By Derek Gray, CPA, Director and Amy Sandlin, CPA, Senior Tax Manager at Blue & Co.
A bipartisan bill drafted by House Ways and Means Chair Jason Smith (R-MO) and Senate Finance Committee Chair Ron Wyden (D-OR) took another step toward passage Wednesday evening. The Tax Relief for American Families and Workers Act of 2024 (the “Act”) passed the House and now moves on to the Senate. The bill passed by an overwhelming 357-70 margin, leading to hope that it will move quickly through the Senate and soon be on President Biden’s desk for signature.
As the name implies, the Act has provisions for both American families and businesses.
Most of the relief for families comes in the form of an enhanced Child Tax Credit (“CTC”).
Under current law, eligible taxpayers can claim a tax credit of up to $2000 for each qualifying child, with a limit on how much of the CTC is refundable. The Act holds the maximum CTC at $2000 for the 2023 tax year but increases the CTC for inflation in 2024 and 2025.
Under the Act, the refundable portion of the CTC, now capped at $1600 for the 2023 tax year, increases to $1800 for 2023, with additional increases to $1900 and $2000 for the 2024 and 2025 tax years, respectively.
On the business side, there are three major business changes, and some are retroactive. First, domestic research and experimental expenditures will be deductible for the 2022 – 2025 tax years. The Tax Cuts and Jobs Act (“TCJA”) previously required companies to capitalize these amounts and amortize over a 5-year period, beginning with the 2022 tax year. This is seen as a major win in the business community, and lawmakers on both sides of the aisle have supported this measure.
Secondly, the Act modifies the calculation for interest expense for certain businesses. Depreciation, amortization, and depletion limit interest deductions for these businesses, a change from TCJA that went into effect in 2022. The Act delays this calculation change until 2026.
Finally, two measures impact business depreciation deductions. Bonus depreciation has incentivized business investment since TCJA passed at the end of 2017 by allowing taxpayers to deduct 100 percent of qualified property costs. TCJA also included a phaseout provision beginning in 2023. Bonus depreciation is currently capped at 80 percent in 2023, 60 percent in 2024, and 40 percent in 2025. The Act delays the phaseout and allows 100 percent bonus depreciation through 2025.
Additionally, the Act enhances the Sec. 179 deduction, which also allows for a faster depreciation recovery. Beginning in 2024, the Act would allow businesses to immediately expense $1,290,000 of the cost of qualified assets (up from $1 million) while also increasing the amount at which the deduction begins to phase out from $2.5 million to $3,220,000.
The Act also includes provisions related to Taiwan, disaster relief, and Form 1099 filings, among other provisions.
To help offset the cost of this $78 billion tax bill, the Act increases penalties for nefarious promoters of the Employee Retention Tax Credit and any businesses that have taken this credit improperly. Additionally, businesses cannot claim the credit after January 31, 2024.
Although the Act passed in the House by a wide margin, this bill isn’t without detractors. If the Act ultimately becomes law, many provisions will only be in effect through the end of 2025, when many taxpayer-friendly parts of the TCJA are also set to expire.
Notably, SALT cap relief is not in the Act. If legislators tackle this controversial tax policy, we expect it to be in a separate bill.
Expect taxes to be an important issue in the upcoming election cycle, both at the national and the state level. Many of the tax policies addressed in this bill will continue to be at the forefront of the news cycle, even after the election, as lawmakers will no doubt look to create a solution that is more permanent than this short-term fix.
We will continue to watch the bill as it works through the Senate. In the meantime, please contact us if you have any questions about what the Act means for you.