The House Ways and Means Committee voted 40-3 on Jan. 19 to advance a compromise tax package that would retroactively reinstate and extend 100% bonus depreciation, Section 174 expensing for domestic research, and a more favorable calculation for the limit on the interest deduction under Section 163(j).
The overwhelmingly bipartisan vote is a positive development that adds momentum to the effort, but there are still several important steps that could be difficult and need to be completed before potential enactment. House Ways and Means Committee Chair Jason Smith, R-Mo., is pushing for a House vote the week of Jan. 29, but House Speaker Mike Johnson, R-La., has so far declined to comment on the schedule.
Smith is projecting confidence that the bill can pass the full House, perhaps even on a suspension vote requiring a two-thirds majority. Ways and Means Committee Democrats offered several amendments that were rejected along party lines, but the most of them ultimately supported the chairman’s mark. Republican support also seems robust, but the caucus has had trouble uniting on issues this year. The effort could also be complicated by a faction of members from both parties who have vowed to block any tax legislation that doesn’t address the cap on the individual state and local tax deduction.
The Senate likely presents another hurdle because procedural complications can make it difficult to pass stand-alone tax legislation. Tax writers had originally hoped to add the package to other must-pass legislation. A government funding agreement would normally offer the best vehicle, but lawmakers recently agreed to extend government funding in two tranches through March 1 and March 8. Senate Finance Committee Chair Ron Wyden, D-Ore., had been pushing to enact the bill before the filing season opened on Jan. 29. There is now little chance of that happening, and Smith made changes to a child tax credit provision that included instructing Treasury to create a process to issue individual refunds after enactment without taxpayers needing to refile.
Strong support from Senate Majority Leader Chuck Schumer, D-N.Y., is raising hopes that leaders will find a way to navigate the package through the Senate, either on its own or as part of another bill. The White House also issued a strong statement in support of the bill. Senate Republicans could be the potential problem, and at least nine of their votes will ultimately be needed. Senate Finance Committee ranking minority member Mike Crapo, R-Idaho, is calling for changes to the bill and has pushed for a committee mark-up.
The agreement was brokered by Wyden and Smith and trades $33 billion in child tax credit enhancements for three key 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 be effective through 2025 and retroactive to 2022 at the taxpayer’s election
- Restoring 100% bonus depreciation for property placed in service from 2023 through 2025
The legislation also includes a handful of other largely bipartisan priorities, including:
- Conferring tax treaty-like benefits to Taiwan
- Increasing the information return threshold for Forms 1099-MISC and 1099-NEC from $600 to $1,000
- Increasing the Section 179 expensing thresholds
- Providing disaster relief
- Increasing and enhancing the low-income housing tax credit
According to estimates from the Joint Committee on Taxation, the bill would be fully offset by $78.6 billion in changes to the employee retention credit (ERC) that would bar claims filed after Jan. 31, 2024, and increase the preparer penalty for certain promoters.
Grant Thornton insight
The overwhelming bipartisan support for the bill in the Ways and Committee raises hopes that enactment is possible over the next several weeks. The full legislative text and summaries are now available, allowing taxpayers to fully understand the technical considerations and potential impact. The retroactive reinstatement of the favorable business provisions could present administrative challenges, but the bill does provide transition relief giving taxpayers favorable options for implementing the changes. Taxpayers should keep in mind, however, that enactment is still far from guaranteed and changes to the legislation remain possible.
R&E expensing
The legislation would effectively suspend the requirement to amortize domestic Section 174 costs enacted under Tax Cuts and Jobs Act (TCJA). The TCJA required taxpayers to capitalize and amortize R&E costs under Section 174 over five years (domestic) or 15 years (foreign) for tax years beginning in 2022 or later. The legislation largely mirrors a provision from a Republican tax bill earlier in the year and does not actually reinstate the pre-TCJA rules by postponing the effective date of the TCJA change. Instead, the legislation puts in place temporary alternative rules under new Section 174A that are similar to the rules in place before the TCJA.
Under these rules, domestic R&E would deductible for tax years beginning before Jan. 1, 2026, while foreign R&E would still be required to be capitalized and amortized over 15 years.
Grant Thornton insight
Retaining amortization of foreign costs over 15 years was intended to bring down the cost of the three main business provisions from nearly $50 billion to $33 billion, which in turn allowed them to lower the amount of equivalent CTC relief. Lawmakers alternatively discussed carving out the 2022 year, but ultimately decided to pursue full retroactively for domestic costs.
Software development costs would be included in the Section 174A definition of R&E, and taxpayers would have the option of capitalizing and amortizing all or part of the costs over the useful life of the research (with a 60-month minimum). The change would be retroactive to tax years beginning after 2021, and the statutory language provides four elective transition rules for implementing the changes retroactively.
Grant Thornton insight
Retaining amortization of foreign costs over 15 years was intended to bring down the cost of the three main business provisions from nearly $50 billion to $33 billion, which in turn allowed them to lower the amount of equivalent CTC relief. Lawmakers alternatively discussed carving out the 2022 year, but ultimately decided to pursue full retroactively for domestic costs.
Software development costs would be included in the Section 174A definition of R&E, and taxpayers would have the option of capitalizing and amortizing all or part of the costs over the useful life of the research (with a 60-month minimum). The change would be retroactive to tax years beginning after 2021, and the statutory language provides four elective transition rules for implementing the changes retroactively.
Grant Thornton insight
The options for implementing the change include allowing taxpayers to make a late election to capitalize and amortize costs or apply the reinstatement of expensing as a method change on a subsequent return with a catch-up adjustment under Section 481 on a modified cut-off basis.
The legislation would also require taxpayers to reduce all Section 174A amounts by any research credits with rules similar to Section 280C(c), but only for years beginning after Dec. 31, 2022.
Before the TCJA, Section 280C generally required taxpayers to reduce their deduction for R&E costs by the amount of any research credit or reduce their credit to achieve a similar result. Changes made by the TCJA were generally interpreted to require taxpayers only to reduce their Section 174 capital account to the extent their research credit exceeded their amortization deduction for that year. This result allowed many taxpayers to claim a full research credit without reducing any current or future deduction for Section 174 costs. The legislative language would potentially preserve this treatment for tax years beginning in 2022 exclusively, while shutting it down for years beginning in 2023 or later, though it also clarifies that the new provision is not meant to infer anything about the proper treatment in 2022 tax years.
Section 163(j)
The legislation would retroactively postpone a change to the limit on the deduction for net interest expense under Section 163(j), which generally limits the deduction to 30% of adjusted taxable income (ATI). Under current law, for tax years beginning after 2021, ATI must include depreciation and amortization. This lowers taxable income and potentially triggers the limit more quickly. The bill would retroactively reinstate the exclusion of depreciation and amortization from ATI and maintain it for tax years beginning before 2026.
Grant Thornton insight
The legislative language more specifically provides that it the reinstatement of prior treatment is effective for tax years beginning after 2023, but can be made fully retroactive and apply for tax years beginning after 2021 at the election of the taxpayer. The IRS will need to provide administrative guidance for making this election and implementing the change retroactively.
Bonus depreciation
The bonus depreciation rate was reduced to 80% for property placed in service in 2023, and is set to be reduced to 60% in 2024, 40% in 2025, 20% in 2026, and zero in 2027. The legislation would reinstate 100% bonus depreciation for property placed in service in 2023 and extend it for property placed in service through 2025.
Grant Thornton insight
The rate for bonus depreciation would no longer phase down gradually and would instead be scheduled to go from 100% in 2025 to 20% in 2026 and zero in 2027. The expiration of all three of these provisions now lines up with the expiration of many other key aspects of the TCJA and several other tax credits. Lawmakers are already referring to this as a potential fiscal cliff, which could spur another round of potential tax reform. The outcome of the 2024 election could be pivotal for long-term tax policy.
The legislation would also increase the $1 million threshold for Section 179 expensing ($1.16 in 2023 with inflation adjustments) to $1.29 million in 2025, indexed for inflation thereafter. The deduction would phase out based on the amount of qualifying property placed in service exceeding $3.22 million, up from $2.5 million ($2.89 million in 2023 with inflation).
Grant Thornton insight
Section 179 largely became superfluous in recent years thanks to 100% bonus depreciation, but could become meaningful again for small taxpayers if bonus depreciation rates drop.
Taiwan tax treaty benefits
The bill incorporates legislation intended to provide benefits equivalent to a tax treaty to Taiwan, which is unavailable due to Taiwan’s unusual political status. The bill would create a new section of the Internal Revenue Code, Section 894A, that would provide treaty-like benefits to Taiwan based on the 2016 U.S. Model Tax Treaty, contingent on Treasury certifying that Taiwan has granted reciprocal benefits to U.S. persons. The bill would also require the president to enter into a treaty-like agreement with Taiwan, which would require consultation with Congress. For more information on these provisions, see our earlier coverage.
Information reporting
The bill would increase the threshold for reporting payments for services on Form 1099-MISC and Form 1099-NEC under from $600 to $1,000 beginning with payments made in 2024. The $1,000 threshold would be indexed to inflation.
Grant Thornton insight
The bill does not address the threshold for Form 1099-K reporting under Section 6050W for third-party payment networks, which was considered a higher priority for many lawmakers. Prior to the American Rescue Plan Act of 2021, reporting was only required for recipients of $20,000 in payments and 200 transactions. The ARP lowered this threshold to $600 regardless of the number of transactions. This change was originally scheduled to take effect for 2022 payments, but the IRS issued transition relief preserving the original threshold for 2022 and 2023 payments and setting a $5,000 threshold for 2024 payments (see our prior story for more information).
Employee retention credit
The bill is projected to raise $78.6 billion with a series of ERC changes. The IRS has claimed it has been inundated with improper and even fraudulent claims. It placed a moratorium on processing claims filed on or after Sept. 14, 2023, and has since created two separate settlement programs. The legislation would:
- Bar additional ERC claims after Jan. 31, 2024
- Extend the statute of limitation on ERC claims to six years
- Increase the preparer penalties on ERC claims for advisors that charged contingent fees or receive certain percentages of their gross receipts from ERC claim fees.
Grant Thornton insight
Democrats seeking to add additional child tax credit relief have proposed paying for the changes moving the Jan. 31 date further back, even retroactively, to bar a larger number of claims. Taxpayers with legitimate claims should consider moving quickly to file them.
Next steps
The fate of the legislation will likely be determined over the next several weeks. If enacted, it would have a significant and favorable impact on nearly all taxpayers, but could present major compliance and implementation challenges. Taxpayers should continue to monitor Congress and incorporate the potential for enactment into tax and business planning.
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