Executive summary: Favorable business tax provisions advance in Congress
The House of Representatives on Jan. 31 passed its version of the Tax Relief for American Families and Workers Act of 2024, a milestone that brings the measure closer to potential enactment. The bill, which contains favorable business tax provisions and expands the child tax credit, passed by the substantial margin of 357-70.
Specifically, the bill proposes temporary reinstatement of certain business tax benefits that were part of the Tax Cuts and Jobs Act, including:
- Research and development (R&D) expensing (section 174)
- Less stringent business interest limitations (section 163(j))
- Continuation of 100% bonus depreciation
It now moves to the Senate with significant momentum but an uncertain fate. The Senate holds the keys to whether the bill advances, and in what form. Timing for Senate action is expected to come into sharper focus in early February.
Detailed discussion: Tax relief bill advances to Senate, where prospects are uncertain
The fate of the Tax Relief for American Families and Workers Act of 2024 remains uncertain as it moves to the Senate with significant momentum following the House of Representatives’ 357-70 vote to approve it on Jan. 31.
Leading Republican senators have expressed reservations about the bill, particularly about some elements of the child tax credit, and have called for changes. Meanwhile, some leading Democratic senators have expressed concerns about some of the business provisions.
It is unlikely, however, that there would be any further substantive changes to the three major provisions related to the Tax Cuts and Jobs Act—more favorable tax treatment of research and development expenses, a more favorable calculation affecting the limit on deductions of business interest expense, and restoration of full bonus depreciation.
The legislation will likely need 60 votes to pass in the Senate. Also, the question of timing adds uncertainty to the bill’s fate.
The Senate is scheduled to be in session the week of Feb. 5 but in recess for the following two weeks. That seems to indicate that if a bill is not passed by Friday, Feb. 9, it might not pass the Senate until after Feb. 29—if it passes at all. However, there may be flexibility in that schedule.
House passes its version without adding SALT provision
No amendments were offered on the House floor before it passed. The House floor vote was by a “suspension of the rules,” which required a two-third majority vote, thus bypassing the Rules Committee and precluding amendments.
Notably, no provisions addressing the deduction for state and local taxes (SALT) were added to the legislation that the House Ways and Means Committee approved on Jan. 19.
Several lawmakers from high tax districts demanding action on the SALT issue were able to secure a commitment to a separate vote on the SALT cap that would move independently from the tax relief bill. The separate SALT bill proposes removing the marriage penalty to allow for $20,000 SALT deduction for married couples (instead of only $10,000) and has a $500,000 income phase-out.
Our Jan. 19 article has details and observations related to the bill. At a high level, the measure the House approved includes provisions that address:
- Deductions for research and experimental expenditures. Delay the date on which taxpayers must begin capitalizing their domestic research or experimental costs and amortizing them over a five-year period, as required under the TCJA. Under the proposal, taxpayers would be able to deduct currently (rather than capitalize) domestic research or experimental costs that are paid or incurred in tax years beginning after Dec. 31, 2021, and before Jan. 1, 2026. Foreign research and experimental costs would continue to be capitalized and subject to amortization over a 15-year period.
- Less stringent business interest deduction limitation. The limitation or cap on business interest would revert to an amount based on an EBITDA approach (i.e., earnings before interest, taxes, depreciation, and amortization), instead of the current more-stringent EBIT (i.e., earnings before interest and taxes) calculation. This provision would take effect for taxable years beginning after Dec. 31, 2023 (and, if elected, for taxable years beginning after Dec. 31, 2021), and before Jan. 1, 2026, thus allowing for retroactive treatment on an elective basis.
- Extension of 100% bonus depreciation. Extend 100% bonus depreciation for qualified property placed in service after Dec. 31, 2022, and before Jan. 1, 2026 (Jan. 1, 2027, for longer production period property and certain aircraft).
- Increased expensing of depreciable business assets. Increase the maximum amount a taxpayer may expense under section 179 for qualifying property.
- Child tax credit. Expand and extend the child tax credit for three years and modify the calculation of the refundable child tax credit to enable more families with multiple children to claim a larger credit before running into limits based on earned income.
- The bill would also increase the current child tax credit of $2,000 per child for inflation in tax years 2024 and 2025. In determining their maximum child tax credit, taxpayers would be able to use earned income from the prior taxable year to the extent it exceeds the current year’s amount. The provisions on the child tax credit would be effective for tax years 2023 through 2025.
- U.S.-Taiwan relief. Provide targeted and expedited relief from double taxation on U.S.-Taiwan cross border investment through changes to the U.S. tax code.
- Disaster relief. Extend the rules for the treatment of certain disaster related personal casualty losses, including the elimination of the requirement that casualty losses must exceed 10% of adjusted gross income (AGI) to qualify for the deduction, to a potentially large amount of disasters.
- Low-income housing credits. Increase the ceiling on the state housing credit (for purposes of the low-income housing tax credit) for calendar years 2023 through 2025, and lower the bond-financing threshold (as part of the tax-exempt bond financing requirement) to 30% for projects financed by bonds with an issue date before 2026.
- Employee retention credit. End the period for filing ERC claims for both 2020 and 2021 as of Jan. 31, 2024 and beef up penalties on “COVID-ERTC promoters” (as defined in the legislation) who aid and abet the understatement of a tax liability or who fail to comply with certain due diligence requirements relating to the filing status and amount of certain credits.
Although this tax relief legislation reached a crucial milestone by passing the House, it is important to keep in mind that the situation is very fluid, and that ultimate passage of a tax bill is far from certain. The provisions described above are subject to change as the legislation moves forward in the Senate.
This article was written by Matt Talcoff, Tony Coughlan, Fred Gordon, Ryan Corcoran, Dave Kautter and originally appeared on 2024-02-01.
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