Federal Tax Relief Act of 2024
Senate Finance Committee Chair Ron Wyden, D-Ore., and House Ways and Means Committee Chair Jason Smith, R-Mo. on January 16 unveiled a framework for a $78 billion bipartisan tax package that would expand the child tax credit in exchange for business-friendly provisions, including restoring and extending 100% bonus depreciation and addressing scheduled changes under the Tax Cuts and Jobs Act (TCJA). The Ways and Means Committee approved the package on January 19 on a 40-3 vote. This legislation is independent of President Biden’s continuing resolution on January 19 to keep the government funded and avoid a partial shutdown.
Business Tax Provisions
The Tax Relief for American Families and Workers Act of 2024 balances the expansion of the child tax credit and other family-friendly tax provisions with several tax measures favorable to businesses.
Deduction for Research and Experimental Expenditures. Under current law, research or experimental (R&E) costs paid or incurred in tax years beginning after December 31, 2021, must be deducted over a five-year period (or a 15-year period if the research is conducted outside the U.S.) The proposed provision would delay the date taxpayers must begin deducting their domestic research or experimental costs over a five-year period until taxable years beginning after December 31, 2025. Thus, taxpayers would be allowed to deduct current domestic – but not foreign — research or experimental costs paid or incurred in tax years beginning after December 31, 2021, and before January 1, 2026.
Business Interest Deduction Limitation. The TCJA enacted a limitation on the deduction for business interest expense, generally limiting the deduction to 30% of adjusted taxable income (ATI). For tax years beginning before January 1, 2022, the computation of ATI is determined without regard to any deduction allowable for depreciation, amortization, or depletion (i.e., earnings before interest, taxes, depreciation, and amortization (EBITDA)). For tax years beginning after December 31, 2021, ATI is computed without adding back depreciation, amortization, or depletion (EBIT). Under the proposal, for taxable years beginning after December 31, 2023, and if elected for taxable years beginning after December 31, 2021, ATI would be computed by adding back deductions allowable for depreciation, amortization, or depletion (i.e., EBITDA).
Bonus Depreciation. Under the TCJA, taxpayers were allowed to immediately expense the full cost of qualified property rather than depreciating it over its useful life. This “bonus depreciation” was in place through 2022, but beginning in 2023, it was scheduled to be reduced by 20% each year and phased out completely in 2027. The proposal would extend 100% bonus depreciation for qualified property placed in service after December 31, 2022, and before January 1, 2026.
The framework includes language that would create a new Internal Revenue Code section to provide substantial benefits to Taiwan residents similar to those provided under the U.S. Model Tax Treaty. The new tax code section would not enter into effect until Taiwan provides the same tax benefits to U.S. persons with income subject to tax in Taiwan, similar to the reciprocal operation of a tax treaty.
Employee Retention Credit
The proposal addresses IRS concerns that most ERC claims currently being filed are fraudulent by closing the program on January 31, 2024. Under current law, employers can file ERC claims for 2020 until April 15, 2024, and for 2021 until April 15, 2025.
Wyden’s statement asserted that this change would result in $70 billion in taxpayer savings. This is an essential element to finance the bill’s other provisions, so the January 31, 2024, deadline appears firm even though it allows little time for legitimate ERC claims to be prepared and filed.
Even if this bill is not enacted, there is significant pressure to address the ERC program, which is fraught with bad players. Given the bipartisan support for ending the program early, it would be prudent for employers that have not yet filed legitimate ERC claims to consider filing before the potential program closes on January 31, 2024.
The proposal would also increase the penalty for aiding and abetting the understatement of a tax liability by an employee retention credit (ERC) promoter to the greater of $200,000 ($10,000 in the case of a natural person) or 75% of the promoter’s gross income derived from providing aid, assistance, or advice regarding a return or claim for ERC refund or a document relating to the return or claim.
The proposal also extends the statute of limitations period for ERC claims – generally five years from the date of the claim — to six years. It extends the period for taxpayers to claim valid deductions for wages attributable to invalid ERC claims corrected after the normal period of limitations.
The overwhelming bipartisan support for the proposal in the Ways and Means Committee signals potential enactment of the legislation. Taxpayers should proceed cautiously when planning, as passage and timing remain uncertain. According to press reports, the bill could be sent to the House floor the week of January 29.
Should the legislation become law, it would likely be after the start of the 2024 tax filing season on January 29. The IRS will face challenges implementing changes impacting the 2024 filing season.