Senate rules and procedures have a major impact on how tax laws are drafted and amended, especially when it comes to those related to the budget reconciliation process.

Budget reconciliation is a separate Senate procedure established by the Congressional Budget Act (CBA) of 1974. The main differentiator is that the reconciliation process changes the vote threshold to a simple majority of 50 instead of 60, essentially negating the filibuster.

Not every bill can be taken up under this process, though – including tax provisions. There are guidelines that govern what tax provisions can be included in laws passed using the budget reconciliation process in the form of both rules and precedent.

Impact of the Act

The CBA may help expedite passing new tax legislation, but there are drawbacks and limitations. For example, administrative provisions are often a very important aspect of the policy objective behind tax laws, but using the reconciliation process strips out these measures since it prohibits “extraneous matters.” All an opposing senator needs to do is make a point of order; if it is sustained by the committee chair, then the material deemed extraneous is removed from the bill.

In addition to the removal of extraneous material, there is a prohibition on out-year deficit effects. This means that tax provisions that pass as part of a reconciliation package are often temporary and given expiration dates.

The Role of Precedent

The precedents of the Senate are often just as important as the rules themselves. Senate rules are often vague, but the practices of the Senate regarding these rules are well developed, effectively becoming the rules themselves.

The most important procedural rules can be found in a publication called Riddick’s Senate Procedure. These Senate rules and precedents are not automatic, however. The system relies on senators to raise a point of order to challenge a possible violation of the rules.

Conclusion

The budget reconciliation process makes passage of the bill more efficient for the majority party, but it comes with certain drawbacks by design. The intent is to make sure that the powers are not too broad and cannot be abused by the majority party.

The deadline has passed to elect Section 475 MTM for tax year 2020, but it’s still possible to do so for 2021. In this article, we’ll cover the basics about when and how to make the election.

Section 475 Basics

Eligible traders have the option to make a Section 475 election, which allows mark-to-market (MTM) accounting and treatment of trading gains and losses on commodities and securities as ordinary income. Without the election, traders use the cash method of accounting and are taxed on capital gains and losses when they are realized, with losses subject to the $3,000 limitation.

MTM accounting allows traders to offset losses against every type of income, including wages; in years where they have heavy losses, they are not subject to the loss limitations. MTM accounting also works the other way, so if you have large unrealized gains in your positions, then you’ll have to recognize those even though you haven’t liquidated those positions. Another benefit is that it exempts securities trades from wash sale loss adjustments. 

Making the election is generally a good idea at the outset of operations or for existing taxpayers who have new losses from trading year-to-date up to the election deadline, giving ordinary loss treatment to these transactions. You can revoke the election in future years subject to certain rules.

Making the Election

Existing individual taxpayers need to file a Section 475 election statement with their return or extension by April 15, 2021. Then a Form 3115 needs to be filed with the 2021 tax return.

Conclusion

The Section 475 election can be a great benefit for active traders; however, the rules are complex so it’s best to consult with your CPA if are considering the election.