Overview of the Tax Relief for American Families and Workers Act of 2024
In a 40-3 vote, the House Ways and Means Committee approved the Tax Relief for American Families and Workers Act of 2024, H.R.7024 (“the Bill”). The Bill provides wide-ranging tax savings for businesses and an enhancement of the child tax credit for families/individuals.
With busy January schedules for both the House and Senate, the goal to have the Bill signed by President Biden before the 2023 tax filing season may be difficult. In addition, the most significant changes included in the Bill can be retroactively applied to 2023 tax filings. If passed, the changes will likely present new challenges for the IRS and CPAs in timely processing of tax returns.
Highlights of proposed business tax provisions
The proposed Bill extends some of the Tax Cuts and Jobs Act of 2017 (TCJA) provisions that are now expired, delays the implementation of other provisions, and expands some long-standing deductions.
Research and development
In our recent article, we discussed the IRS rule changes in tax treatment of research and development (R&D) costs and the negative impact those changes are having on business operations and profitability. The proposed Bill reflects the bipartisan consensus on reforming the new and unpopular R&D tax laws.
Starting January 1, 2022, taxpayers were no longer allowed to deduct R&D Section 174 expenses in the year incurred. The proposed Bill would delay to tax years beginning after December 31, 2025, the application of the rule with regard to research and experimental costs attributable to domestic activities. There would be no change for activities outside the U.S. The bill provides transitional rules applicable to interactions with research credits, as well as making accounting changes.
Note: The Bill does not provide any direct rules applicable to claiming the deduction in a tax year for which a return has already been filed for tax years beginning in 2022. Presumably, these retroactive deductions will necessitate the filing of an amended return, unless the IRS provides a means for claiming the deduction on a subsequent year’s return.
Business interest limitation under Section 163(j)
The proposed Bill would restore depreciation, amortization, and depletion to the carve out in the calculation of adjusted taxable income for tax years beginning after December 31, 2023, and before January 1, 2026. Taxpayers can elect to restore depreciation, amortization, and depletion to the carve-out for tax years beginning after 2021 and before 2024. Under current law, in tax years beginning before 2022, the calculation of adjusted taxable income for purposes of the business interest expense limitation under Code Sec. 163(j) was made without regard to any deductions for interest, taxes, depreciation, amortization, or depletion (EBITDA). For tax years beginning after 2021, depreciation, amortization, and depletion were removed from the carve-out, meaning only deductions for interest and taxes were not taken into account in computing the limitations.
Note: Unless there is guidance from the IRS allowing to apply this change retroactively on a current-year tax return, an amended return will likely be required for these changes to be applied.
The TCJA generally allowed qualified property placed in service after September 17, 2017, and before January 1, 2023, to be immediately expensed in the year in which the property was placed in service (“100-percent bonus depreciation”). The law provided for a gradual reduction in the first-year depreciation for property placed in service after 2022 (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026) before being eliminated altogether for property placed in service in 2027 (these years are all extended by one year for longer production period property and certain aircraft).
The proposed Bill would extend 100-percent bonus depreciation to apply to property placed in service before January 1, 2026 (January 1, 2027, for longer production period property and certain aircraft). The 20% and 0% bonus depreciation rates would continue to apply to property placed in service generally in 2026 and 2027.
Increased 179 Deduction
Under current law, a business may elect to expense the cost of certain qualifying property (depreciable tangible personal property, off-the shelf computer software, and qualified real property that is purchased for use in the active conduct of a trade or business) rather than recover the cost through depreciation. The amount of the deduction is limited to an inflation adjusted amount. For 2024, the amount of the deduction is capped at $1.22 million, and this limit is reduced dollar-for-dollar by the amount of the expense in excess of $3.05 million.
The Bill proposes an increase in these amounts for property placed in service after 2023. For property placed in service in 2024, the deduction limitation is increased to $1.29 million, and the expense limitation is increased to $3.22 million. These amounts would be adjusted for inflation in tax years beginning after 2024.
Employee Retention Tax Credit
The Employee Retention Credit (ERC) is a complex tax credit for businesses and tax-exempt organizations that continued paying employees during the COVID-19 pandemic because their operations were either: 1) fully or partially shut down because of a federal, state or local government order, or 2) when they had a “significant decline” in gross receipts during certain eligibility periods in 2020 and 2021.
The ERC opportunity prompted aggressive marketing tactics from bad actors that lured ineligible taxpayers to claim the credit. In response, the Internal Revenue Service (IRS) rolled out initiatives to assist businesses that have been misled by the promotors or claimed the credit in error. The initiatives include letters notifying taxpayers that their claims are not allowed, an ERC claim withdrawal option, a moratorium on processing of new ERC claims, and most recently, the ERC Voluntary Disclosure Program.
The proposed Bill includes several additional measures intended to combat these fraudulent claims, including dramatic increases in penalties on fraudulent COVID-ERTC promoters, an extension of the limitations period on assessments of ERTC claims to six years, and provisions that effectively require COVID-ERTC promoters to report themselves to the IRS in the same manner as promoters of listed transactions. Most significantly, the Bill would terminate the period for making claims for the ERTC on January 31, 2024.
The Bill proposes an extension of relief first provided in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which includes the forgiveness of early-withdrawal penalties under Code Sec. 72(t) for qualified disaster distributions, the recontribution of amounts withdrawn for home purchases, and an increase in the amount of loans from qualified plans. An employee retention credit is also allowed for employers in affected areas, as well as special casualty loss rules for affected individuals.
1099-MISC and 1099-NEC filing thresholds
The Bill would increase the threshold for the need to file a Form 1099-NEC or 1099-MISC by businesses paying for services performed by an independent contractor or other similar payments from $600 to $1,000 for payments made after December 31, 2023. After 2024, the $1,000 would be adjusted for inflation.
The Bill would increase the nine percent low-income housing tax credit ceiling to 12.5 percent for calendar years 2023 through 2025. The Bill would also lower the bond-financing threshold to 30 percent for projects financed by bonds with an issue date before 2026.
The Keiter Tax team will continue to monitor and update you on this and other tax regulations that may impact you and your business. Contact your Keiter Opportunity Advisor, if you have any questions.
- H.R. 7024
- “The Tax Relief for American Families and Workers Act of 2024”, Wolters Kluwer
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