The Chairs of the Senate Finance Committee and the House Ways and Means Committee released on January 16, 2024, a bipartisan framework for proposed tax legislation. The proposal addresses various scheduled changes to the tax code and also would modify the employee retention credit (ERC) in significant ways.
The proposal includes the following provisions, some of which have been lobbied for aggressively by the business community for years:
1. Section 174 expensing for research and experimental (R&E) costs. These costs were fully deductible by businesses until 2022, when they were required to be capitalized and amortized over 5 years (for research performed inside the U.S.) or 15 years (for research performed outside the U.S.). The proposal would restore full deductibility for domestic R&E expenses in tax years 2022 through 2025. This would provide a retroactive tax benefit for tax years 2022 and 2023. The 2023 tax filing season opens on January 29, 2024, and benefits for 2022 likely would be claimed on amended income tax returns.
2. Section 168(k) bonus depreciation. Businesses were permitted to claim 100% bonus depreciation in 2022 for qualifying assets placed in service in 2022. The rate decreased to 80% in 2023, 60% in 2024, and was scheduled to drop to 40% in 2025, 20% in 2026, and zero in 2027. The proposal would extend the ability of businesses to claim 100% bonus depreciation for investments in machines, equipment, and vehicles for tax years 2023, 2024, and 2025, providing a retroactive tax benefit for 2023.
3. Section 163(j) interest expense disallowance. Prior to 2022, the tax code generally limited a business’s ability to deduct interest expense to 30% of its adjusted taxable income (ATI), which generally included earnings before depreciation and amortization, or EBITDA. Starting in 2022, the limitation became more restrictive because ATI was computed using EBIT, or earnings after the deduction for depreciation and amortization. The proposal would extend the favorable use of EBIDTA to calculate ATI for tax years 2024 and 2025, and would provide an election to use it for tax years 2022 and 2023.
4. Section 179 expensing. The proposal would increase the limitations on section 179 small business expensing of depreciable business assets, starting with property placed in service in 2024.
5. Enhancements to the child tax credit, Taiwan double-tax relief, disaster tax relief, enhancements to the low-income housing tax credit, and an increased threshold for 1099-NEC and 1099-MISC reporting.
To pay for the cost of these taxpayer-friendly changes, the proposal would make significant changes to the ERC. In particular, the proposal would (i) prevent the filing of ERC claims after January 31, 2024, (ii) retroactively extend the statute of limitations on ERC claims from 3 years to 6 years, (iii) increase certain penalties on ERC promoters, and (iv) retroactively impose reporting and list maintenance requirements on ERC promoters similar to those currently imposed on promoters of tax shelters. The changes to the ERC are scored to raise about $70 billion.
The proposal is significant because it is endorsed by the Chairs of both Congressional tax-writing committees, but its passage is far from certain. There are many more hurdles to clear before it becomes law, and the earliest the House could hold a floor vote on the proposal would be the week of January 29, 2024, though some believe it may have to wait until a government funding bill is enacted in March 2024 or later.
