Congress has drafted new tax legislation that is shaping up well amongst both the House and Senate Committee leaders. The $78 billion tax agreement, introduced as The Tax Relief for American Families and Workers Act of 2024, includes pending rule changes that result in business owners seeing an increase in 2023 tax year deductions, with some possibility of 2022 as well. Qualifying parents could also see an increase in the child tax credit. And, new ERTC provisions have been proposed.
Below, Pinion’s tax advisors provide a summary of the provisions in the forthcoming deal:
- Increased refundable Child Tax Credit: Up to 15% of the credit, per child, will be refundable – currently the maximum Child Tax Credit refund is $1,400, regardless of the number of qualifying children an individual has. The proposals would allow a refund of up to $1,800 per child in tax year 2023, $1,900 in 2024, and $2,000 in 2025. The child tax credit will be adjusted for inflation in 2024 and 2025.
- Deduction for Section 174 Research Expenditures: Section 174 governs the deductibility of research and experimentation expenditures. The TCJA required, for tax years beginning on or after January 1, 2022, for all R&E expenditures to be capitalized and amortized over time. The proposal would allow, retroactive to 2022, domestic Section 174 expenditures to be deductible. Section 174 expenditures will be required to be capitalized after December 31, 2025. Deducting 2022 research and experimentation expenditures that were previously required to be capitalized will not require an amended return.
- Rollback of Business Interest Expense Limitation Changes: Beginning in 2022, deductible business interest expense was limited to 30% of adjusted taxable income – meaning earnings before interest and taxes. Prior to 2022, deductible business interest expense was 30% of earnings after adding back interest, taxes, depreciation, and amortization, allowing for a much larger interest expense deduction. For tax years beginning after December 31, 2023, and before January 1, 2026, adjusted taxable income returns to EBITDA (rather than EBIT). If the taxpayer elects, the taxpayer can use EBITDA for tax years 2022 and 2023 as well, using procedures that the proposal requires the IRS to issue.
- Extension of Bonus Depreciation: Beginning in 2023, bonus depreciation was reduced from 100% of qualifying capital expenditures to 80%, with stair-step decreases in the bonus depreciation amount through 2026. Under the proposal, 100% bonus depreciation would be extended from January 1, 2023 through December 31, 2025, with 20% bonus depreciation for property acquired and placed in service in 2026, and no bonus depreciation available after 2026.
- Increase in Section 179 Deduction: Section 179 allows for immediate expensing (rather than accelerated first-year depreciation) for qualifying assets placed in service during the year. For several years, the maximum Section 179 deduction has been $1 million, with a phase-out of the deduction if taxpayers place more than $2.5 million of assets in service during the year. The proposal increases the maximum expensing amount $1.29 million, with phase-out beginning at $3.22 million assets placed in service, and allows these limits to be adjusted for years beginning after 2024.
- Early End to ERTC Claims: The proposal would bar additional ERTC claims after January 31, 2024. A pandemic-era tax credit designed to help keep employees on payroll and prevent layoffs, lately the IRS has claimed that claims made recently are predominantly fraudulent. Under current law, taxpayers have until April 15, 2025, to claim ERTC.
Expected Timeline: What Happens Next
While there is hope for the deal to pass by the beginning of tax filing season on January 29, there is also no shortage of obstacles (like figuring out whether the agreement would need to ride on a broader vehicle or if it can be enacted as a standalone bill). Congress is also trying to avert a government shutdown and completing its funding process by March.
Brian Kuehl, Pinion government and public affairs advisor, is optimistic it will pass. The question is when, and whether it will hold up as-is:
“There is talk that the House Ways and Means Committee may hold their mark-up of the bill as soon as this week and then to try to pass the bill through the House on “suspension” which would require a super majority approval.”
Kuehl adds, “Even as the House committee may move quickly to mark up, there are still some questions about the substance of this bill, perhaps none bigger than the question of whether enough Democratic lawmakers will believe that the expanded child credit in the agreement is generous enough. Whether this tax deal makes it across the finish line in the weeks to come is still up in the air — and it certainly wouldn’t be unheard of for further changes to be made to this initial deal.”
Pinion will continue to push House and Senate leadership so that they see this as a priority and move this bill across the finish line.
Takeaways/Actions for Businesses – Once Passed
These changes are expected to be a significant tax relief for businesses. Most of the adjustments would be retroactive and would alter 2023 tax return filings. Pinion will communicate impacts both for 2023 tax positions and going forward, as well as any actions needed by businesses as soon as legislation is passed.