UPDATE on 2/1/24: On January 31, 2024, the House passed The Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) by a vote of 357-70.
The key aspects of the bill for businesses are:
- Changes to allow current expensing of research expenditures
- Modifications to the interest expense deduction
- Retaining the 100% bonus depreciation
Each of these provisions has some transition impact that could apply for 2022 and 2023. The tax bill would also make individual tax changes in the calculations of the child tax credit.
The bill now goes to the Senate.
On January 16, 2024, House Ways and Means Chairman Jason Smith and Senate Finance Chairman Ron Wyden announced a framework on possible tax legislation, coined “The Tax Relief for American Families and Workers Act of 2024.” The long sought after agreement addresses tax issues that Congress has been wrestling with over the last several years. While full text of the bill has not yet been provided, a copy of the framework was released by Smith and Wyden. The two Congressional tax leaders noted the agreement was a bipartisan effort to provide tax relief to families and to help U.S. companies remain competitive.
A trio of tax measures left hanging from the Tax Cuts and Jobs Act (TCJA) of 2017 include: (1) the tax treatment of research expenditures; (2) the limitation on interest deductibility; and (3) the 100% bonus depreciation. Businesses, large and small across industry lines, were impacted by these changes and requested relief from Congress. While many legislators were receptive of these appeals, Congressional leaders could not come to an agreement that would allow relief to move forward.
This framework offers relief on these key business incentives:
- Deduction for Research Expenditures: Beginning in 2022, research expenditures were no longer deductible but needed to be capitalized and amortized over five years (15 years for foreign research). The framework would delay the date when taxpayers must begin capitalizing and deducting their domestic research or experimental costs over five years until 2026. Thus, under the proposal, taxpayers would be able to currently deduct research or experimental costs (performed in the U.S.) paid or incurred in tax years beginning after December 31, 2021 and before January 1, 2026. Foreign research expenses would continue to be capitalized and amortized over 15 years.
The transition rules and details of how to make this change for 2022 and 2023 were not yet provided but should hopefully be released soon. The expensing of previously unamortized R&D costs from 2022 could be reported on 2023 returns or might require an amended 2022 return for impacted taxpayers.
- Interest Expense Limitation: Another change in 2022 was the calculation of the interest deduction limitation. This calculation did not include an add-back to adjusted taxable income (ATI) for depreciation, amortization and depletion (as it previously had). This produced a lower threshold, and more companies were, therefore, subject to the interest deduction limit. The framework reintroduces the more favorable treatment of adjusting ATI for depreciation, amortization and depletion for 2024 and 2025. Further, this treatment would be elective for tax years 2022 and 2023, but please note that how this election is made still needs to be provided.
Changes to the computation of the interest expense limitation is certainly a welcome adjustment, due to the higher borrowing costs in 2023. This change impacts 2022 returns already filed and could require amending the 2022 return as well.
- Extension of 100% Bonus Depreciation: Qualified property, including new and used equipment and improvements, eligible for “bonus depreciation” saw the prior 100% bonus depreciation scaled back. In 2023, it was reduced to 80%; in 2024, it was 60%; and then 2025 was expected to see a decline to 40%. The proposed legislation extends the 100% bonus depreciation for qualified property placed in service from January 1, 2023 to December 31, 2025. However, the bonus depreciation decreases to 20% for qualified property placed in service in 2026 (post- December 31, 2025).
A key part of the negotiations between House and Senate leaders was the level of the refundable child tax credit. The proposal would provide a higher amount to individual taxpayers, beginning with $1,800 in 2023; $1,900 in 2024; and then up to $2,000 in 2025. Eligibility for the credit is subject to Earned Income limitations. A taxpayer can use their current or prior year earned income to maximize the amount of the credit. Note that the child credit would also be indexed for inflation for tax years 2024 and 2025.
The increase in the child tax credit should provide more discretionary income for impacted taxpayers over the next two years and could positively impact consumer spending. There are some leaders in Congress who would like to see this credit increase further – but as this was a negotiated item, any increase in this credit could result in other changes as well.
There are several other provisions included in the proposal of significance:
- Disaster-Related Personal Casualty Losses: The bill proposes relief for certain personal casualty losses incurred in qualified disaster areas. This relief goes back to losses incurred on or after January 1, 2020, and ending 60 days after this legislation is enacted. The proposed change provides favorable tax relief for impacted taxpayers. This is an “above-the-line” deduction, meaning, it is available for taxpayers regardless of whether they are eligible to itemize deductions. Amended tax returns will likely be needed to obtain this relief. This relief will also be extended to those impacted by wildfires in California and those affected by an Ohio train derailment in February 2023.
The elimination of the 10% AGI floor for personal casualty losses will likely require an amended tax return in our estimation.
- Low Income Housing Credit: This credit will be enhanced for tax years 2023 through 2025.
- Forms 1099-NEC and 1099-MISC: The filing threshold for these tax forms was $600 per year for several years at this point. The proposed legislation would raise this to $1,000 beginning in 2024, subject to annual inflation adjustments.
Employee Retention Credit (ERC) Enforcement
The framework includes a revenue offset to help cover costs of tax relief for businesses and individuals as listed above. The offset concentrates on the ERC, as the IRS has been concerned with perceived abuses and fraud of the credit, and has thus instituted various steps to curtail these abuses. One item proposed is that third-party ERC promoters would be required to provide lists of clients to the IRS upon request. Congress would impose various penalties on these promoters under the proposed law. It would also extend the statute of limitations to six years for the IRS to be able to audit ERC claims.
Lastly, the proposed legislation would adopt a January 31, 2024 deadline to file any remaining ERC refund claims. The statute of limitations for filing amended payroll returns for ERC was April 15, 2024 for the 2020 year, and April 15, 2025 for the 2021 year. This would accelerate the deadline, with all claims needing to be filed by January 31, 2024. While this legislation is simply a proposal, those still planning to file an ERC refund claim should make note of this deadline and plan accordingly.
The proposed ERC filing deadline being accelerated to January 31, 2024 may be debated. Remember that the IRS continues to have a moratorium on filing of new claims, and this would not provide much time for taxpayers that have been waiting to file.
The bipartisan agreement on these provisions was a major step in the right direction, but there is more work to do in Congress. Hearings and proposed changes will be forthcoming, so it is still uncertain whether any or all these tax changes will become law. Not only is the passage and timetable of this bill uncertain, but the effective date of some of the provisions is unclear.
Notably, for the week of January 22, the House is not scheduled to be in session. If a tax bill is ultimately agreed to and approved by Congress, it may not be signed into law until mid-February at the earliest (and could slide into March). Remember that Congress is also trying to adopt a budget for the current federal fiscal year. Thus, this tax bill is not the only item on Congress’s plate. If this tax bill is enacted in February or March, with some of the provisions having a retroactive impact for 2022 and 2023, it will most likely complicate and delay the tax return filings and payments for many businesses and individuals this filing season.
Additionally, it is uncertain if some of the provisions that impact returns already filed will require amended tax returns for 2022, or if taxpayers will have the option to report these changes in their 2023 tax returns that have not yet been filed.
If this tax legislation is enacted within the framework announced on January 16, 2024, the increase in business deductions will likely cause impacted companies and business owners of pass-through entities to be overpaid for 2023 income taxes. (These taxpayers likely budgeted tax payments for 2023 based on the existing law.) The favorable tax changes in this legislation should provide more capital to business owners to invest and grow through 2024 and into 2025.
Please contact your Sikich tax advisor with any questions on this proposed legislation and how it may impact you. Stay tuned…