Tax Proposal Passes House; ERC, R&D, and Other Programs Impacted
On Jan. 31, 2024, the House passed The Tax Relief for American Families and Workers Act of 2024. The bill sailed through the House with a vote of 357-70. While this gives the bill significant momentum and puts pressure on the Senate to pass it, it is unclear whether there’s truly enough momentum to carry it all the way through.
The bill now faces challenges in the Senate where certain senators are threatening amendments, and any amendments could kill the proposed legislation altogether. Senate voting on the bill could begin as early as the week of Feb. 5 as the Senate will likely feel pressure to vote before its Feb. 12 recess.
Key Provisions and Impacts
- The bill would retroactively reinstate 100% bonus depreciation for 2023.
- The bill would extend 100% bonus depreciation to 2024 and 2025.
Section 174 – Research and Development Expenses
- The long-awaited relief from the mandatory capitalization of research expenses is included for domestic (U.S. based) expenses. Taxpayers will be able to retroactively expense 2022 Section 174 expenses.
- Foreign expense would still be subject to capitalization.
- The bill delays rather than repeals capitalization requirement. Mandatory capitalization will kick back in for tax years beginning after Dec. 31, 2025, barring additional legislation.
- Taxpayers will have flexibility to amend their 2022 tax return or recognize the unamortized amount in 2023 through an accounting method change.
Section 163(j) – Interest Expense Limitation
These changes will come as a welcomed relief and a significant benefit to taxpayers who have been limited on their interest deductions in recent years.
- The year 2022 was the first tax year where taxpayers based their interest expense limitation off earnings before interest and taxes (EBIT) rather than earnings before interest, taxes, depreciation, and amortization (EBITDA). The bill retroactively changes the interest expense limitation to being based off of EBITDA for tax years beginning before Jan. 1, 2026.
- Taxpayers will have the election to apply this to their 2022 and/or 2023 tax returns.
Employee Retention Credit
It’s not all good news. Taxpayer-unfavorable changes to the ERC were needed to help offset the cost of the business provisions.
- The bill would limit all new ERC claims after Jan. 31, 2024, cutting the program short by more than a year for 2021 claims.
- The bill extends the statute of limitation to six years. This is unwelcome for many taxpayers who thought the statute on their 2020 claim would close in a couple of months on April 15.
Child Tax Credit
- A key component to getting the support for this bill includes the enhancement of the child tax credit. The bill enhances the credit to make it more beneficial and accessible to low-income families.
The bill also contains several provisions that may not be as broadly applicable but would still have significant ramifications for some taxpayers.
- Retroactive expansion of certain disaster-related benefits
- Increase for Low-Income Housing Credit
- Increases the $600 Threshold for Filing 1099s to $1,000 for Forms 1099-Misc and 1099-NEC
- Double-Tax Relief for U.S. Taxpayers Subject to Tax by Taiwan
At this time there is no specific action to be taken other than being aware of the pending legislation and potential implications should it pass. Should the bill pass, there will be several key things to think about:
- Impact on tax returns
- While many are excited about the favorable changes, it will take some analysis to determine how to most effectively and tax-efficiently implement the changes.
- For example, will it make sense to amend 2022 to take advantage of immediate expensing of Section 174 expenses, or should taxpayers take the adjustment in 2023? This is going to depend on specific tax situations, such as 2022 and 2023 income levels, the number of returns this would impact, the number of shareholders/partners for flow through entities, etc.
- It will take time for the IRS to issue guidance on how to apply the changes. For example, we may need guidance on how to implement some of the retroactive changes. This could delay filing for some taxpayers.
- Modeling tax situations will require gathering information from previously filed tax returns, analyzing 2023 information that may not be filed, and considering financial forecasts which may slow some taxpayers down.
- Coordination with your tax preparer
- If the bill passes, it will require working closely with tax advisors to understand how to best apply the changes.
- While taxpayers will have time to make these decisions (assuming they file extensions), these decisions could impact extension payments. Thus, a preliminary analysis will need to be performed.
KSM will continue to monitor this evolving legislation. In the meantime, reach out to your KSM advisor with questions or complete this form.
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