Over the Memorial Day weekend, Congressional leaders and the Administration reached an agreement to extend the debt limit, also agreeing to make various changes to the federal budget process. The legislation, H.R. 3476, “The Fiscal Responsibility Act of 2023,” carried a sense of urgency and moved rather quickly, as Treasury Secretary Yellen indicated the federal government would default on its obligations and run out of money by June 5, 2023. The House passed this legislation on May 31, 2023, by a wide bi-partisan margin, and the Senate followed suit on June 1 by approving the bill with nearly a two-third margin. The bill was signed into law on June 3 by President Biden.
Background
Periodically, Congress needs to raise the debt ceiling in order for the federal government to borrow money. The Fiscal Responsibility Act suspends the current debt ceiling of $31.4 trillion until January 1, 2025, which is just after the 2024 presidential election. This is not new spending – rather, it represents debt the government has accumulated over the years that still needs to be repaid. As current budget deficits are added to this debt, the country is pushed toward its debt ceiling, and Congress must increase the debt limit.
Let’s put some of these amounts into perspective:
Assume you owed someone $1 trillion dollars. If you paid them back $1 million a day without factoring in any interest on this debt, it would take you over 2,700 years to pay the $1 trillion in full. Again, this does not factor into account interest.
What's in the Bill
The deal announced a number of measures to control government spending in an attempt to curb the budget deficit. However, the agreement limits the controls to discretionary non-defense related spending and imposes a 1% annual growth over the next six years. Note that the bill does not limit non-discretionary spending (or entitlements), which are the largest part of the overall government budget. Below are several other selected provisions:
- The IRS funding for new IRS agents and other programs under the Inflation Reduction Act (IRA) was trimmed by approximately $20 billion to $60 billion.
- Requires Congress to complete its 12 separate appropriations bills (rather than one larger omnibus spending bill) or face further overall spending reductions.
- Requires student loan repayments.
- Recovers billions of dollars in unspent COVID-19 funds appropriated by Congress over the past three years.
It should be noted that there are no new taxes under this debt and budget deal. While the Administration had sought to impose new taxes on businesses and individuals, this was not included in the final package.
Prospects for Tax Legislation in 2023
Even though there were no tax provisions in this legislation, tax matters are still on the minds of many in Washington. Before the ink is barely dry on the Fiscal Responsibility Act, members of Congress are set to roll out a tax bill, perhaps as early as this week. Here are some of the key provisions expected in this legislation:
- Research Expenditures. The Tax Cuts and Jobs Act (TCJA) changed the rules for deducting research expenditures (Section 174) to capitalize and amortize this expense beginning in 2022. While this created concern for businesses, Congress was unable to reach an agreement to change this provision last year. This expected package would revert the provision to allow current expensing of research expenditures; however, it is unclear if this will be retroactive to the start of 2022 or not.
- Interest Expense. Another change was made in the TCJA to interest expense deductions. The TCJA made deducting interest expenses more difficult beginning in 2022. This, too, would change and permit interest to be deductible similar to what was available before the 2022 change.
- Bonus Depreciation. Bonus depreciation was set at 100% by the TCJA, but only through December 31, 2022. As part of TCJA, a scaled-back bonus depreciation began in 2023 to 80% and then again to 60% in 2024, with further reductions after that. Full bonus depreciation of 100% is anticipated to be part of this bill.
- Child Tax Credit. Child tax credits are expected to expand to perhaps $3,000 per child (the credit amount from 2021) in this upcoming tax package. This would be the result of a political trade-off to permit the business changes listed above.
- Other Items. Other possible tax items, such as the SALT deduction, might be included in this bill; although, no details have been provided yet. Watch for these in the coming weeks.
A new tax bill has many supporters, but it is uncertain when and how it will move forward this year. As always, it has the possibility to be a stand-alone bill, or it could be attached to other must-pass legislation later this year. Watch for details on this bill in upcoming tax alerts from our team. Please contact your Sikich tax advisor with any questions. Stay Tuned…
About our authors
Jim Brandenburg
Jim Brandenburg, CPA, has extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.
Tom Bayer
Thomas Bayer, CPA, CExP, has 30 years of experience providing a broad range of accounting, tax and business advisory services to commercial clients across various industries. Tom has specialized expertise in the areas of tax planning and compliance, business advisory services, and business succession planning.
