Business Tax Breaks in the Tax Relief for American Families and Workers Act of 2024

On January 31, 2024, the U.S. House of Representatives passed the “Tax Relief for American Families and Workers Act of 2024” (HR 7024) with support from both parties. The bill, if passed by the Senate and signed into law by the President, includes significant tax benefits that businesses of all sizes may be able to take advantage of.

Such benefits include:

• Higher interest deductions for tax years 2022-2025.
• Immediate deduction for U.S. research and development (R&D) expenses until 2026, instead of amortizing them over five years.
• 100-percent bonus depreciation for qualified property until January 1, 2026, instead of 80-percent for 2023, 60-percent for 2024, and 40-percent for 2025.
• An increase in the maximum deduction for the cost of depreciable business assets under IRC §179 placed in service in 2023 to $1.29 million, and an increase to the phaseout threshold to $3.22 million.
• An increase in the minimum threshold for filing IRS Forms 1099-MISC and 1099-NEC from $600 to $1000 for payments made after December 31, 2023, and an increase in the threshold for future years based on inflation.

The bill also addresses the large number of potentially fraudulent claims related to the Employee Retention Tax Credit (ERTC). As currently written, the bill would end the period for filing ERTC claims for tax years 2020 and 2021 as of January 31, 2024, and the penalties involved will increase.

While the bill was quickly approved by the House, its path forward remains uncertain in the Senate. The required 60-vote threshold in the Senate will most likely require further negotiations and modifications to the legislation, some of which could be substantial.

However, given the retroactive nature of the tax changes in the bill, business taxpayers should consider filing for an extension to file their annual tax return. In doing so, business taxpayers would have the opportunity to fully evaluate how the potential tax changes could impact them and capitalize on the beneficial provisions, should the bill ultimately be enacted into law.

Interest Deduction

The bill proposes to retroactively permit the calculation of adjusted taxable income (ATI) for purposes of the business interest expense limitation under IRC §163(j) to be determined using an EBITDA computation for tax years beginning prior to January 1, 2026. Thus, yielding a higher limitation on deductible business interest compared to the EBIT computation currently required for post-2021 tax years.

R&D Expense

The proposed legislation seeks to reinstate the ability to deduct domestic R&D expenses incurred during tax years commencing after December 31, 2021 and before January 1, 2026, pursuant to IRC §174. This provision represents a retroactive extension of the pre-Tax Cuts and Jobs Act treatment, where such costs were generally deductible when incurred rather than be required to be capitalized and amortized over a 5-year period. Foreign based R&D would however continue to be subject to the 15-year amortization period.

Bonus Depreciation

An extension of the 100-percent bonus depreciation provisions under IRC §168(k) is included in the proposed legislation for qualified property placed in service during tax years 2023 through 2025. The existing scheduled phasedown to 80-percent in 2023, 60-percent in 2024, and 40-percent in 2025 would no longer apply, but the 20-percent bonus depreciation would remain in effect for property placed in service in 2026.

Deduction for Depreciable Business Assets under IRC §179

The statutory limits governing the ability to expense the cost of qualifying depreciable business assets pursuant to IRC §179 would be increased under the bill. The maximum deduction amount would be increased to $1.29 million (from $1.16 million for 2023), with the phaseout threshold would be increased to $3.22 million (from $2.89 million).

1099-MISC and 1099-NEC Reporting

An increase to the reporting thresholds for IRS Forms 1099-MISC and 1099-NEC is also included, raising the annual payment amount requiring informational reporting from $600 to $1,000. The increased threshold would apply for payments made after December 31, 2023 and would be indexed for inflation in subsequent years.

ERTC

Lastly, the legislation introduces new enforcement protocols regarding the ERTC introduced during the COVID-19 pandemic. This includes establishing a January 31, 2024 deadline for filing ERTC claims related to 2020 and 2021, increased penalties for abusive or fraudulent credit claims, and an extended 6-year statute of limitations (from a 5-year statute of limitations) for ERTC examination by the IRS.

Attorneys at Baird Holm LLP specialize in business tax law. Please do not hesitate to contact us if you have any questions on this or any related matter.