On January 31, 2024, the House passed a bipartisan tax act—the Tax Relief for American Families and Workers Act of 2024 (the Act). The Act extends important business tax deductions and expands the child tax credit to increase the refundable portion available.
Business Interest Deduction limitation
The Tax Cuts and Jobs Act (TCJA) implemented a limitation on the deduction for business interest expense, limiting the deduction to 30% of adjusted taxable income (ATI). ATI was initially calculated based on earnings before interest, taxes, depreciation, and amortization (EBITDA), but for tax years 2022 and beyond, the calculation was restricted to one based on earnings before interest and taxes (EBIT). The proposal would reinstate the EBITDA calculation for the 2024 and 2025 tax years and provide the option of choosing between using EBIT or EBITDA for 2022 and 2023.
The TCJA provided immediate expensing of assets, referred to as bonus depreciation, which was in place through 2022. For years beginning in 2023, bonus depreciation was reduced by 20% per year until a complete phaseout occurred in 2027. The Act proposes to extend 100% bonus depreciation through 2025.
Research and Experimental Costs
Before the TCJA required five-year amortization of domestic research and experimental costs and 15-year amortization for foreign costs beginning in 2022, these costs were allowed to be expensed immediately. The Act proposes to retroactively delay the capitalization requirements for domestic research and experimental costs only through the 2025 tax year. No change is proposed for foreign research and experimental costs incurred.
Employee Retention Tax Credit
In addition to the proposed tax cuts, the Act also prohibits the filing of new Employee Retention Tax Credit claims after January 31, 2024. Currently, the filing deadline is April 15, 2024, for 2020 credits and April 15, 2025, for 2021 credits.
The Act now faces an uncertain future in the Senate where strong headwinds are working against it. First, while the Act passed with strong bipartisan support in the House, Senate Republicans have expressed frustrations with concessions made during the negotiation of the Act and are looking for opportunities to amend the Act. Second, the Senate has a laundry list of other priorities that it must first address, including a supplemental aid package for Ukraine and Israel and impending government funding deadlines. These and other factors indicate the Senate will likely not consider this bill until March at the earliest. That said, as developments occur, we will keep you updated on the outcome.
Please contact our Ryan tax professionals for further information on the impact of this proposal.
TECHNICAL INFORMATION CONTACTS:
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at email@example.com.