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On January 31, 2024, the House of Representatives passed H.R. 7024 on a 357-70 vote. The $79 billion bill, referred to as The Tax Relief for American Families and Workers Act of 2024, entails updates to tax code provisions of significant interest to many taxpayers, as well as modifications to rules concerning the Employee Retention Tax Credit. The bill now goes to the Senate with the momentum of the House vote, but its passage in the Senate remains far from certain. The following provides an overview of key provisions therein.
Expansion of Child Tax Credit Refundability
Expansion of Child Tax Credit Refundability
As a reminder, the 2021 child tax credit was fully refundable. The 2021 credit also equated to $3,000 per child (or $3,600 for a child under the age of 6). Currently, taxpayers can claim a nonrefundable tax credit of 2,000 per qualifying child with such credit phased-out once income reaches a threshold ($400,000 for married taxpayers filing jointly; $200,000 for all other taxpayers). The credit is phased-out by $50 for each $1,000 over the applicable threshold. A portion of the credit may be refundable up to a maximum of $1,600 for the 2023 tax year.
The bill would increase the refundable portion of the tax credit for applicable taxpayers as follows:
2023 - $1,800
2024 - $1,900
2025 - $2,000
It would also adjust the computation for determining the limitation of refundability, which is based on earned income by adding a per child multiplier. The bill would also allow a taxpayer to use prior year earned income for the computation of its maximum 2024 and 2025 child tax credits, an element that some Republicans strongly opposed.
Domestic Research and Experimentation
Prior to 2022 tax year, taxpayers could currently deduct expenditures for research and experimentation, domestic and foreign (with the exception of passive owners of flow through entities who were subject to alternative minimum tax). As a result of a provision in the Tax Cuts and Jobs Act of 2017 (the “TCJA”), for taxable years beginning after December 31, 2021, taxpayers have to capitalize such expenditures and amortize those expenditures over five years, if domestic activities, or 15 years, if foreign activities.
The bill would reinstate the ability to currently deduct research and experimentation expenditures for domestic research activities for taxable years beginning after December 31, 2021. However, the relief would be temporary, as capitalization and amortization of domestic research and experimentation expenditures would be required for taxable years beginning after December 31, 2025.
For taxpayers that previously adopted the accounting method change to capitalize and amortize research and experimentation expenditures for the 2022 tax year, it appears that such taxpayers could amend prior year tax returns (unless a partnership that is subject to the centralized partnership audit regime which would have to file an Administrative Adjustment Request) if the bill becomes law. However, the drafters of the bill appear to recognize the cost and complexity of such amended filings, and thus, the bill provides taxpayers with an election to make a modified Section 481 adjustment and deduct the remaining capitalized amount (10 percent amortization deduction having been allowed in 2022 tax year) over a two-year period (i.e., deduct 50 percent of the capitalized balance in 2023 and the remaining 50 percent balance in 2024).
Notably, research and experimentation expenditures for foreign activities would remain subject to the capitalization and 15-year amortization requirements. The bill would also amend the language of Section 280C(c) in a manner that would again behoove most taxpayers to make the reduced research and development tax credit election.
Business Interest Expense Deduction
The TCJA also introduced a new limitation on the deduction of business interest expense in a current tax year for taxable years beginning after December 31, 2017. An important element of the computation to determine the amount of business interest expense that is allowed for a tax year concerns Adjusted Taxable Income (“ATI”). Taxpayers may deduct business interest expense to the extent of the sum 30 percent of ATI, business interest income, and floor plan financing interest. For taxable years beginning before January 1, 2022, ATI was computed with the add-back of depreciation, amortization, and depletion (i.e., on EBITDA basis).
For taxable years beginning after December 31, 2021, the computation of ATI no longer provides an add-back of depreciation, amortization, and depletion (i.e., computed on an EBIT basis). As a result, the ATI component of the business interest expense limitation is lower, and thus more taxpayers have experienced a limitation on the deduction of their business interest expense.
The bill would reinstate the add-back of depreciation, amortization, and depletion to the computation of ATI for purposes of the business interest expense limitation. This would provide for an increased current tax year deduction of business interest expense. The add-back of depreciation and amortization (as well as depletion) would return for taxable years beginning after December 31, 2023 and before January 1, 2026.
There is mention of an election for such computation for taxable years beginning after December 31, 2021, but there is no detail provided as to how such an election would operate. Treasury would need to provide guidance.
Bonus Depreciation to Continue at 100 Percent
The TCJA also provided 100 percent bonus depreciation for qualified property placed in service after September 17, 2017 and before January 1, 2023 (before January 1, 2024 for property with longer production periods or plants bearing fruits and nuts). Thereafter, the applicable percentage decreased each year by 20 percent (e.g., bonus depreciation decreased to 80 percent for qualified property placed in service after December 31, 2022 and currently stands at 60 percent for qualified property placed in service after December 31, 2023 – again one-year addition for property with longer production periods or plants bearing fruits and nuts).
The bill would reinstate 100 percent bonus depreciation for qualified property placed in service after December 31, 2022 and before January 1, 2026 (before January 1, 2027 for longer production property and certain aircraft). For qualified property placed in service after December 31, 2025 and before January 1, 2027 (after December 31, 2026 and before January 1, 2028 for longer production property & certain aircraft), the applicable percentage would decrease to 20 percent, as it currently would be under the present tax law.
Increased Section 179 Limitations
Currently, Section 179 provides for a maximum expense of $1 million for qualifying property, which is reduced if a taxpayer places more than $2.5 million of qualifying property in a service during a tax year. These limitations are adjusted for inflation. As an example, for the 2023 tax year, the limitations were $1.16 million and $2.89 million respectively. The bill would increase the Section 179 limitations for tax years beginning after December 31, 2023. The bill would increase the respective limitations to $1.29 million and $3.22 million for qualifying property placed in service in taxable years beginning after December 31, 2023. These limitations would be adjusted for inflation for taxable years beginning after 2024.
Employee Retention Tax Credit
Many taxpayers have claimed the employee retention tax credit (ERTC) since the credit was first stablished under the CARES Act and then expanded by the Consolidated Appropriations Act of 2021. Currently, taxpayers have until April 15, 2024 to claim a 2020 ERTC, and until April 15, 2025 to claim a 2021 ERTC.
Under the bill, ERTC claims would not be allowed if filed after January 31, 2024. The bill would also extend the current five-year statute of limitations for ERTC claims filed to six years – applicable to all quarters of ERTC claims – from the later of the original filing or date of claim. However, it would also extend the statute of limitations to amend impacted income tax returns to five years for taxpayers who are disallowed the ERTC and seek to amend their income tax returns to reclaim the wage deduction disallowed due to the credit claim. The bill also takes aim at ERTC promoters, as it would increase penalties for ERTC promoters and add filing requirements to their income tax returns. The legislation defines an ERTC promoter as one charging or receiving a fee based on the amount of an ERTC refund or credit or where the amount of gross receipts from which ERTC services exceeds half the gross receipts for such year or gross receipts for such services exceed 20 percent of gross receipts for such year and the ERTC promoter has received more than $500,000 in total for such services.
Disaster Relief Provisions
Over the past couple of years, many taxpayers have experienced extensive damage to personal property as a result of natural disasters. While the TCJA limited the ability to deduct personal casualty losses for taxable years beginning after December 31, 2017 and before January 1, 2026, such losses were allowed for federally declared disasters. Nonetheless, those losses were not allowed unless they exceeded the sum of personal casualty gains and 10 percent of a taxpayer’s adjusted gross income (“AGI”). Under the Taxpayer Certainty and Disaster Tax Relief Act of 2019 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020, taxpayers had a temporary reprieve of the 10 percent of AGI limitation for qualified disaster-related personal casualty losses that occurred in 2018 through 2020, but no such disasters have been identified to constitute qualified disaster loss since February 25, 2021.
The bill would provide an extension of relief for qualified disaster-related personal casualty losses during the period beginning on January 1, 2020 and ending 60 days after the date of enactment of the bill into law. For such personal casualty losses falling within the expanded period, the bill would eliminate the requirement that casualty losses exceed 10 percent of adjusted gross income (AGI) and would provide an above-the-line deduction for those taxpayers that do not itemize. However, the loss must exceed $500 to be deductible.
The bill would also provide an exclusion from gross income for qualified wildfire relief payments received by an individual during taxable years beginning after December 31, 2019 and before January 1, 2026. Any such payments excluded from income would not increase the basis in property. No deduction or credit would be allowed for any related expenditure to the extent of income exclusion.
Additionally, the bill would provide an exclusion from gross income for East Palestine train derailment payments paid by federal, state, or local government agencies with regard to the February 3, 2023 train derailment in East Palestine, Ohio.
Other Items in the Bill
The 1099-NEC/1099-MISC threshold of $600 would be increased to $1,000 for payments made after 2023. There are no modifications related to 1099-K reporting included in the bill. The bill also includes provisions that would enhance the Low-Income Housing Credit and provisions related to Taiwan to prevent double-taxation of cross-border investments, including prevention of double-taxation of Taiwan residents.
SALT Deduction Limitation Increase Not Included
The bill does not include an increase to the current $10,000 limitation on the deduction of state and local taxes for individual taxpayers. However, on February 1, 2024, it was announced the House could see a floor vote the week of February 5th on a bill that would double the deduction limitation to $20,000 for taxpayers married filing jointly if their adjusted gross income is less than $500,000. As worded, the increased deduction limit for such taxpayers would apply for a taxable year beginning after December 31, 2022 and before January 1, 2024.
The 357-70 House vote provides significant momentum as the bill heads to the Senate. Senator Ron Wyden (D-OR), who chairs the Senate Finance Committee, was heavily involved in the drafting of the bill along with House Ways and Means Committee Chair Jason Smith (R – MO). Additionally, Senate Majority Leader Chuck Schumer (D – NY) has voiced support for passage of the legislation. Nonetheless, senators in both parties have voiced a desire for mark-up and amendments in the Senate. Any such action or delay could halt the current progress due to the Senate’s planned recess the week of February 12th. Therefore, the fate of the pending tax legislation remains unknown.
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