We wanted to share information on a pending bill that would impact your 2022 and 2023 income tax returns. This information below is from The Tax Foundation.
The House advanced a tax bill to the Senate that would temporarily—and retroactively—restore two major business deductions for cost recovery and expand the child tax credit through 2025, among other changes. The deal, titled Tax Relief for American Families and Workers Act of 2024, is paid for by clamping down on fraudulent payments of a COVID-era tax credit.
This bill represents a step in the right direction by taking a fiscally responsible approach to improving cost recovery. Most importantly, it addresses a major competitive disadvantage in our current treatment of research and development (R&D), returning to the international norm of allowing companies to fully and immediately deduct R&D expenses, including salaries for scientists and researchers. Similarly, it allows companies to fully and immediately deduct investment in equipment and other short-lived assets. However, it only extends these provisions temporarily through 2025, creating uncertainty for taxpayers and dampening the policies’ otherwise strong pro-growth incentives. It is not clear whether the Senate will vote on the bill in an election year or not.
The Tax Relief for American Families and Workers Act of 2024 contains the following major provisions:
Temporary R&D Expensing
The bill would temporarily restore full expensing for domestic R&D. Since the start of 2022, companies have been required to spread deductions for investments in domestic R&D out over five years (15 years for foreign-sited R&D). This policy is known as R&D amortization and was put in place by the 2017 Tax Cuts and Jobs Act (TCJA). The tax deal would return to R&D expensing for R&D occurring within the United States, applying retroactively for the 2022 and 2023 tax years and continuing until the end of 2025.
Temporary Full Expensing for Short-Lived Assets (100 Percent Bonus Depreciation)
The bill would temporarily restore 100 percent bonus depreciation for equipment and other short-lived capital assets. The TCJA allowed companies to fully deduct the cost of short-lived investments immediately, from the fourth quarter of 2017 until the end of 2022, after which it started to phase out by 20 percentage points per year: in 2023, companies were able to deduct 80 percent of their short-lived investment costs immediately; this year, companies will be able to deduct 60 percent immediately; and so on. The bill would restore 100 percent bonus depreciation retroactively for investments made since the end of 2022 and maintain 100 percent bonus depreciation until the end of 2025.
Temporary Child Tax Credit Expansions
For tax years 2024 and 2025, the bill would adjust the maximum child tax credit for inflation, lifting it from $2,000 to $2,100 in both years. Currently for 2023, if the child tax credit exceeds a taxpayer’s tax liability, they may receive up to $1,600 of the credit as a refund based on an earned income formula calculated as 15 percent of earned income above $2,500.
The proposal would increase the $1,600 limit on refundability to $1,800 for tax year 2023, $1,900 in 2024, and $2,000 in 2025, as well as apply an inflation adjustment in 2025 that would make the cap match the credit maximum of $2,100. It would also quicken the phase-in for taxpayers with multiple children and allow taxpayers an election to use their prior-year earned income to calculate their maximum child tax credit. After the end of 2025, all four changes to the credit would expire.
In addition to the two major cost recovery changes and the child tax credit expansion, the bill would:
-
-
- Restore a less restrictive limitation on business deductions for net interest expense, returning to a 30 percent limit based on EBITDA (earnings before interest, taxes, depreciation, and amortization) rather than EBIT (earnings before interest and taxes); the tighter limitation based on EBIT took effect beginning in 2022, and the proposal would allow companies an election to use the looser limitation for 2022 and 2023 and require the EBITDA-based limitation for 2024 and 2025
-
- Increase the amount of low-income housing tax credit (LIHTC) available to states by 12.5 percent and lower the bond-financing threshold for the credit from 50 percent to 30 percent from 2023 through 2025
-
- Expand Section 179 expensing by increasing the maximum deduction from $1.16 million to $1.29 million and increasing the phaseout threshold from $2.89 million to $3.22 million for tax years beginning after 2023, with these levels indexed for inflation thereafter
-
- Provide relief from double taxation for residents of Taiwan, consistent with standard bilateral treaties the U.S. has with many countries
-
- Provide tax relief for losses and other situations related to qualified disaster areas or events
- Gradually increase certain information reporting requirement thresholds from $600 to $1,000, adjusted for inflation after 2024
-
To pay for the tax cuts over the 10-year budget window, the bill would tighten enforcement efforts and make other changes to the COVID-era employee retention tax credit (ERTC), which under current law may be claimed on amended returns through April 15, 2025. It would apply penalties to “ERTC promoters” who have failed to comply with requirements for preparing ERTC claims, increase the statute of limitations on assessments of the ERTC, and disallow claims of the ERTC after January 31, 2024.
What does this mean in terms of finalizing your business and personal income tax returns for 2023?
If you have provided your tax information to us, we are working on them. If your returns are affected by the bill above, we recommend waiting to file your tax returns until we have more clarity on whether the bill gets passed in the Senate or stalls out.
If the bill passes, we will apply the new tax law to your tax returns. We must also wait for our tax software to be updated to reflect the new tax law. We would rather extend your returns and have you file timely by the extended deadline instead of filing hastily without extending, which could lead to additional costs to amend your business and possibly personal tax returns. We know you are eager to file your tax returns, and we are eager to finalize them for you. However, we would like to know with more certainty what will happen in Congress and how this bill will definitively impact your tax situation in order to determine when and how to proceed. More to come!
If you have any questions, please call us at 410-841-5575 and we will connect you with your HeimLantz tax advisor.