Tax extenders finally fall short in Senate

The Senate failed to advance a House-passed extenders bill (H.R. 7024) on a 48 to 44 procedural vote on Aug. 1, rejecting one of the last opportunities to retroactively restore the expensing of domestic research costs and address other expired business provisions.

The cloture vote needed 60 votes to pass and would have allowed a simple majority vote on the underlying bill. The cloture voted failed when only three Republicans joined with 45 Democrats to support advancing the bill (Senate Majority Leader Chuck Schumer, D-N.Y. changed his vote to “no” to preserve the ability to call up the legislation again). There is bipartisan support for many of the underlying provisions, but Senate Republicans opposed the legislation for a variety of reasons, and rejection of the bill ends any hope of a deal before the election.

The result was not unexpected as the vote was widely viewed as a Democratic messaging exercise meant to put Republicans on record blocking the bill. It is possible lawmakers come back after the election and try to resurrect negotiations in a lame-duck session, but the outlook is not promising. It appears more likely that the expired business provisions will be part of the broader tax reform debate in 2025. Given the timing, hopes for a fully retroactive fix are diminishing.

The legislation was centered around three core business provisions that would:

• Restore expensing of domestic research and experimentation (R&E) costs retroactive to 2022 and extend the treatment through 2025, while retaining the 15-year amortization period for foreign R&E
• Reinstate the previous calculation of adjusted taxable income (ATI) for the limit on the interest deduction under Section 163(j), which would have been retroactive to 2022 at the taxpayer’s election and effective through 2025
• Restore 100% bonus depreciation for property placed in service from 2023 through 2025

The legislation was the result of a bipartisan compromise between Senate Finance Committee Chair Ron Wyden, D-Ore., and House Ways and Means Chair Jason Smith, R-Mo. The business relief in the bill was balanced by $33 billion in child tax credit enhancements important to Democrats. The bill was paid for with a revenue raiser that would bar employee retention credit (ERC) claims made after Jan. 31, 2024, and increase the statute of limitations and preparer penalties on certain ERC claims. The bill also carried a handful of other bipartisan provisions that would:

• Confer tax treaty-like benefits to Taiwan
• Increase the information return threshold for Forms 1099-MISC and 1099-NEC from $600 to $1,000
• Increase the Section 179 expensing thresholds
• Provide disaster tax relief
• Increase and enhance the low-income housing tax credit

Opposition

The compromise agreement emerged early this year after more than a year of negotiations, and the prospects for enactment initially looked promising. The House approved the bill on Jan. 31 in a bipartisan 357-70 vote. It quickly ran into problems with Senate Republicans, led by Senate Finance Committee ranking minority member Mike Crapo, R-Idaho, who expressed reservations about the deal for various reasons, including opposition to parts of the child tax credit enhancements and discomfort with the revenue raiser. Crapo was particularly unhappy with getting jammed on the bill outside of regular order, and worried about the political implications of enactment. Several Republicans expressed reservations about giving Democrats a political win on the child tax credit before the election, and Crapo said he hoped to craft a better bill if Republicans do well in November.

Lame duck

It is possible that after the election eases some political concerns, lawmakers return to the negotiating table in a lame-duck session to try and recraft a similar deal. The extenders are often a year-end exercise, but there are several reasons why this may be difficult:

• Retroactivity: There are practical and administrative challenges to making changes retroactive all the way back to the 2022 tax year so late in 2024. After the Sept. 15 and Oct. 15 extended deadlines have passed, calendar-year taxpayers will already have filed both the 2022 and 2023 returns.
• Eroding offset: Much of the support of the current deal was contingent on the fact that the cost was offset by a provision banning ERC claims after Jan. 31, 2024. It’s not clear how viable this offset will be if the IRS begins paying out claims made after Jan. 31.
• Looming fiscal cliff: A lame-duck session would convene in the shadow of 2025, when much of the Tax Cuts and Jobs Act is set to expire along with several other tax provisions. It will be difficult for Congress to address only the provisions in this extenders deal with so many bigger changes becoming more urgent.

The prospects may be better for separately moving the less controversial bipartisan provisions from the bill, such as the Taiwan tax agreement and disaster relief. The House has already approved a separate stand-alone version of the disaster tax relief package. But it is always difficult to move tax bills through the Senate, and Democrats may be reluctant to allow pieces of the bill to move after Republicans killed the larger package.

2025 outlook

The failure of the package shifts the focus onto 2025, when built-in changes to tax code are expected to prompt a broader tax reform discussion. The outcome may hinge on the election. The inability of lawmakers to agree on the extenders does not bode well for 2025 negotiations if the election results in split government. Most of the provisions in the extender bill enjoyed bipartisan support. The issues that will be in play next year are larger in scale, more complex, and subject to more divisive views.

Lawmakers could again consider provisions addressing bonus depreciation, Section 174, and Section 163(j), but these issues could be subsumed by higher priorities and cost will be a major issue. It will also become more difficult to justify fully retroactive fixes, or to implement such fixes in an administrable way.

Next steps

Congress is close to passing government funding for the remainder of the year, and with much of the negotiating done, proposals in this budget are even more symbolic than usual, at least in terms of immediate relevance. Aside from the $78 billion deal to revive three business tax breaks, as well as a more generous child tax credit, until the end of 2025, it’s unlikely any major new tax policy will pass this calendar year.