Key Takeaways
- Bipartisan legislation has introduced key provisions for addressing business concerns, including full expensing of domestic research costs until 2026, 100% bonus depreciation for property placed in service from 2023 to 2025, and the use of EBITDA for deductible business interest through 2025.
- The proposal significantly increases the child tax credit refundability for low-income taxpayers, determining it on a per-child basis and increasing the refundability limitations.
- Additional elements of the legislation include an increase in small business section 179 expensing limit and measures to prevent double taxation of Taiwan-related income.
House Ways and Means Committee Chairman Jason Smith (R-MO) and Senate Finance Committee Chairman Ron Wyden (D-OR) have released bi-partisan legislation addressing key business tax concerns.
Highlights of the proposal include:
- Full expensing of domestic research costs for tax years beginning before 2026, including for 2022 and 2023
- 100% bonus depreciation for property placed in service in 2023 through 2025
- Use of EBITDA in place of EBIT in determining the amount of deductible business interest through 2025
- An increase in the amount eligible for small business section 179 expensing
- Accelerating the statutory deadline for any remaining ERC claims to January 31, 2024
The Smith-Wyden proposals also include legislation to address the potential double taxation of Taiwan-related income, provisions to expand the low-income housing tax credit, and legislation to provide additional relief for taxpayers in disaster-affected communities, including provisions allowing certain wildfire relief payments to be excluded from income.
What are the business tax provisions in the plan?
Expensing of Research Costs
The Tax Cuts and Jobs Act requires that research costs incurred in taxable years beginning after 2021 be amortized over five years for domestic costs and 15 years for foreign costs rather than currently expensed. The Smith-Wyden proposal would delay the amortization requirement for domestic research until 2026 with a retroactive effective date to the 2022 taxable year.
Bonus Depreciation
The Tax Cuts and Jobs Act also phased out 100% bonus depreciation at 20% per year, beginning with properties placed in service after 2022. Thus, bonus depreciation for most property placed in service in 2023 was limited to 80% and is limited to 60% for 2024.
The Smith-Wyden proposal would preserve 100% bonus depreciation for most properties placed in service through 2025. Property placed in service in 2026 would be limited to 20% bonus depreciation as under present law.
Deductible Business Interest
The current deduction of business interest is generally limited to 30% of adjusted taxable income (ATI), with any excess carried forward to be deductible in future years.
- For tax years beginning before 2022, ATI was determined without reduction for depreciation, amortization, or depletion (EBITDA).
- For tax years beginning after 2021, depreciation, amortization, and depletion are considered in determining ATI.
The Smith-Wyden proposals would extend the allowance of depreciation, amortization, and depletion (EBITDA) in determining ATI for tax years beginning before 2026.
Small Business Expensing (Section 179)
The Smith-Wyden proposals increase the maximum amount a taxpayer may expense in 2024 to $1.29 million, reduced by the amount by which the cost of qualifying property exceeds $3.22 million. These amounts would be adjusted for inflation for taxable years beginning after 2024.
What does the proposal do for Child Tax Credit Refundability?
The Smith-Wyden proposal significantly increases the child tax credit refundability for low-income taxpayers, allowing them to benefit over and above what would otherwise be their tax liability. Changes would include determining refundability per child and increasing the overall limitation on refundability.
How much will this legislation cost?
The cost of the legislation would be offset by:
- Requiring employee retention credit (ERC) claims to be filed by January 31, 2024
- Extending the period during which the IRS can assess taxes, penalties, and interest concerning erroneous ERC claims
- Significantly increasing the due diligence burden on employee retention credit promoters and penalties for assisting in filing erroneous ERC claims
Is the legislation likely to pass?
At this time, the outlook for passage of tax legislation in 2024 is unclear. This bipartisan agreement between the chairmen of the tax-writing committees is positive, particularly in addressing the political need to balance business tax relief with the child tax credit expansion.
While a general agreement regarding business tax relief has existed, the amount and structure of an accompanying child credit expansion have been controversial. If the focus on refundability in the Smith-Wyden proposals reflects growing consensus on this issue, the chances tax legislation could be enacted in 2024 will increase.
However, the Congressional calendar remains focused on budget and other nontax issues. Congressional leadership has yet to indicate its support for advancing tax legislation. If tax legislation is enacted in 2024, the Smith-Wyden proposals will likely be the model for that legislation.
Our dedicated tax legislation team is carefully watching how this proposal unfolds and will keep you updated on the impacts on your business.
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