Business tax relief
A number of business incentives that have been passed in recent years, going back to the Tax Cuts and Jobs Act of 2017, have expired in the last couple of years. This bill would extend some of those provisions, delay the implementation of other provisions, and expand some long-standing deductions.
Research and experimental expenses
Under current law, domestic research and experimental expenditures paid or incurred in tax years beginning after December 31, 2021, are required to be amortized over a five-year period.
In tax years prior to 2021, these expenses could be immediately deducted in the year in which they were paid or incurred. Costs attributable to research or experimentation outside the U.S. must be deducted over a 15-year period.
The proposed law would delay, to tax years beginning after December 31, 2025, the application of this rule with regard to research and experimental costs attributable to domestic activities. There would be no change for activities outside the U.S.
The bill provides transitional rules applicable to interactions with research credits, as well as making accounting changes.
COMMENT. The bill does not provide any direct rules applicable to claiming the deduction in a tax year for which a return has already been filed for tax years beginning in 2022. Presumably, these retroactive deductions will necessitate the filing of an amended return, unless the IRS provides a means for claiming the deduction on a subsequent year’s return.
Learn more about research and experimental expenses on CCH® AnswerConnect.
Business interest limitation
Under current law, in tax years beginning before 2022, the calculation of adjusted taxable income for purposes of the business interest expense limitation under Code Sec. 163(j) was made without regard to any deductions for interest, taxes, depreciation, amortization, or depletion (EBITDA).
For tax years beginning after 2021, depreciation, amortization, and depletion were removed from the carve-out, meaning only deductions for interest and taxes were not taken into account in computing the limitations.
The new law would restore depreciation, amortization, and depletion to the carve-out in the calculation of adjusted taxable income for tax years beginning after December 31, 2023, and before January 1, 2026. Further, taxpayers can elect to restore depreciation, amortization, and depletion to the carve-out for tax years beginning after 2021 and before 2024.
COMMENT. Short of guidance from the IRS allowing to apply this change retroactively on a current-year tax return, an amended return will likely be required for these changes to be applied.
Over the last 20 years, first-year depreciation (or bonus depreciation) has gone through many changes and iterations.
The most recent iteration was from the Tax Cuts and Jobs Act of 2017, which generally allowed qualified property placed in service after September 17, 2017, and before January 1, 2023, to be immediately expensed in the year in which the property was placed in service (“100% bonus depreciation”).
Currently, the law provides for a gradual reduction in the first-year depreciation for property placed in service after 2022 before being eliminated altogether for property placed in service in 2027*. The first-year depreciation for years after 2022 is as follows:
- 2023*: 80%
- 2024*: 60%
- 2025*: 40%
- 2026*: 20%
*These years are all extended by one (1) year for longer production period property and certain aircraft.
The proposed bill would extend 100% bonus depreciation to apply to property placed in service before January 1, 2026, or January 1, 2027, for longer production period property and certain aircraft. The 20% and 0% bonus depreciation rates would continue to apply to property placed in service generally in 2026 and 2027.
Learn more about bonus depreciation on CCH® AnswerConnect.
Increased 179 deduction
Under current law, businesses may elect to expense the cost of certain qualifying property (depreciable tangible personal property, off-the-shelf computer software, and qualified real property that is purchased for use in the active conduct of a trade or business) rather than recover the cost through depreciation. The amount of the deduction is limited to an inflation-adjusted amount. For 2024, the amount of the deduction is capped at $1.22 million, and this limit is reduced dollar-for-dollar by the amount of the expense in excess of $3.05 million.
The proposed law would increase these amounts for property placed in service after 2023. For property placed in service in 2024, the deduction limitation is increased to $1.29 million, and the expense limitation is increased to $3.22 million. These amounts would be adjusted for inflation in tax years beginning after 2024.
Learn more about Section 179 deductions on CCH® AnswerConnect.
Employee Retention Tax Credit
The above changes are largely paid for through changes in the Employee Retention Tax Credit (ERTC). The ERTC was first established at the beginning of the COVID-19 pandemic in March 2020. The credit was meant to provide businesses with a credit against certain payroll taxes if they retained employees during lockdowns that may have limited the business’ income. The credit was extended by the American Rescue Plan Act of 2021, and slightly expanded to apply to Medicare taxes as well. Under current law, taxpayers can continue to make ERTC claims until April 15, 2025, even though the period of retained employment for which the credit can be claimed has long-since passed.
Recently, the IRS has become aware of a number of fraudulent claims being made by taxpayers, in many cases unknowingly, due to the emergence of third-party processors of claim requests (“COVID-ERTC promoters”).
Due to the huge number of potentially fraudulent claims, in late 2023 the IRS announced that it was putting a freeze on accepting any further claims while it investigated its current backlog for possible instances of fraud. Meanwhile, the IRS established an amnesty program for taxpayers who themselves may have discovered a potential instance of an ERC claim to which they are not entitled to withdraw their claim or to pay back an unqualified credit without penalty.
The proposed bill includes a number of measures intended to combat these fraudulent claims, including:
- Dramatic increases in penalties on fraudulent COVID-ERTC promoters
- An extension of the limitations period on assessments of ERTC claims to six years
- Provisions that effectively require COVID-ERTC promoters to report themselves to the IRS in the same manner as promoters of listed transactions.
Most significantly, the bill would terminate the period for making claims for the ERTC on January 31, 2024.
Learn more about the Employee Retention Tax Credit (ERTC) on CCH® AnswerConnect.