The text of the highly anticipated tax legislation titled the Tax Relief for American Families and Workers Act of 2024 has been released. The Act seeks to provide relief to working families through an expanded child tax credit and spur business innovation and growth through increased deductions for research and experimental expenditures, business interest, and depreciable business assets. Furthermore, the Act asserts increased global competitiveness with treaty-like provisions with Taiwan, provides further assistance for disaster-impacted communities, expanded access to affordable housing, and increased Form 1099 filing thresholds. In an effort to provide a revenue-neutral bill, the Act also dramatically increases penalties on COVID-Employee Retention Tax Credit (ERTC) promoters (a new defined term) related to illegitimate claims of the Employee Retention Credit and shortening the claim period to end after January 31, 2024.
This bill was just approved by the House Ways and Means Committee. It is anticipated a full House vote may occur as early as the week of January 29 when the House returns from its recess. Further, whether this bill can proceed as a “standalone” bill remains to be seen as it would be subject to amendments in the Senate, bogging down hope for expedited passage. Alternatively, the bill may be included with other legislation, including the fiscal year 2024 appropriations (that look to be further delayed into early March), or the Federal Aviation Administration bill also due in March, putting into jeopardy retroactive application of certain bill provisions as it moves further from the tax filing season beginning in late January.
Tax Relief for Working Families
Enhanced Child Tax Credit. Under the bill, the Child Tax Credit limit of $2,000 per child would be indexed for inflation in tax years 2024 and 2025. The refundable amount of the Child Tax Credit (currently $1,600 per child) would raise to $1,800 in tax year 2023, $1,900 in tax year 2024, and $2,000 in tax year 2025. For tax years 2023 to 2025, the bill also modifies the calculation of the maximum refundable credit by first multiplying earned income in excess of $2,500 by 15%, and then multiplying that amount by the number of qualifying children. Finally, for tax years 2024 and 2025, a taxpayer may elect to use their earned income from the prior taxable year in calculating the maximum child tax credit.
American Innovation & Growth
Deduction for Research & Experimental Expenditures
Amendments made by the Tax Cuts and Jobs Act (TCJA) required taxpayers to capitalize and amortize certain specific research and experimental expenditures (SREEs). As a reminder, expenditures associated with the development of software are included. Under the TCJA, domestic SREEs are amortized over a five-year period while foreign SREEs are amortized over a 15-year period. Under pre-TCJA law, taxpayers could elect to recognize such expenditures as deductions in the year incurred. In addition, for certain types of SREEs, taxpayers also had the option of recognizing deductions ratably over a period of not less than 60 months or capitalizing the expenditures as part of depreciable property.
The bill would temporarily repeal the TCJA amendments with respect to domestic SREEs, allowing taxpayers to recognize SREEs as a deduction immediately in the year incurred or utilize one of the other elective pre-TCJA options. Domestic SREEs would be defined by the bill as SREEs other than those attributable to foreign research under the research and development credit rules. Meanwhile, foreign SREEs would continue to be subject to the TCJA requirements and recognized as amortization over the 15-year period.
This change to domestic SREEs would apply to expenditures paid or incurred in years beginning before January 1, 2026 and would apply retroactively to amounts paid or incurred in tax years beginning after December 31, 2021. For taxpayers that changed their method of accounting under Section 174 in the first tax year beginning after December 31, 2021, the taxpayer will have the ability to elect to change their method of accounting and include a modified cut-off basis §481(a) adjustment including only domestic SREEs paid or incurred during the taxpayer’s first tax year beginning after December 31, 2021. The §481(a) adjustment will not include deductions previously allowed and will be accounted for ratably during the appropriate two-year period. For a calendar-year taxpayer that changed their method of accounting under §174 on their 2022 income tax return, the taxpayer could make an election on their 2023 income tax return to calculate a §481(a) adjustment for the remaining unamortized 2022 capitalized costs. Fifty percent of the §481(a) adjustment would generally be deducted on their 2023 income tax return and the remaining 50% would generally be deducted on their 2024 income tax return.
For tax years beginning after December 31, 2025, taxpayers would be required to capitalize and amortize domestic SREEs over a five-year period.
Extension of Allowance for Depreciation, Amortization, or Depletion in Determining the Limitation on Business Interest
For tax years beginning on or after January 1, 2022, adjusted taxable income (ATI) for purposes of the §163(j) business interest expense limitation is currently calculated without the addback of depreciation, amortization and depletion—in essence, an earnings before interest and taxes (EBIT) calculation. Under §163(j), taxpayers are generally limited in the amount of interest expense they can deduct to the sum of 30% of the taxpayer’s ATI, any business interest income, and any floor plan financing interest expense.
Pursuant to this provision, taxpayers would calculate ATI with the benefit of adding back depreciation, amortization, and depletion, an earnings before interest, taxes, depreciation, and amortization (EBITDA) calculation, for tax years beginning after December 31, 2023 and before January 1, 2026. In addition, taxpayers would have the option of computing ATI for tax years beginning after December 31, 2021 and before January 1, 2024, using the EBITDA approach if so elected. The Secretary of the Treasury would provide the mechanics, both time and manner, of how this election would be made. For tax years beginning after December 31, 2025, ATI would revert back to the EBIT calculation.
Extension of 100% Bonus Depreciation
Currently, bonus depreciation under §168(k) generally begins to phase down 20% a year from 100% regarding property placed in service on or after January 1, 2023. The provision would generally extend 100% bonus depreciation for most qualified property placed in service after December 31, 2022 and before January 1, 2026.
The provision would maintain the 20% bonus depreciation amount for most qualified property placed in service after December 31, 2025 and before January 1, 2027, and bonus depreciation would sunset for most qualified property placed in service after December 31, 2026.
The provision also would make the appropriate adjustments to the special rules that currently apply to longer production period property, certain aircraft, and specified plants planted or grafted to account for the general changes made to the bonus depreciation rules discussed above.
These changes would generally apply to property placed in service after December 31, 2022 or in the case of plants bearing fruits and nuts for specified plants that are planted or grafted after December 31, 2022 .
Increase in Limitations on Expensing of Depreciable Business Assets (§179)
Section 179 currently allows electing taxpayers to immediately expense up to $1 million a year of the cost of qualifying property rather than depreciate the property to recover the costs. If the taxpayer places in service qualifying property in excess of $2.5 million in a year, the $1 million is reduced dollar for dollar by the excess amount. These amounts are indexed for inflation and certain other limitations apply. For 2023, the amounts were $1.16 million and $2.89 million, respectively.
Under this provision, taxpayers would be able to elect to expense up to $1.29 million a year of qualifying costs. This amount would be reduced by the amount of qualifying property placed in service during the tax year exceeding $3.22 million. These amounts would continue to be indexed for inflation. The provision would apply to property placed in service by taxpayers in tax years beginning after December 31, 2023.
Assistance for Disaster-Impacted Communities
This bill extends the provisions introduced in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which provided relief for qualified disaster-related personal casualty losses by eliminating the 10% adjusted gross income threshold and itemized deduction treatment but reduces the deductible amount by $500 instead of $100. The proposed Act will include any presidentially declared disaster area beginning January 1, 2020 and ending 60 days after the enactment of the proposed Act, if the incident occurred on or after December 28, 2019 and on or before the date of the proposed Act.
In addition, compensation received by an individual during taxable years beginning after December 31, 2019 and before January 1, 2026 for losses, expenses, or damages (that also are not compensated for by insurance or otherwise) due to a federally declared wildfire disaster (declared after December 31, 2014) are not included into the taxpayer’s gross income. Deductions, credits, nor basis increases are allowed for any expenditures related to compensation excluded by this provision.
Similarly, disaster relief payments to victims (individuals) of the East Palestine train derailment received on or after February 3, 2023 are to be treated as disaster relief payments under §139(b) of the Internal Revenue Code, which excludes from gross income such payments. Compensation related to the East Palestine train derailment for loss, damages, expenses, loss in real property value, closing costs and realtor commissions for real property, or inconvenience provided by federal, state, or local government agencies, the Norfolk Southern Railway, or any subsidiary, insurer, agent, or related person of the Norfolk Southern Railway constitute qualified payments excluded from gross income.
More Affordable Housing
The federal government allocates a pool of Low-Income Housing Tax Credits (LIHTC) to states, which then award their allocated pool to property owners. The tax proposal extends the time frame for the previously boosted “ceiling” amount of available allocations to states. This proposal would reinstate the 1.125 multiplier for years 2023 through 2025 and is effective for calendar years after 2022.
The currently effective guidance includes a “50% test,” where the allocation limitation of LIHTC does not apply to 100% of the building and land’s basis if 50% or more of the property was financed with certain tax-exempt bonds subject to a state agency’s private activity bond cap. While the proposal maintains this 50% test as an option, for buildings placed in service after December 31, 2023, it adds a second “30% test” option as well. This 30% test has two requirements: 1) 30% or more of the aggregate basis of the building and land are financed by “qualified obligations,” and 2) the qualified obligations meet certain requirements. In short, at least one of the qualified obligations must be “recent”—meaning they are part of an issue dated after December 31, 2023—and these “recent” qualified obligations must make up at least 5% of the financing for the property’s aggregate basis. Note that to meet the definition of a qualified obligation for the 30% test, the issue date must be before January 1, 2026.
Further, the proposal indicates that the “separate new building” resulting from rehabilitation is placed in service along with the existing building at the close of the 24-month rehabilitation expenditure period.
Tax Administration & Eliminating Fraud
Increase in Threshold for Certain 1099 Information Reporting Forms – Effective for payments made after December 31, 2023, the annual payment threshold for payments by a business to an independent contractor and for certain other payments will increase from the current $600 level to $1,000. The latter amount would be adjusted for inflation for years after 2024. The threshold increase applies only to payments reportable on 1099-NEC (primarily to independent contractors) and 1099-MISC (rents, prizes and awards, other income, and certain other payments). One notable exception to the increase is the threshold for reporting of direct sales by the seller is decreased from $5,000 to the same $1,000 level for other 1099-MISC payments. Direct sales are sales in a person’s trade or business to a buyer for resale in the home or in a nonpermanent retail establishment of the buyer.
Early Termination of ERTC Claims – Under current law, claims for ERTC for 2020 may be made until April 15, 2024, and 2021 ERTC claims may be made until April 15, 2025. In a move to assist with the funding for other provisions of the American Families and Workers Act of 2024, the ability to file claims for the ERTC would terminate after January 31, 2024, more than 14 months from the current expiration. More punitive is that the new termination date is just over two weeks from the public release of the framework of the tax provisions of the Act, which first disclosed the new termination date of the ERTC program.
Enforcement Provisions With Respect to ERTC – There are currently provisions that allow for the assessment of a $1,000 penalty if a person knows or has reason to know that the aid, assistance, or advice that they provide would result in the understatement of the tax liability of another person. The Act introduces a new defined term, a COVID-ERTC promoter, and increases the penalty on such person to the greater of $200,000 ($10,000 in the case of a natural person) or 75% of the gross income derived or to be derived by the COVID-ERTC promoter from providing aid, assistance, or advice with respect to any ERTC return, claim for refund, or document used therein. This new provision does not change the definition of aiding and abetting in the current law, but simply adds a harsher penalty structure for the COVID-ERTC promoter. This provision would be effective retroactively to March 12, 2020.
A second new penalty provision requires a COVID-ERTC promoter to comply with certain due diligence requirements applicable to all paid tax return preparers. The penalty for failure to comply is a modest $1,000 for each failure; however, the significance of this provision is that failure to comply with the due diligence provision also means the promoter will be treated as knowing their advice would result in the understatement of tax by another, subjecting the promoter to the more significant penalty described in the preceding paragraph. This provision would be effective for aid, assistance, and advice provided after the effective date of this Act.
A third provision related to the ERTC enforcement automatically treats a COVID-ERTC promoter as a material advisor with respect to any ERTC transaction that the promoter provided aid, assistance, or advice in connection with. Such transactions would be a listed transaction under existing law and, as such, a reportable transaction by the promoter. This classification requires the promoter to make certain filings with the IRS regarding the transactions and to maintain certain lists containing the names of the persons whom the promoter provided the advice, among other information. While the effective date of this provision is for aid, assistance, or advice provided on or after March 12, 2020, any lists required to be maintained or filed for any period prior to the effective date of the Act shall not be required to be filed or maintained before the date that is 90 days after the enactment date.
The term COVID-ERTC promoter is a new term and is defined in relation to a COVID-ERTC document. Such document is any return, affidavit, claim, or other document related to eligibility for, or the calculation or determination of, the ERTC. A COVID-ERTC promoter is any person who provides aid, assistance, or advice with respect to such document, and:
- The person receives or charges a fee based on the ERTC refund or credit amount, or
- The person providing such assistance has gross receipts from ERTC-related services for the taxable year the assistance was provided, or the proceeding taxable year, exceeding 50% of all gross receipts for such taxable year.
There is an alternative to the second item above for a person whose ERTC gross receipts for a year exceed $500,000 and are more than 20% of total gross receipts. In that case, the person would be a COVID-ERTC promoter even if they cleared items one and two above. Finally, aggregation rules do apply for the thresholds above for determination of COVID-ERTC promoter status. These rules are similar to those that were applicable to the ERTC qualification by employers.
Extension of Statute of Limitations on ERTC-Related Items – The general three-year limitation on assessment is extended for the assessment of any amount attributable to an ERTC credit until the date that is six years after the latest of:
- The date of the original return, which includes the calendar quarter with respect to which such credit is determined is filed,
- For employment and withholding tax returns, April 15 of the succeeding calendar year, or
- The date on which the ERTC claim or refund is made.
In an overt act of fairness, the time for claiming a wage deduction for an improperly claimed ERTC is similarly extended.
FORVIS continues to monitor the progress of this bill and will provide updates as new information becomes available. If you have any questions or need assistance, please reach out to one of our professionals.