.
A domestic industry also may petition for the initiation of an investigation of alleged countervailable subsidies provided by a foreign government to producers and exporters of the subject merchandise. DOC will impose AD and/or CVD duties on subject merchandise if it determines that imports of that product are dumped and/or subsidized, and if the ITC also determines that the domestic industry is materially injured or threatened with such injury by reason of imports of the subject merchandise.
The immediate activity will occur at the ITC. In the preliminary stage, the threshold to find injury from the accused imports is low such that the ITC generally finds sufficient indicia of injury to a U.S. industry from the accused imports to continue the AD/CVD investigations. If the ITC votes to continue, then the investigation moves to DOC.
If the ITC and DOC make preliminary affirmative determinations, U.S. importers will be required to post cash deposits in the amount of the AD and/or CVD duties for all entries of the subject merchandise entered on or after the date of DOC’s preliminary determinations being published in the Federal Register. Note that if there is a surge of imports from the subject countries following the filing of the petitions, DOC can find critical circumstances for a particular subject country (or producer) and instruct U.S. Customs & Border Protection (CBP) to collect cash deposits retroactively to 90 days before the date of publication of the preliminary determination.
Following further factual investigation, verification, and briefing, DOC can change the preliminary AD/CVD rates in its final determinations. AD/CVD Orders will only issue if both the DOC and ITC make affirmative final determinations. The ITC final injury investigation is more rigorous than its preliminary injury investigation, where historically 30% or so of petitions are rejected at that stage.
Scope
Petitioner requests the following product scope for the investigation:
“The merchandise subject to this investigation is temporary steel fencing. Temporary steel fencing consists of temporary steel fence panels and temporary steel fence stands. Temporary steel fence panels, when assembled with temporary steel fence stands or other types of stands outside of the scope, with each other, or with posts, create a free-standing structure. Such structures may include, but are not limited to, fencing for construction sites, security perimeters, and events, as well as animal kennels. Temporary steel fence panels are covered by the scope regardless of whether they attach to a stand or the type of stand to which they connect.
Temporary steel fence panels have a welded frame of steel tubing and an interior consisting of chain link, steel wire mesh, or other steel materials that are not more than ten millimeters in actual diameter or width. The steel tubing may surround all edges of the temporary steel fence panel or only be attached along two parallel sides of the panel. All temporary steel fence panels with at least two framed sides are covered by the scope, regardless of the number of edges framed with steel tubing.
Temporary steel fence panels are typically between 10 and 12 feet long and six to eight feet high, though all temporary steel fence panels are covered by the scope regardless of dimension. Temporary steel fence panels may be square, rectangular, or have rounded edges, and may or may not have gates, doors, wheels, or barbed wire or other features, though all temporary steel fence panels are covered by the scope regardless of shape and other features. Temporary steel fence panels may have one or more horizontal, vertical, or diagonal reinforcement tubes made of steel welded to the inside frame, though all temporary steel fence panels are covered by the scope regardless of the existence, number, or type of reinforcement tubes attached to the panel. Temporary steel fence panels may have extensions, pins, tubes, or holes at the bottom of the panel, but all temporary steel fence panels are covered regardless of the existence of such features.
Steel fence stands are shapes made of steel that stand flat on the ground and have one or two open tubes or solid pins into which temporary steel fence panels are inserted to stand erect. The steel fence stand may be made of welded steel tubing or may be a flat steel plate with one or two tubes or pins welded onto the plate for connecting the panels.
Temporary steel fencing is covered by the scope regardless of coating, painting, or other finish. Both temporary steel fence panels and temporary steel fence stands are covered by the scope, whether imported assembled or unassembled, and whether imported together or separately.
Subject merchandise includes material matching the above description that has been finished, assembled, or packaged in a third country, including by coating, painting, assembling, attaching to, or packaging with another product, or any other finishing, assembly, or packaging operation that would not otherwise remove the merchandise from the scope of the investigation if performed in the country of manufacture of the temporary steel fencing.
Temporary steel fencing is included in the scope of this investigation whether or not imported attached to, or in conjunction with, other parts and accessories such as hooks, rings, brackets, couplers, clips, connectors, handles, brackets, or latches. If temporary steel fencing is imported attached to, or in conjunction with, such non-subject merchandise, only the temporary steel fencing is included in the scope.
Merchandise covered by this investigation is currently classified in the Harmonized Tariff Schedule of the United States (HTSUS) under the subheading 7308.90.9590. The HTSUS subheading set forth above is provided for convenience and U.S. Customs purposes only. The written description of the scope is dispositive.”
Foreign Producers and Exporters of Subject Merchandise
A list of foreign producers and exporters of temporary steel fencing, as identified in the petition, is provided in Attachment 1.
U.S. Importers of Subject Merchandise
A list of U.S. importers of temporary steel fencing, as identified in the petition, is provided in Attachment 2.
Alleged Margins of Dumping/Subsidization
Petitioners allege the following dumping import duty margins:
China: 405.19%
These are only estimates based on data most favorable to Petitioner. DOC generally assigns duties at the highest alleged dumping rate to foreign producers and exporters who fail to cooperate during the investigation as to answering DOC questionnaires to obtain an AD/CVD margin based on their actual situation.
Petitioner does not provide specific subsidy rates in the petition.
Potential Trade Impact
According to official U.S. import statistics, imports of the subject merchandise totaled 38,423 short tons in 2024, representing approximately 85% of all imports of temporary steel fencing into the United States.
Estimated Schedule of Investigations
1/14/2025
Petition filed
2/28/2025
ITC preliminary injury determination
4/9/2025
DOC preliminary CVD determination, if not postponed
6/13/2025
DOC preliminary CVD determination, if fully postponed
6/23/2025
DOC preliminary AD determination, if not postponed
7/12/2025
DOC preliminary AD determination, if fully postponed
12/26/2025
DOC final AD and CVD determinations, if both preliminary and final determinations fully postponed
2/9/2026
ITC final injury determination, if DOC’s determinations fully postponed
2/16/2026
AD/CVD orders published
How Employers Can Aid Employees Impacted by the Los Angeles Wildfires
Over the past two weeks, wildfires have caused substantial loss and damage to homes and communities in Los Angeles, California, and the surrounding areas. In the wake of such devastation, employers may seek opportunities to provide financial assistance to impacted employees. Fortunately, the Internal Revenue Service (IRS) has outlined various ways for employers to provide much-needed assistance to employees impacted by natural disasters like the wildfires, including tax-free qualified disaster relief payments, leave donation programs, and other tax-efficient options.
In Depth
QUALIFIED DISASTER RELIEF PAYMENTS
Generally, payments made by an employer to, or for the benefit of, an employee must be included in the employee’s taxable gross income unless excluded under another provision. One such exclusion is “qualified disaster relief payments” under Section 139 of the Internal Revenue Code. Employers can make “qualified disaster relief payments” to employees who are victims of many disasters, including the Los Angeles wildfires, on a tax-free basis.
Qualified disaster relief payments include both reimbursements and cash advances and are not treated as taxable income/wages subject to payroll taxes (e.g., Federal Insurance Contributions Act and Federal Unemployment Tax Act) for employees. In addition, employers can deduct these payments as ordinary and necessary business expenses.
A payment qualifies as a “qualified disaster relief payment” if the following requirements are satisfied:
There has been a “qualified disaster” (e.g., a federally declared disaster issued by the president of the United States).
The payment is intended to cover reasonable and necessary personal, family, living, or funeral expenses, or reasonable and necessary expenses incurred for repairing or replacing a personal residence or its contents, provided the expenses were incurred as a result of the qualified disaster and are not covered by insurance or other resources.
The payment is not income replacement (i.e., a payment for lost wages, lost business income, or unemployment benefits).
Qualified disaster relief payments do not need to be paid pursuant to a plan document. In fact, a formal written plan document is not required or recommended. Nevertheless, given the benefits of tax-free status for qualified disaster relief payments, employers that choose to provide such payments should consider adopting an administrative process to validate such payments meet the necessary legal requirements. Such a process can include a short application form for assistance that validates the disaster for which relief is sought, contains an affirmative statement from the employee that the requested funds are necessary for expenses associated with the Los Angeles wildfires, and confirms that such expenses are not reimbursable by insurance.
In addition, employees are not required to account for actual expenses in order to qualify for the exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred. Although substantiation is not required, a simple application/attestation statement from the employee is recommended to provide the employer with assurance regarding its compliance with the legal requirements for offering these payments on a tax-free basis.
LEAVE DONATION PROGRAMS
Since the wildfires have been federally declared a natural disaster, an employer may establish “leave banks” for employees to donate accrued but unused leave to other employees who may be affected by the wildfires. Employees who donate their accrued leave are exempt from taxes on those amounts, but those who receive the leave will incur payroll and income taxes for the time given. Employer-sponsored leave banks programs must be written and must meet certain requirements under IRS Notice 2006-59 to receive favorable tax treatment for both the donor and recipient employee.
RETIREMENT PLAN OPTIONS
An employer-sponsored defined contribution retirement plan can provide additional relief to “qualified individuals” impacted by a qualified disaster. A “qualified individual” is an individual whose principal residence during the incident period of any qualified disaster is in the qualified disaster area and the individual has sustained an economic loss by reason of that qualified disaster. Employer-provided retirement plans can provide the following options:
Distributions up to $22,000 per federally declared disaster, with no early withdrawal penalty. Such distributions must be taken within 180 days of the date the disaster was declared.
Increased maximum loan amounts equal to 100% of a participant’s account balance, up to $100,000.
Extended repayment period of one year for current outstanding loans (as of date such natural disaster was declared). In this case, employers can extend repayment of loans to January 8, 2026.
Employers will need to amend their retirement plans if their plans do not already have such disaster-related provisions. Such amendments must be made by the end of this year for employees to take advantage of these provisions.
SUMMARY
Employers seeking to provide financial assistance to employees should consider the various tax-advantaged programs made available by the IRS. Since the requirements of each program vary, it is important that employers properly structure these programs to comply with the necessary legal requirements.
Potential Impact of FHA’s Revised Defect Taxonomy on Mortgage Originators and Servicers
On January 7, 2025, the Federal Housing Administration (FHA) officially revised its Defect Taxonomy (Final Defect Taxonomy) with the publication of Mortgagee Letter (ML) 2025-01 and the related attachment detailing those changes. The changes are effective as of January 15, 2025, and will be implemented in Appendix 8.0 of FHA Handbook 4000.1 at a later date.
FHA first proposed revising the Defect Taxonomy on October 28, 2021, with the publication of FHA INFO 2021-92. Since then, FHA announced a new proposed version of the Defect Taxonomy with the publication of FHA INFO 2024-25 on July 10, 2024 (Proposed Defect Taxonomy). As we reported at the time, the proposed revisions to the Defect Taxonomy were broad and, most notably, created a new section specific to loan servicing defects. The Proposed Defect Taxonomy did not suggest revisions to the Underwriting Loan Review section of the Defect Taxonomy, but it did propose revisions to the generally applicable introduction of the Defect Taxonomy, as well as the creation of an entirely new Servicing Loan Review section. The Final Defect Taxonomy generally aligns with the Proposed Defect Taxonomy from July 10, 2024. However, based on its own internal review and/or industry feedback, FHA has made some notable revisions to the Final Defect Taxonomy that will likely impact how the U.S. Department of Housing and Urban Development (HUD) applies it in practice.
Examples/Explanation of What Constitutes a Tier 2 or Tier 3 Finding
The Defect Taxonomy has general definitions of what constitutes either a Tier 1 or Tier 4 defect. Both relate to Findings of fraud or materially misrepresented information, but a Tier 1 defect is a Finding that the “Mortgagee knew or should have known” about and a Tier 4 defect is a Finding that the “Mortgagee did not know and could not have known” about. Unlike the clearly stated definition of a Tier 1 or Tier 4 defect, the Defect Taxonomy uses specific examples of Mortgagee conduct to define a Tier 2 or Tier 3 defect as something that falls between a Tier 1 or Tier 4 defect. These examples are included in multiple parts of the Defect Taxonomy, including the introduction, the Underwriting Loan Review section, and the Servicing Loan Review section. The recent revisions only impact the introduction and Servicing Loan Review sections.
The edits to the introduction section of the Final Defect Taxonomy are generally clarifying edits. However, FHA made a more substantive change to the examples given in defining a Tier 3 defect. Specifically, the Final Defect Taxonomy now states that a Tier 3 defect includes a Finding “of noncompliance remedied by the Mortgagee prior to review by the FHA.” This example is not included in the Proposed Defect Taxonomy. The addition is helpful in drawing a line between a Tier 3 and Tier 2 defect, because the Final Defect Taxonomy defines a Tier 2 servicing defect as a Finding that requires “mitigating documentation, corrective servicing action, and/or financial remediation.” As a result, it appears FHA recognizes that a self-mitigated defect merits a lower tier rating for purposes of the Defect Taxonomy.
For the Servicing Loan Review section, FHA made numerous revisions to the examples provided for what constitutes a Tier 2 or Tier 3 defect under each specific defect area. The revisions generally reflect a more specific or clear example of a Tier 2 or Tier 3 defect, so these revisions do not present a significant departure from the Proposed Default Taxonomy. However, it would be beneficial for all servicers or impacted parties to review the new examples of Tier 2 and Tier 3 defects under the Final Defect Taxonomy.
Remedies for Tier 2 Findings
Like the revisions to the examples of a Tier 2 or Tier 3 defect, the Final Defect Taxonomy outlines different potential remedies for a Tier 2 defect compared to the remedies outlined in the Proposed Defect Taxonomy. Some of these revisions may be impactful for Mortgagees. For example, in the context of a Loss Mitigation Processing defect, the Proposed Defect Taxonomy stated that FHA would accept a one-year or five-year indemnification if the borrower did not accept the terms of the appropriate loss mitigation option. But now, the Final Defect Taxonomy states that “FHA will accept indemnification (1-Year or 5-Year) only when the Servicer provides documentation of a good faith effort to complete” the loss mitigation option. Similar revisions were incorporated in the context of Home Disposition defects and Home Retention defects. It is unclear what constitutes “a good faith effort,” but at the very least, this revision will potentially impose a new reporting obligation on impacted servicers.
Rebuttal of a Finding or Severity Determination
The introduction section of both the Final and Proposed Defect Taxonomies state that a Mortgagee may provide supporting documentation through the Loan Review System (LRS) to rebut any Finding or severity determination under the Defect Taxonomy. However, the Final Defect Taxonomy also specifies that “Rebuttals are based on information available to FHA prior to the initial Finding.” This seemingly small addition appears to meaningfully limit the scope of the information a Mortgagee can use to rebut HUD’s determinations pursuant to the Defect Taxonomy. As a result, this limitation on the rebuttal process could be a future cause of Mortgagee concern.
Takeaways
Going forward, Mortgagees and other impacted parties likely should review the Final Defect Taxonomy to develop a better idea of what FHA and HUD view as a Tier 1, Tier 2, Tier 3, or Tier 4 defect. It would also likely be beneficial for Mortgagees to implement this information in their policies and procedures, such as internal audit and quality control, to try to preempt potential origination or servicing defects. Other factors to consider include: (1) identifying defects that could be self-mitigated and therefore characterized as a Tier 3 defect; (2) documenting good faith efforts to complete loss mitigation; and (3) reviewing the information submitted in the LRS to ensure that it is detailed enough to support a potential rebuttal to a Finding or severity determination pursuant to the Defect Taxonomy.
The impact of the Final Defect Taxonomy will become clearer as HUD interprets and implements it in the near future.
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Trump Tariffs Survival Guide: 10 Strategies for U.S. Importers
Tariffs remain the focus of the incoming Trump Administration. Over the past several months, the announcements from president-elect Trump and his transition team have been dynamic. We expect the Trump trade policy team to use creative methods to deliver aggressive new tariff policies this year.
There are several strategies U.S. importers may consider to cope with the anticipated tariff increases. Some of the strategies are lessons learned during the first Trump Administration (e.g., to mitigate the impact of the Section 301 tariffs on Chinese-origin imports). The key to success remains to plan ahead, understand the laws, and weigh all options.
Potential New U.S. Import Tariffs
Before turning to strategies, we outline the potential types of tariffs that have been shared by Trump insiders. For each type, we cover the potential tariff action, timing for such imposition, and our assessment of the potential likelihood of imposition. Exporters, please note that we may expect to see other countries impose retaliatory tariffs against imports from the United States following the increase of U.S. import tariffs. China, Canada, Mexico and the EU have all threatened such tariffs.
Chinese-Origin Goods.
Potential Tariff Action: Currently, the Section 301 tariffs on most imports of Chinese-origin goods are largely in the 25-50 percent range. During the Trump presidential campaign, we heard about a 60 percent tariff on all Chinese-origin goods. At the end of November 2024, president-elect Trump announced immediately upon taking office, tariffs on imports from China would increase by 10 percent. When coupled with the existing Section 301 tariffs, that action would result in a 35 to 60 percent tariff on such imports.
Timing: Such a tariff could be imposed using the same Section 301 of the Trade Act of 1974, but that method would take several months to implement. The wild card option under consideration (leaked on January 8, 2025) would be to use the president’s emergency authority under the International Emergency Economic Powers Act of 1977 (IEEPA), which would enable the incoming Administration to impose tariffs almost immediately. IEEPA has not been used previously to implement tariffs, so any such tariff action could be a bit of the Wild West.
Likelihood: Very likely.
Chinese-Owned or Operated Ports.
Potential Tariff Action: During the Trump presidential campaign, we heard brief threats about the imposition of tariffs on any goods, regardless of country of origin, that entered the United States through any Chinese-owned or operated ports.
Timing: Such a tariff could be implemented quickly after inauguration. Congress has delegated broad authority to the Executive Branch to impose tariffs for reasons of national security. Thus, the same IEEPA-type action could authorize such tariffs immediately upon inauguration, or potentially even Section 232 of the Trade Expansion Act. Any Section 232 action would require several months.
Likelihood: Not likely.
Mexico and Canada.
Potential Tariff Action: Trump has all but promised a 25 percent tariff on all imports from United States-Mexico-Canada Agreement (USMCA) partners Canada and Mexico. The USMCA was negotiated by the first Trump Administration. The agreement has a national security carveout (a theme here) that enables a party to the agreement to apply measures it considers necessary for protection of its own essential security interests. Thus, the USMCA gives the incoming Administration the pretext it needs to impose such tariffs.
Timing: Such a tariff could again be implemented quickly using IEEPA or much longer should negotiations drag on related to any such tariff. The immediate imposition of such a tariff would be aggressive, though not impossible. There is a decent chance the threat is being used as a negotiating tool (or stick) ahead of the 2026 joint review of the USMCA by the member parties.
Likelihood: Possible, but more likely used as negotiating leverage.
Universal Tariff.
Potential Tariff Action: The incoming Administration has also announced the potential for a 10 or even 20 percent universal tariff. Such a tariff would apply to all imports from all countries. However, in recent weeks, we have seen leaks that such a universal tariff would be targeted to imports relating to national security as follows: defense industrial supply chain (through tariffs on steel, iron, aluminum and copper); critical medical supplies (syringes, needles, vials and pharmaceutical materials); and energy production (batteries, rare earth minerals and even solar panels).
Timing: Such a tariff could again be implemented quickly using again using national security arguments. There are also recent reports that it would be phased in gradually to minimize disruption to supply chains and financial markets.
Likelihood: A broad universal tariff is not likely, but also not impossible. A universal tariff targeting imports relating to national security considerations is fairly likely.
Antidumping and Countervailing Duties.
Potential Tariff Action: President-elect Trump’s team is committed to the fair trade end of the free trade/fair trade spectrum. The main tool in that arsenal is an old one: antidumping duties and countervailing duties (AD/CVD). We expect the use of the AD/CVD laws to increase steadily during the incoming Trump administration. One major focus will be anti-circumvention proceedings that are designed to punish imports from countries where foreign manufacturers under AD/CVD orders may try to shift their production.
Timing: AD/CVD cases are slow by nature. No real changes will be noticeable until 2026 or 2027.
Likelihood: Very likely.
Top 10 Tariff Coping Strategies
The potential for new tariffs is substantial. We provide the following for consideration in preparing for such actions. Any plan requires tailoring to specific supply chains, products, and compliance realities. Sometimes a combination of the below strategies may be necessary.
Contract Negotiation: Review supplier and customer contracts to assess the assignment of liability for tariff increases; and negotiate favorable tariff burden-sharing.
Supply Chain Management: Consider suppliers in countries subject to lower tariffs, but be aware of the potential for AD/CVD and circumvention issues. Also consider sourcing a different product or raw material subject to a lower tariff rate. Don’t forget to examine whether manufacture in a third country using raw materials from a high tariff country creates a “substantial transformation,” such that the end product would be considered to originate in the third country. And of course, to the extent possible, review the possibility of sourcing from domestic suppliers.
Trade Agreements: Consider sourcing from countries subject to free trade agreements with the United States, which would enable duty-free imports. But do not assume that Canadian and Mexican goods will be duty-free; be aware of the potential of a national security-based tariff or renegotiated USMCA.
Trade Preference Programs: Keep an eye on potential programs that provide duty-free imports. For example, past programs included the Generalized System of Preferences (GSP) and the Miscellaneous Tariff Bill (MTB). But be aware that the GSP and MTB programs have been languishing without reauthorization by Congress for years.
In-Bond Shipments and Foreign Trade Zones (FTZ): If a company’s supply chain involves goods transiting through the United States, for sale elsewhere, consider use of in-bond shipments or an FTZ, where tariffs do not normally apply. But be aware that in-bond and FTZ schemes can involve high storage fees, rigorous accounting procedures, and other costs.
Duty Drawback: If manufacturing products in the United States for export, consider making use of a drawback program. Drawback enables importers to obtain refunds of certain U.S. duties paid on the imported component goods or materials. Section 301 duties are eligible for drawback, but AD/CVD are not.
Exclusions: If new tariffs are issued under Sections 301 or 232, consider seeking a tariff exclusion if such an administrative process is provided.
Comments: If Sections 301 or 232 are used, we expect to see a notice and comment period as part of the rulemaking, which should provide interested parties an opportunity to comment on the economic impact of the proposed tariffs.
Congressional Relations: Consider whether outreach to congressional delegations could help in any tariff mitigation strategy.
Litigation: We expect multiple lawsuits challenging the authority to impose certain tariffs. But U.S. courts have generally been receptive to the national security justifications offered for such tariffs, and the timeline to resolve such actions requires years.
In sum, while the imposition of additional tariffs will be challenging for U.S. importers, there are several possible strategies that may reduce certain negative impacts of these tariffs. All importers must carefully analyze any supply chain changes under the applicable laws, and each decision should be well documented and supported by the company’s written import policies and procedures.
Direct Employer Assistance and 401(k) Plan Relief Options for Employees Affected by California Wildfires
In the past week, devastating wildfires in Los Angeles, California, have caused unprecedented destruction across the region, leading to loss of life and displacing tens of thousands. While still ongoing, the fires already have the potential to be the worst natural disaster in United States history.
Quick Hits
Employers can assist employees affected by the Los Angeles wildfires through qualified disaster relief payments under Section 139 of the Internal Revenue Code, which are tax-exempt for employees and deductible for employers.
The SECURE Act 2.0 allows employees impacted by federally declared disasters to take immediate distributions from their 401(k) plans without the usual penalties, provided their plan includes such provisions.
As impacted communities band together and donations begin to flow to families in need, many employers are eager to take steps to assist employees affected by the disaster.
As discussed below, the Internal Revenue Code provides employers with the ability to make qualified disaster relief payments to employees in need. In addition, for employers maintaining a 401(k) plan, optional 401(k) plan provisions can enable employees to obtain in-service distributions based on hardship or federally declared disaster.
Internal Revenue Code Section 139 Disaster Relief
Section 139 of the Internal Revenue Code provides for a federal income exclusion for payments received due to a “qualified disaster.” Under Section 139, an employer can provide employees with direct cash assistance to help them with costs incurred in connection with the disaster. Employees are not responsible for income tax, and payments are generally characterized as deductible business expenses for employers. Neither the employees nor the employer are responsible for federal payroll taxes associated with such payments.
“Qualified disasters” include presidentially declared disasters, including natural disasters and the coronavirus pandemic, terrorist or military events, common carrier accidents (e.g., passenger train collisions), and other events that the U.S. Secretary of the Treasury concludes are catastrophic. On January 8, 2025, President Biden approved a Major Disaster Declaration for California based on the Los Angeles wildfires.
In addition to the requirement that payments be made pursuant to a qualified disaster, payments must be for the purpose of reimbursing reasonable and necessary “personal, family, living, or funeral expenses,” costs of home repair, and to reimburse the replacement of personal items due to the disaster. Payment cannot be made to compensate employees for expenses already compensated by insurance.
Employers implementing qualified disaster relief plans should maintain a written policy explaining that payments are intended to approximate the losses actually incurred by employees. In the event of an audit, the employer should also be prepared to substantiate payments by retaining communications with employees and any expense documentation. Employers should also review their 401(k) plan documents to determine that payments are not characterized as deferral-eligible compensation and consider any state law implications surrounding cash payments to employees.
401(k) Hardship and Disaster Distributions
In addition to the Section 139 disaster relief described above, employees may be able to take an immediate distribution from their 401(k) plan under the hardship withdrawal rules and disaster relief under the SECURE 2.0 Act of 2022 (SECURE 2.0).
Hardship Distributions
If permitted under the plan, a participant may apply for and receive an in-service distribution based on an unforeseen hardship that presents an “immediate and heavy” financial need. Whether a need is immediate and heavy depends on the participant’s unique facts and circumstances. Under the hardship distribution rules, expenses and losses (including loss of income) incurred by an employee on account of a federally declared disaster declaration are considered immediate and heavy provided that the employee’s principal residence or principal place of employment was in the disaster zone.
The amount of a hardship distribution must be limited to the amount necessary to satisfy the need. If the employee has other resources available to meet the need, then there is no basis for a hardship distribution. In addition, hardship distributions are generally subject to income tax in the year of distribution and an additional 10 percent early withdrawal penalty if the participant is below age 59 and a half. The participant must submit certification regarding the hardship to the plan sponsor, which the plan sponsor is then entitled to rely upon.
Qualified Disaster Recovery Distributions
Separate from the hardship distribution rules described above, SECURE 2.0 provides special rules for in-service distributions from retirement plans and for plan loans to certain “qualified individuals” impacted by federally declared major disasters. These special in-service distributions are not subject to the same immediate and heavy need requirements and tax rules as hardship distributions and are eligible for repayment.
SECURE 2.0 allows for the following disaster relief:
Qualified Disaster Recovery Distributions. Qualified individuals may receive up to $22,000 of Disaster Recovery Distributions (QDRD) from eligible retirement plans (certain employer-sponsored retirement plans, such as section 401(k) and 403(b) plans, and IRAs). There are also special rollover and repayment rules available with respect to these distributions.
Increased Plan Loans. SECURE 2.0 provides for an increased limit on the amount a qualified individual may borrow from an eligible retirement plan. Specifically, an employer may increase the dollar limit under the plan for plan loans up to the full amount of the participant’s vested balance in their plan account, but not more than $100,000 (reduced by the amount of any outstanding plan loans). An employer can also allow up to an additional year for qualified individuals to repay their plan loans.
Under SECURE 2.0, an individual is considered a qualified individual if:
the individual’s principal residence at any time during the incident period of any qualified disaster is in the qualified disaster area with respect to that disaster; and
the individual has sustained an economic loss by reason of that qualified disaster.
A QDRD must be requested within 180 days after the date of the qualified disaster declaration (i.e., January 8, 2025, for the 2025 Los Angeles wildfires). Unlike hardship distributions, a QDRD is not subject to the 10 percent early withdrawal penalty for participants under age 59 and a half. Further, unlike hardship distributions, taxation of the QDRD can be spread over three tax years and a qualified individual may repay all or part of the amount of a QDRD within a three-year period beginning on the day after the date of the distribution.
As indicated above, like hardship distributions, QDRDs are an optional plan feature. Accordingly, in order for QDRDs to be available, the plan’s written terms must provide for them.
GeTtin’ SALTy Episode 44 | California 2025 SALT Outlook [Podcast]
In the latest episode of the GeTtin’ SALTy podcast, host Nikki Dobay and guest Shail Shah, both shareholders at Greenberg Traurig, discuss the complexities of California’s state and local tax landscape as 2025 begins. The episode kicks off with a surprising announcement from Governor Gavin Newsom: California has shifted from a significant budget deficit to a surplus.
The discussion delves into the implications of this fiscal roller coaster, with Shail offering insights into Governor Newsom’s positioning on taxes. The conversation explores indirect tax increases through adjustments in apportionment factors and deductions.
Nikki and Shail address the changes in California’s apportionment rules from the 2024 budget. They provide updates on legal challenges against these retroactive changes, with organizations like the National Taxpayers Union questioning the constitutionality. This litigation is likely to shape the tax landscape in 2025, with potential outcomes still uncertain.
They also tackle the topic of California’s market-based sourcing regulations, which have been in development since 2017, and the future of FTB (Franchise Tax Board) guidance.
The episode concludes with a surprise non-tax question about the perils of a malfunctioning coffee maker.
Practical Considerations for Navigating Tariff Risk on Construction Projects
As the second Trump administration begins next week, developers, contractors, subcontractors and suppliers are evaluating the extent of the construction industry’s international ties – and contractual exposure to potential tariff increases. While President-elect Trump has been forthright about his intent to impose and increase tariffs, he has not provided details about which products, goods, and countries may be affected.
This uncertainty leaves many in the construction industry concerned, and both upstream and downstream parties are carefully negotiating contractual risk of changes in tariffs. Broadly speaking, tariffs are typically considered import (or export) taxes imposed on goods and services imported from another country (or exported). In the United States, Congress has the power to set tariffs, but importantly, the president can also impose tariffs under specific laws (most notably in recent years, the Trade Act of 1974), citing unfair trade practices or national security.
Many different contractual provisions may be impacted by the introduction of new tariffs: tax provisions, force majeure provisions, change in law provisions, and price escalation provisions, for example. Procurement contracts routinely rely on Incoterms, which allocate tariff risk to either buyer or seller depending on the selected Incoterm. Negotiating an appropriate allocation of risk of changing tariffs can be as much an art as science and requires consideration of how tariffs are administered and their effects on the market. Consider, for example, the following:
Tariffs are paid by the importer of record to U.S. Customs & Border Protection. If a contractual party is not the importer of record, such party will not be directly liable for payment of tariffs.
Instead, tariffs raise the ultimate cost of goods or services because importers increase their price to buyers to account for the tariffs.
Tariffs also tend to indirectly increase the cost of goods or services related or equivalent to the goods or services subject to tariffs by raising demand for domestic or non-affected substitute goods or services.
Some goods and services are higher risk than others (e.g., goods originating from China, and potentially in a second Trump administration, goods originating from Canada and Mexico). Understanding the extent of the international reach of a construction project’s supply chain may assist in evaluating exposure and negotiating appropriate relief from imposition of new or increased tariffs.
Having a working knowledge of how tariffs are implemented and their impacts on related markets is important to assessing and mitigating contractual risk. Parties to a construction contract may have different methods for managing tariff impacts. A supplier may choose to source goods from less risky countries, even if the cost of such goods is incrementally higher than their Chinese equivalent in the short term. A buyer may choose to enter into a master supply agreement, allowing the buyer to set a long-term fixed price on a guaranteed volume of goods that in turn permits the seller to better forecast its demand and supply chain. Many developers and contractors may negotiate shared risk of changed tariffs, establishing a change order threshold or cost-sharing ratio. Ultimately, those who consider and carefully negotiate provisions addressing changes in tariffs will be better prepared to face and manage their economic impact.
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Ohio Streamlines Unemployment Insurance Reporting for Commonly Controlled, Concurrent Employers
New for January 1, 2025, Ohio has streamlined its unemployment insurance reporting process to allow employers that control multiple corporate entities to report unemployment insurance for their concurrent employees in a single account.
Quick Hits
Ohio now allows commonly controlled, managed, or owned companies—or companies reorganized in such a way—to apply for a single unemployment insurance account for reporting purposes.
Companies must file a “transfer of business form,” which began to be accepted on January 1, 2025.
On December 11, 2024, the Ohio Department of Job and Family Services (ODJFS) adopted revisions to Ohio Administrative Code Rule 4141-11-13 that rescinded the prior prohibition on common paymaster reporting, where one entity reports unemployment insurance for a group of related entities with concurrent employment. This change allows Ohio unemployment insurance reporting to be more closely aligned with the Internal Revenue Service’s “common paymaster” employment tax reporting.
Under the new Ohio rule, commonly controlled, managed, or owned companies, or companies reorganized in such a way, may apply for a single unemployment insurance account to report all employees. The rule is currently being interpreted to include registered professional employer organizations in which shared employees are coemployed. Companies meeting the rule’s definition must file a “transfer of business form … identifying the concurrent employers, and whether the employees will be reported on the primary account due to concurrent employment or transfer.”
The rule defines “concurrent employment” as the employment of an individual with at least two substantially commonly owned, managed, or controlled employers during the same time period.” According to ODJFS, commonly owned companies may further reorganize their structure to “create a new commonly owned entity” or may “use one of their existing commonly owned businesses as the primary-wage-reporting entity.”
The changes significantly streamline the unemployment insurance reporting process for commonly owned companies. Under the prior Rule 4141-11-13, each corporate entity was required to report payments for employees regardless of whether it was controlled by another entity under a “common paymaster arrangement” or similar.
The rule also makes clear that common paymaster reporting is an exception to the rule that one legal entity may not report another legal entity’s employees for Ohio unemployment insurance purposes without transferring the direction and control of the employees to the legal entity that will report the employees for Ohio unemployment insurance. Thus, common paymaster reporting is more than just an administrative election to report unemployment insurance under a particular entity.
Next Steps
The ODJFS began accepting applications for a single unemployment insurance reporting account on January 1, 2025. Employers must file a “Transfer of Business” form (JFS 20101), which can be found on the ODJFS website here.
If the primary account does not have an employer ID, ODJFS requires the employer to open a new account online or file “Report to Determine Liability” form (JFS 20100), which can be found on the ODJFS website here.
2025 Budget Reconciliation Roadmap: Impacts and Action Steps
Overview
The budget reconciliation process is a critical legislative tool that allows Congress to pass budget-related measures with a simple majority in the Senate, bypassing the filibuster and expediting passage of significant legislative priorities. Established under the Congressional Budget Act of 1974, reconciliation is designed to align revenue and spending with Congress’ annual budget resolution. This mechanism is particularly valuable when one party controls Congress and the White House, as it allows major initiatives to advance without bipartisan support. However, reconciliation is subject to strict rules, including the “Byrd Rule,” which restricts provisions to those with direct budgetary impacts, i.e., with direct impact on either spending or revenues.
Prior Uses of Reconciliation During President Trump’s first term, budget reconciliation was a key tool for advancing significant legislative priorities, including the Tax Cuts and Jobs Act of 2017, which enacted sweeping tax changes. Similarly, the Biden Administration utilized reconciliation to pass key components of its agenda, such as the American Rescue Plan Act of 2021, which provided critical pandemic relief and economic stimulus. These examples highlight reconciliation’s utility in enacting transformative policies under unified government control.
Trump and Congressional Agenda for Reconciliation For the incoming Trump administration and Republican-majority Congress, reconciliation will be instrumental in enacting an ambitious agenda, that encompasses tax provisions, border security, energy production and deregulation, and defense funding. As stakeholders in energy, maritime, transportation, trade, defense, and railway, and Native American and Alaska Native affairs, all stakeholders should prepare for significant opportunities and risks as these measures take shape.
Reconciliation Strategy: One Bill or Two?President-elect Trump’s position on the scope and structure of reconciliation has evolved in recent weeks. While initially favoring a single comprehensive package, he has expressed openness to a two-bill strategy. The first bill would focus on energy, border security, and defense, while the second would address tax provisions and broader fiscal priorities.
House Speaker Mike Johnson (R-LA) has strongly advocated for a single reconciliation bill, arguing that it is the most efficient way to advance Trump’s agenda within the first 100 days. Johnson’s approach is supported by House Budget Committee Chairman Jodey Arrington (R-TX) and House Ways and Means Chairman Jason Smith (R-MO), who believe a unified package will maximize legislative momentum. However, Senate Republicans, including Budget Committee Chairman Lindsey Graham (R-SC), have emphasized the urgency of addressing border security and defense separately to mitigate national security risks, with tax policy changes following later this year in a second bill. This internal debate could impact the timeline and scope of reconciliation efforts.
Scope of Potential Legislation
Tax ProvisionsTax changes are expected to play a significant role in the reconciliation process, with the extension of the 2017 tax cuts at its core. These extensions aim to provide continued relief for businesses and high-earner individuals while reducing corporate tax rates further to enhance global competitiveness and attract investment. Additional measures under consideration include eliminating taxes on tipped income to support the service industry, eliminating taxes on Social Security benefits, simplifying the tax code by reducing brackets, and eliminating certain deductions to streamline compliance and reduce costs. A new revenue-generating mechanism involving tariffs on imports is also being proposed.
Border Security and DefenseBorder security and defense funding are poised to feature prominently in the reconciliation agenda. Significant allocations are anticipated for border wall construction, advanced surveillance technologies, and enhanced U.S. Customs and Border Protection and Immigration and Customs Enforcement operations. Simultaneously, the military will receive increased funding to address strategic vulnerabilities and modernize equipment. These measures not only aim to provide immediate legislative wins but also to mitigate pressing national security concerns.
Energy PolicyEnergy policy will focus on streamlining permitting processes for critical infrastructure projects, such as pipelines, renewable energy installations, and oil and gas export terminals. Domestic energy production will be promoted through the reduction of regulatory barriers, particularly in the oil, gas, and nuclear sectors. Further, energy independence initiatives, including incentives for clean energy and advanced technology adoption, will be advanced. However, proposals to reform environmental protections, such as the National Environmental Policy Act (“NEPA”) review process, are expected to face legal and public opposition, even as they aim to accelerate project timelines. Whether or not permitting reform meets the Byrd Rule by saving tax revenues remains to be seen.
Debt CeilingDebt ceiling adjustments are also on the table, with plans to raise the debt limit within the reconciliation package to ensure government solvency and avoid market disruptions. To secure support from conservative members, this increase will likely be paired with $2.5 trillion in spending cuts over ten years, focused on discretionary spending and the reduction of waste and inefficiencies. It remains to be seen whether these tax cuts can be balanced out simply with discretionary spending cuts. Balancing the debt limit increase with long-term fiscal sustainability will be a key focus.
Tentative Timeline and Legislative Actions
Early February: Adoption of a budget resolution with reconciliation instructions is expected, providing the framework for committees to draft detailed legislation.
March 14, 2025: Deadline to pass final fiscal 2025 spending bills to avoid a government shutdown.
Early April: House passage of the reconciliation package, with the goal of Senate approval by the end of April or early May.
May 2025: Final reconciliation measures enacted, aligning with Trump’s first 100 days.
It is important to note that this is an ambitious one-bill strategy timeline, and dates could be delayed due to lengthy negotiations. A two-bill approach may stretch until the end of the 2025 calendar year to meet the deadline for expiration of the original Trump tax cuts.
Implications for Stakeholders
EnergyIn the energy sector, increased project approvals and decreased regulatory hurdles may present significant opportunities for developers of fossil fuels, renewables, and nuclear energy. However, potential reforms of environmental protections may lead to legal risks for stakeholders. Moreover, the introduction of tariffs on imports, aimed at funding reconciliation priorities, could disrupt supply chains for energy infrastructure projects reliant on imported materials and potentially cause consumer prices to rise, creating inflation-related risks. This may be ameliorated if the incoming Administration, as reported, focuses the tariffs on only certain critical imports. This may, though, positively impact domestic energy producers due to an increased demand for low-cost, non-tariffed energy.
Maritime and TransportationThe maritime and transportation sectors stand to benefit from infrastructure investments that could drive growth in port modernization and rail projects. Streamlined regulatory approvals are expected to accelerate construction timelines, creating additional opportunities for stakeholders involved in large-scale projects. However, proposed discretionary spending cuts could reduce the availability of federal grants that support critical transportation infrastructure upgrades.
Native American/Alaska Native AffairsFor Native American and Alaska Native communities, the reallocation of federal funding poses a significant risk to vital services, including healthcare, education, and housing programs. Advocacy will be essential to ensure equitable treatment and representation in legislative negotiations. Despite these challenges, tribes, native organizations, and corporations may find opportunities to leverage energy and infrastructure investments to promote economic development, including through federal contracts, provided their interests are safeguarded in the reconciliation process.
What to Watch
Legislative DevelopmentsThe reconciliation strategy debate between a single comprehensive package and a two-bill approach will significantly shape the legislative process. Stakeholders should closely monitor the resolution of this debate, as it will determine the sequencing, timeline, and scope of legislative priorities. The progress of key committees in drafting specific provisions will also be critical to understanding how reconciliation impacts various industries.
Stakeholder AdvocacyProactive stakeholder advocacy will play a vital role in shaping favorable outcomes. Engaging with congressional offices to advocate for specific language in reconciliation provisions, particularly those impacting energy, defense, transportation, trade, and tribal programs, will be essential. Building coalitions to amplify industry voices and address shared concerns about proposed cuts or regulatory changes can further strengthen advocacy efforts.
Market ImpactsAdditionally, stakeholders should evaluate the market implications of proposed tax policies, including corporate rate reductions and import tariffs, to understand their potential impact on profitability and supply chain operations. Assessing the implications of energy deregulation measures on project feasibility and financing opportunities will also be critical. Finally, stakeholders should prepare for potential shifts in federal funding priorities, particularly those affecting grant-dependent programs and projects, to mitigate risks while seizing new opportunities.
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SEC Updates Names Rule FAQs
On 8 January 2025, the staff of the Division of Investment Management of the US Securities and Exchange Commission (the SEC) released an updated set of Frequently Asked Questions (the FAQs) related to the amendments to Rule 35d-1 (Names Rule) under the Investment Company Act of 1940, as amended (the 1940 Act) and related form amendments (collectively, the Amendments) adopted in 2023. The FAQs modify, supersede, or withdraw portions of FAQs released in 2001 (the 2001 FAQs) related to the original adoption of the Names Rule. In addition to the FAQs, the SEC staff also released Staff Guidance providing an overview of the questions and answers withdrawn from the 2001 FAQs (Staff Guidance). Together, the FAQs and the Staff Guidance on the withdrawn FAQs are intended to provide guidance to the various implementation issues and interpretative questions left unclear by the adopting release of the Amendments to the Names Rule (2023 Adopting Release). While the FAQs and the Staff Guidance do not address all key issues and questions related to the Names Rule, they do provide new guidance on certain areas and suggest interpretive frameworks that can be more universally applied.
Revisions to Fundamental Policies
In the revised FAQs the SEC staff updates certain FAQs, broadening the reach of those FAQs’ applicability. For instance, the SEC staff modifies the 2001 FAQ relating to the shareholder approval requirement for a fund seeking to adopt a fundamental 80% Policy to also provide guidance in instances where an 80% investment policy (an 80% Policy) that is fundamental is being revised. The SEC staff provides clarification concerning the process required to revise fundamental investment policies. The FAQ states that a fundamental 80% Policy may be amended to bring such policy into compliance with the requirements of the amended Names Rule without shareholder approval, provided the amended policy does not deviate from the existing policy or other existing fundamental policies. The FAQs restate that individual funds must determine, based on their own individual circumstances, whether shareholder approval is necessary within this framework. Accordingly, funds may take the position that clarifications or other nonmaterial revisions to a fundamental 80% Policy in response to the amended Names Rule would not require shareholder approval. If it is determined that nonmaterial revisions have been made to a fundamental 80% Policy, notice to the fund’s shareholders is required.1 Funds should also continue to provide 60 days’ notice (as required by amended Rule 35d-1) for any changes to nonfundamental 80% policies. A similar analysis can be applied in determining whether a post-effective amendment filed pursuant to rule 485(a) under the Securities Act of 1933 is required in connection to the Names Rule implementation process.
Guidance on Tax-Exempt Funds
The FAQs provide insight into the SEC staff’s view of the applicability of the Names Rule to funds whose names suggest their distributions are exempt from both federal and state income tax. According to the FAQs, such funds fall within the scope of the Names Rule and, per Rule 35d-1(a)(3), must adopt a fundamental policy to invest, under normal circumstances, either:
At least 80% of the value of its assets in investments, the income from which is exempt from both federal income tax and the income tax of the named state.
Its assets so that at least 80% of the income that it distributes will be exempt from both federal income tax and the income tax of the named state.
With respect to the 80% Policy basket of single-state tax-exempt funds (e.g., a Maryland Tax-Exempt Fund), the FAQs reiterate that those funds may include securities of issuers located outside of the named state. For such a security to be included in the fund’s 80% Policy basket, the security must pay interest that is exempt from both federal income tax and the tax of the named state, and the fund must disclose in its prospectus the ability to invest in tax-exempt securities of issuers outside the named state.
Additionally, with respect to the terms “municipal” and “municipal bond” in a fund’s name, the FAQs reiterate that such terms suggest that the fund’s distributions are exempt from income tax and would be required to comply with the requirements of Rule 35d-1(a)(3) described above. It further reconfirms that securities that generate income subject to the alternative minimum tax may be included in the 80% Policy basket of a fund that includes the term “municipal” within its name but not a fund that includes “tax-exempt” within its name.
Specific Terms Commonly Used in Fund Names
In addition, the FAQs provide some insight as to the SEC staff’s view of the application of the Names Rule with respect to a number of other terms such as:
High-Yield
The FAQs affirm the SEC staff’s view that funds with the term “high-yield” in the name must include an 80% Policy tied to that term. The FAQs note that the term “high-yield” is generally understood to describe corporate bonds with particular characteristics, specifically, that a bond is below certain creditworthiness standards. However, the SEC staff made an exception for funds that use the term “high-yield” in conjunction with the term “municipal,” “tax-exempt,” or similar. Based on historical practice and as the market for below investment grade municipal bonds is smaller and less liquid, the SEC staff asserts that it would not object if such funds invested less than 80% of their assets in bonds with a high yield rating criteria.2
Tax-Sensitive
The SEC staff confirms in the amended FAQs that “tax-sensitive” is a term that references the overall characteristics of the investments composing the fund’s portfolio and would not require the adoption of an 80% Policy.
Income
The FAQs confirm that the term “income,” is not alluding to investments in “fixed income” securities, but rather when used in a fund’s name, it suggests an objective of current income as a portfolio-wide result. The FAQs declare that the term “income” would not, alone, require an 80% investment policy.
While SEC staff’s guidance when considering the three terms noted above does not provide an overview of how all terms should be treated because an amount of judgment is required for certain terms, they do confirm the general framework should be used when analyzing the applicability of Rule 35d-1 to other terms. Specifically, and consistent with the 2023 Adopting Release, the examples reiterate that terms describing overall portfolio characteristics are outside the scope of the Names Rule, while the terms describing an instrument with “particular characteristics” are within scope of the Names Rule.
Money Market Funds
The FAQs also confirm that funds that use the term “money market” in their name along with another term or terms that describe a type of money market instrument must adopt an 80% Policy to invest at least 80% of the value of their assets in the type of money market instrument suggested by its name. The FAQs further explain that a generic money market fund, one where no other describing term is included in its name, would not be required to adopt an 80% Policy. The FAQs also cite relevant information included in frequently asked questions related to the 2014 Money Market Fund Reform.
Withdrawals from 2001 FAQs
In addition to the modification of certain questions within the FAQs, the SEC staff also withdrew a number of key questions from the 2001 FAQs. The SEC staff stated that certain questions were removed for several reasons, including the fact that certain questions were no longer relevant as they addressed circumstances that were specific to the 2001 adoption of the Names Rule, or that they believed the questions were already addressed in the 2023 Adopting Release. Below is a discussion of certain questions that were removed:
The SEC staff withdrew the outdated 2001 FAQ discussing revising former 65% investment policies to 80% Policies.
The FAQs also withdrew a question related to notice to shareholders of a change in investment policy as the Amendments and the 2023 Adopting Release both clearly describe the requirements for Rule 35d-1 notices.
The 2001 FAQs’ guidance regarding terms such as “intermediate-term bond” was also withdrawn. This guidance in the 2001 FAQs set forth the SEC staff position that a bond fund with the terms “short-term”, “intermediate-term”, or “long-term” in its name should have a dollar-weighted average maturity of, respectively, no more than three years, more than three years but less than 10 years, or more than 10 years and an 80% investment policy to invest in bonds. The FAQs removal of the definition suggests the potential for expanding the definition of such terms.
The 2001 FAQs’ guidance also removed several FAQs related to specific terms:
The question regarding the use of terms such as “international” and “global” was removed as the 2023 Adopting Release states that such terms describe an approach to constructing a portfolio and thus not requiring an 80% investment policy. However, the SEC staff would often require funds to adopt certain policies reflecting “international” or “global” investing in practice prior to the 2023 Adopting Release, so whether that reference changes the review staff practice will remain to be seen.
The question related to the use of “duration” was also removed as the 2023 Adopting Release states that such term references a characteristic of the portfolio as a whole.
Although the FAQs may be helpful, many uncertainties regarding the implementation and application of the Amendments to the Names Rule exist and additional guidance will be necessary to more clearly understand and implement the Amendments. Additionally, this guidance comes on the heels of the Investment Company Institute’s letter to the SEC in late December 2024 requesting that the SEC delay implementation of the Names Rule. Given that the development and finalizing of the FAQs requires a significant amount of time and effort, the timing of their release does not suggest that the SEC will or will not act on that request.