Tentative Deal on the Table to Rescue Lost Business Deductions

• January 17, 2024
• Mary Jo Pitzen

An initial framework for proposed tax legislation appears to have bipartisan support. The House Ways and Means Committee Chairman, Jason Smith, and Senate Finance Committee Chairman, Ron Wyden, have laid out a framework for more than just the typical tax extenders. The proposed legislation includes some significant changes, including modifications to the employee retention tax credit (ERTC).

What’s Changing:

• Retroactive Section 174 expensing for domestic research and experimental (R&E) expenses.
  • Current law requires research or experimental costs to be added back and deducted over a 5 year term (costs attributable to R&E activity outside the United States are deducted over a 15 year period).
  • The proposed changes would retroactively reinstate the ability to deduct domestic research and experimental costs in the year incurred. The changes would be retroactive to tax years beginning after December 31, 2021 and would be extended through December 31, 2025. Assuming this passes, it is currently unclear how taxpayers would adjust returns already filed.
• Extension of 100% bonus depreciation.
  • The deduction for bonus depreciation on qualified property is phasing out by 20 percent each year through December 31, 2026. For tax year 2023 the bonus depreciation deduction is limited to 80 percent on eligible property.
  • Proposed changes would extend 100 percent bonus depreciation on qualified property through December 31, 2025. This would retroactively apply to tax year 2023, allowing for a 100 percent deduction on eligible property.
• Retroactive interest expense limitation adjustments.
  • Today’s law limits the ability of certain businesses to deduct interest expense. The limitation generally applies to businesses with average annual gross receipts in excess of $29 million. Today’s calculation is based on a 30% limit of earnings before interest and taxes (EBIT).
  • The proposal would retroactively adjust the interest expense limitation for taxable years beginning after December 31, 2021 and would be extended through December 31, 2025. The adjustment would revert to prior law and would allow calculation the limitation based on 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA). The change could allow taxpayers to deduct more or their interest expense, particularly important with the rising costs of financing.

• Other changes –
  • Increased Section 179 expensing – Section 179 depreciation limitations would increase to $1.29 million for taxable years beginning after December 31, 2023, the deduction would be reduced for qualifying property purchases in excess of $3.22 million.
  • Child tax credit – refundable portion increased for tax years 2023 – 2025.
  • Taiwan – proposed legislation would extend almost tax treaty treatment benefits to Taiwan.
  • Disaster relief – the proposed legislation would include enhanced ability to retroactively deduct losses related to major disasters.
  • Low-income housing tax credits – Credits would increase from 9 percent to 12.5 percent through 2025, and bond financing requirements would decrease from 50 percent to 30 percent.

Financing – ERTC cutbacks:

• To cover the tax benefits, the proposal would significantly limit the timeline for being able to file employee retention tax credits and impose some heavy implications on those filing without proper cause or documentation.
• Currently taxpayers have until April 15, 2025 to file ERTC refund claims. The proposed legislation moves this date to January 31, 2024, two weeks away!
  • If you have already filed amended 941(s) to claim ERTC refunds and have not yet received the related refunds, we suggest contacting the IRS prior to January 31, 2024 to ensure they have received your returns.
• The proposed legislation also lays out significant penalties for ‘COVID-ERTC promoters’.
  • Penalties for COVID-ERTC promoters that know or have reason to know of an understatement of tax liability and have provided aid, assistance, or advice with respect to a return or claim for an ERTC refund may be subject to penalties up to the greater of $200,000 or 75 percent of the gross income of the ERTC promoter.
  • Penalties for failure to provide proper due diligence for an ERTC refund claim increase to $1,000 for each failure to comply.
  • Increases the statute of limitations for ERTC assessment to six years.
  • Includes COVID-ERTC promoters filing ERTC claims as a listed transaction, subject to providing disclosures and lists of clients to the IRS.

There is still a long way to go, however, with the framework available there are several takeaways to start looking at now. If you are eligible for ERTC and have not filed yet, the timeline to file could be significantly reduced. If you do not know the status of your ERTC claims, confirm the IRS has actually received them. If this legislation does pass, and pieces stay retroactive to 2023 tax year, it is likely there will be significant filing and processing delays as the IRS and software companies work to update their systems for all of the changes.

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