On January 31, 2024, the House of Representatives passed the Tax Relief for American Families and Workers Act of 2024.

This legislation, if also approved by the Senate, promises substantial taxpayer-friendly amendments to U.S. business tax laws. Consequently, it is advised that businesses potentially impacted by this bill delay their tax filings until after March 15 and seek extensions for the 2023 tax year.

SECTION 163(J) INTEREST EXPENSE LIMITATION

• Current Law: Under the 2017 Tax Cuts and Jobs Act (TCJA), business interest expense deductions were capped at 30 percent of adjusted taxable income. For the 2022 and 2023 tax years, the adjusted taxable income calculation included depreciation and amortization expenses.
• Proposed Legislation: For 2024 and 2025 tax years, adjusted taxable income would be calculated before depreciation and amortization expenses. The 30-percent cap would be applied to EBITDA (earnings before interest, taxes, depreciation and amortization) instead of EBIT (earnings before interest and taxes).
• Tax Benefit: The proposed law is less restrictive and could allow a business to claim higher interest expense deductions. Businesses could potentially make a retroactive election for tax years beginning after Dec. 31, 2021, pending further clarification from the U.S. Treasury and IRS.

SECTION 179 DEDUCTION AND BONUS DEPRECIATION

• Current Law: The current IRC §179 maximum deduction is $1.16 million and the current phaseout threshold is $2.89 million.
  • Bonus depreciation decreased to 80 percent for the 2023 tax year and will continue to decrease by 20 percent annually before phasing out completely after the 2026 tax year. Bonus depreciation applies to new or old depreciable business assets such as equipment, machinery, software and vehicles.
• Proposed Legislation: The IRC §179 maximum deduction would increase to $1.29 million and the phaseout threshold would be increased to $3.22 million for the 2023 tax year. After Dec. 31, 2023, these amounts will be adjusted for inflation.
  • 100-percent bonus depreciation would be reinstated and extended for the 2023-2025 tax years instead of decreasing every year. For property placed in the 2026 tax year, bonus depreciation would remain at 20 percent.
• Tax Benefit: These proposed changes would bring back substantial tax savings for taxpayers that place assets in service between 2023 and 2025 and allow them to take a full deduction for bonus depreciation as they did in 2022. The increased §179 deductions and threshold could also be beneficial to taxpayers.

SECTION 174 RESEARCH AND EXPERIMENTATION EXPENDITURES

• Current Law: Beginning Jan. 1, 2022, applicable businesses are required to capitalize and amortize specified research or experimental expenditures (SREE) under IRC §174 over five and 15 years for domestic and foreign research, respectively. Even if any property related to SREE expenses is abandoned or disposed of, the expenses must continue to be amortized and no immediate deduction is allowed.
• Proposed Legislation: The requirement to capitalize research and experimentation (R&E) costs would be delayed until the 2026 tax year. This is a bucket-list item for a lot of impacted business who ended up paying tax in 2022 even though they would have generated tax losses otherwise. The proposed law only applies to domestic R&E costs, and foreign R&E costs will continue to be capitalized and amortized over 15 years as currently required under TCJA.
• Tax Benefit: Taxpayers would again be able to fully expense all qualifying domestic R&E costs in the year incurred. This can significantly increase the amount of deduction that a business can take in the year the research and development (R&D) costs are incurred and can be seen a welcome relief to companies investing in innovation and new technology.
  • The taxpayer may need to file an amended tax return within one year of the date of enactment of this legislation to reverse the §174 capitalization reported on a tax return for a tax year beginning after Dec. 31, 2021.

EMPLOYEE RETENTION TAX CREDITS (ERC)

• Current Law: The current deadlines to make a new ERC claim for the 2020 and 2021 tax years are April 15, 2024 and April 15, 2025, respectively. The current statute of limitations on ERC claims is five years.
• Proposed Legislation:
• The expiration due date is moved up to Jan. 31, 2024, where the IRS will shift its focus to implementing more rigorous review standards and auditing previous claims. There would be no more ERC claims accepted after the Jan. 31, 2024 cut-off.
• The statute of limitations would be extended to six years from the later of the original filing or the date of the claim. For example, a claim filed in January 2024 for the 2020 tax year will have the statute open for examination by the IRS until January 2030. It would not have any retroactive effect for claims filed prior to Jan. 31, 2024.
• Key Takeaways:
  • With the IRS Voluntary Disclosure Program expiring on March 22, 2024, it is critical for businesses to assess the legitimacy of their ERC claims.
  • There would be sizeable penalties on an ERC promoter who aids in the understatement of a tax liability or fails to comply with certain filing requirements, which would equal to the greater of the two:
    • $200,000 ($10,000 in the case of a natural person)
    • 75 percent of the gross income derived from the ERC promoter

For any questions regarding the above, please do not hesitate to contact GHJ’s Corporate Tax Practice.