By Brian Klintworth, CPA/MT
Tax Relief for American Families and Workers Act of 2024
Important Tax Changes Likely on the Horizon
January 22, 2024
Over the past several weeks, congressional negotiators have been working to craft a new tax bill that can garner bipartisan support. Earlier last week, a conceptual agreement was reached, and basic terms of the deal were released, known as the Tax Relief for American Families and Workers Act of 2024.
While there is still much to happen in order for the bill to be passed, progress has been promising. Congress has high hopes of passing the bill as soon as possible, potentially by the end of January. While that may be an ambitious goal, we are optimistic that Congress will prioritize the bill so taxpayers can make important decisions as tax season is now underway.
Recently, congressional leaders released details of the proposed legislation. The proposed changes would primarily be in effect through the end of 2025, when provisions of the Tax Cuts & Jobs Act (TCJA) are set to sunset. At HBE, we have been focused on reviewing and understanding the information so we can provide our clients with appropriate guidance prior to filing their taxes. Below is a summary of the potential changes and how they may impact taxpayers.
We are committed to filing our clients’ tax returns on a timely basis. However, as always, last-minute changes from the IRS can impact our ability to finalize returns in the most efficient manner. In addition to the impact on timely filing, these changes will also affect timing of the IRS accepting returns. If your tax situation may be impacted by any of the items notes below, it is very important that you proactively communicate with your HBE advisor.
What’s Included
The key provisions included in the current proposed bill are listed below. For more information on each, please click on the drop down option.
Child Tax Credit
- This bill would increase the amount of the child tax credit over the next several years and also increase the amount of the credit that is refundable to taxpayers. Back in 2021, the credit was enlarged as a part of COVID relief bills, and this is an attempt to help enhance the credit again.
- Under the proposed changes, the standard child tax credit of $2,000 would be increased in both 2024 and 2025 to adjust for inflation.
- In addition, the $1,600 of the credit that was refundable in 2022 would be increased to $1,800 for 2023, $1,900 for 2024, and $2,000 for 2025. The amounts for 2024 and 2025 would be adjusted for inflation.
- Expanding the refundability of the credit would primarily benefit lower income taxpayers who otherwise would lose some of the value of the credit.
Employee Retention Credit (ERC)
- The Employee Retention Credit (ERC) was originally designed to help businesses that were struggling during COVID that met certain criteria during eligible time periods in 2020 and 2021.
- In the years since, however, many ERC promoters have gone after ineligible businesses and helped them file claims that are not legitimate, and these promoters raked in massive fees for their work.
- Originally, the government had estimated that $86 billion would be paid out in ERC claims. However, through October 2023, roughly $230 billion in claims had been filed. The IRS estimates that a high percentage of those claims are not legitimate claims under the ERC rules.
- Under current tax law, entities have until April of 2024 to file claims for the 2020 ERC and April of 2025 to file claims for the 2021 ERC.
- Under this bill, claims would need to be filed by January 31, 2024 to be processed by the IRS. In addition, the IRS will continue to review, audit, and pursue action against illegitimate claims.
Immediate Deduction for Research & Development Expenditures
- Beginning in 2022, entities that participate in research and development (R&D) expenditures saw a major tax change due to IRC Section 174.
- Under this provision, entities must amortize their R&D costs over a five-year period. In the early years of this rule, this has dealt a significant blow to entities performing R&D expenditures, as it caused a large increase in taxable income and many cases of additional income tax balances due. This was originally a funding provision of the TCJA when passed in 2017, but it has bipartisan support to correct this provision.
- Under the terms of this bill, the capitalization of the R&D expenditures will be delayed to 2025. Entities that already had to capitalize the expenditures in 2022 will be able to reverse the impact of the 2022 capitalization, likely receiving refunds of additional income tax that was paid for 2022.
100% Bonus Depreciation
- Bonus depreciation was adjusted to 100% of the cost of eligible assets for 2018 through 2022 as a part of the TCJA. However, this bonus depreciation was adjusted to 80% for 2023, then is set to decrease an additional 20% per year until reaching 0% in 2027.
- This bill would extend 100% bonus depreciation for 2023 through 2025. Bonus depreciation would then decrease to 20% in 2026 and 0% in 2027.
- This change will help ensure that businesses are easily able to deduct the cost of many fixed asset additions in the year that they are acquired.
Section 179 Depreciation
- A minor change of this bill would be to enhance the Section 179 depreciation deduction. Under the TCJA, the Section 179 limitation was $1 million in 2018 and got phased out when eligible asset additions exceeded $2.5 million, and this limitation has been adjusted for inflation each year.
- For 2023, the limitation is $1.16 million on up to $2.89 million of eligible expenses.
- This bill would raise the Section 179 thresholds for 2024 to $1.29 million on up to $3.22 million in eligible expenses, and the amount will be adjusted for inflation each year after 2024.
Interest Expense Limitation under Section 163J
- Another TCJA change was to limit the deductibility of interest expense for larger entities. Under these 163J rules, interest expense is limited to 30% of adjusted taxable income of the entity.
- Prior to 2022, the computation of the adjusted taxable income was calculated as the business income BEFORE deducting interest, taxes, depreciation, and amortization.
- Starting in 2022, the deduction was before interest and taxes, but depreciation and amortization were deducted in computing the adjusted taxable income. For impacted businesses, this sharply reduces adjusted taxable income leading to more interest expense being disallowed as a deduction.
- This tax bill would restore the more generous calculation through 2025, which would allow impacted businesses to deduct more of their interest expense in the year paid.
Next Steps
HBE will continue to monitor the progression of this bill and provide additional information and guidance as it becomes available. Again, if you believe that your tax situation may be impacted by the proposed changes, please contact your HBE advisor sooner rather than later.