Elements of the Tax Relief Act that could help your business

Following passage of the Tax Relief for American Families and Workers Act of 2024 by the U.S. House of Representatives on January 31st, 2024, the bill now moves to the Senate for consideration. The fate of the bill in the Senate is uncertain, but given the strong support within the House and the positive tax benefits for American families (in an election year) it is possible that this bill may ultimately be approved by the Senate and make it to the White House for President Biden's signature into law.

The bill provides for increases in the child tax credit, delays the requirement to deduct research and experimentation expenditures over a five-year period, extends 100% bonus depreciation through 2025, and increases the Code Sec. 179 deduction limitation, among other business-friendly provisions. The bill would also extend tax treaty-like benefits to Taiwan and extend some disaster-related tax relief. 

Provisions in the Tax Relief for American Families and Workers Act of 2024 are paid for by changes to the COVID-era employee retention tax credit, including an acceleration of the termination of the period for making new claims, and increasing penalties on erroneous or fraudulent credit claims.

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. 

Below is a short analysis of the business tax changes contained within the bill that are aimed at stimulating economic growth and job creation. NFFS has joined with many other business and industry groups in advocating for these changes to the US tax code for businesses, and we are pleased to see these efforts appear to have helped move the needle in Congress to get these tax law changes included within the bill in the House.

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.

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 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, 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.

Bonus depreciation

Over the last 20 years, first-year depreciation (or bonus depreciation) has gone through many changes. 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.