This morning, Senate Finance Committee Chair Ron Wyden (D-OR) and House Ways and Means Committee Chair Jason Smith (R-MO) announced the framework of a bipartisan, bicameral tax package. The plan, titled The Tax Relief for American Families and Workers Act of 2024 (the Act), provides low-income families additional access to the child tax credit, addresses three critical business tax breaks curtailed by the Tax Cuts and Jobs Act of 2017 (TCJA), and several other tax provisions.
Prospects for passage
While the compromise contains several provisions with significant bipartisan support, the prospects for the deal’s passage are unknown. Senate Finance Committee Chair Wyden is advocating for swift action, as he’d like the bill to be signed into law before the start of the 2023 tax filing season, which is set to begin on Jan. 29, 2024.
The bill does not yet have the momentum it needs to be signed into law. Notably, the ranking members of the bicameral committees, Senate Finance Committee ranking member Mike Crapo (R-ID) and Ways and Means Committee ranking member Richard Neal (D-MA), have not signed on to the compromise. Additionally, the bipartisan state and local tax (SALT) caucus is likely to take issue with the current proposal, as it does not provide any relief for the $10,000 SALT cap. Even if negotiators can secure widespread support, the bill will either need to pass as a standalone measure, which would likely require two-thirds approval in the House, or it would need to attach to another legislative vehicle.
Congress’ immediate priority is passing a short-term continuing resolution (CR) to avoid a government shutdown. The current CR funds four of the 12 appropriations bills through Jan. 19 and the other eight through Feb 2. Leaders have agreed on a plan that would extend funding at current levels through March 1 and March 8, respectively.
Most of the proposed adjustments are effective through the 2025 tax year. Enactment of the current proposal will dial up the pressure on lawmakers next year, as there are numerous additional TCJA individual tax provisions in effect that are currently set to expire after the 2025 tax year.
Child tax credit
Currently, taxpayers can claim a refundable child tax credit (CTC), the maximum computed as the lesser of the taxpayer’s earned income that exceeds $2,500 by 15 percent, or $1,600. The agreement would increase the maximum refundable amount per child to $1,800 for 2023, $1,900 for 2024, and $2,000 for 2025. For the 2024 and 2025 tax years, taxpayers could also choose to compute their maximum credit by using the previous taxable year’s earned income. Additionally, the credit, which has been $2,000 since the TCJA’s enactment, would be indexed for inflation for the 2024 and 2025 tax years.
Business interest deduction limitation
The TCJA implemented a limitation on the deduction for business interest expense, restricting a taxpayer’s ability claim a deduction to 30% of adjusted taxable income (ATI). ATI was initially calculated based on earnings before interest, taxes, depreciation and amortization (EBITDA) but changed to a more restrictive calculation based on earnings before interest and taxes (EBIT) for tax years 2022 and beyond. The proposal would reinstate the EBITDA calculation for the 2024 and 2025 tax years and provide taxpayers the option of choosing between using EBIT or EBITDA for 2022 and 2023.
Research and experimental expenditures
The TCJA requires taxpayers to amortize domestic research and experimental costs over a five-year period and foreign costs over a 15-year period beginning in 2022. Previously, these costs were expensed in the year incurred. The framework would retroactively delay the capitalization requirements for domestic research and experimental costs through the 2025 tax year. The requirement that costs incurred in connection with foreign-performed research be amortized over 15 years would remain unchanged.
The TCJA gave taxpayers the ability to immediately expense the full cost of qualified property placed in service, rather than depreciating it over its useful life. The benefit, referred to as bonus depreciation, was in place through 2022. Beginning in 2023, bonus depreciation was reduced by 20% per year until it completely phased out in 2027. The Act, if enacted, would extend 100% bonus depreciation through 2025.
Bonus depreciation by year
Small business asset expensing
Currently, eligible small businesses can elect to expense, rather than depreciate, the cost of qualifying property they place in service up to $1 million (indexed for inflation). The maximum $1 million figure is reduced dollar-for-dollar by the amount which the cost of qualifying property placed in service by the taxpayer during the taxable year exceeds $2.5 million (indexed for inflation). For taxable years beginning after 2023, the framework increases the $1 million figure to $1.29 million, and the $2.5 million amount to $3.22 million, with both figures adjusted for inflation for tax years beginning after 2024.
Employee Retention Credit (ERC)
The CARES Act created the Employee Retention Credit (ERC), a payroll tax credit designed to incentivize employers who were subject to COVID-19-related government orders suspending their business or experienced a significant decline in revenue. Taxpayers currently have until April 15, 2024 and April 15, 2025 to claim a credit for the 2020 and 2021 tax years respectively, via an adjusted payroll tax return.
The framework would end the program as of Jan. 31, 2024. The compromise would also increase the penalty for ERC promoters deemed to have aided and abetted the understatement of a tax liability from $1,000 to the greater of $200,000 or 75% of the promoter’s gross income derived from the ERC claim. The proposal would also require promoters to make disclosures, and provide client lists, to the IRS regarding their activities, with a $1,000 failure-to-file penalty. Lastly, the proposal would extend the statute of limitations for assessment of ERC claims to six years from five.
As noted above, prospects for passage remain highly uncertain. However, we continue to monitor developments regarding this monumental proposal, and we will keep you apprised of changes in status as warranted. Please reach out to your tax advisor about how any of the above may impact your tax situation.
Questions? Reach out to your Baker Tilly advisor if you have questions on how this may impact you.
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