The 2023 tax year may be over, but there may still be additional tax savings to be found under newly proposed legislation announced by Congress this week. The Tax Relief for American Families and Workers Act of 2024 contains provisions that would improve the child tax credit, R&D expensing, bonus depreciation and more – many retroactive to the 2022 or 2023 tax year.
If passed by January 29, when the IRS will begin accepting federal income tax returns, this bipartisan agreement would extend, enhance or otherwise change significant tax relief provisions, including:
- Section 174 Expenses: Research and Development expenses could be claimed immediately for domestic cost paid or incurred in tax years beginning after December 31, 2021 and before January 1, 2026. This delays the date when taxpayers must begin deducting these costs over a five-year period. This is welcome news for companies with substantial R&D activity that were negatively affected by the revised Section 174 capitalization rule that took effect in 2022.
- Section 168(k) “bonus” depreciation: 100 Percent Bonus Depreciation would be extended for qualified property placed in service after December 31, 2022 and before January 1, 2026, instead of phasing down as scheduled under the Tax Cuts and Jobs Act.
- Section 163(j) interest deductions: Depreciation and Amortization could continue to be applied to the computation of adjusted taxable income (ATI) for tax years beginning after December 31, 2023 and before January 1, 2026. This provides greater flexibility in calculation methods and tax savings opportunities for additional years.
- Child Tax Credit would be expanded by multiplying it by the number of qualifying children. The limit for the credit would also be increased from $1,600 per child to $1,800 per child for 2023 and increased an additional $100 in 2024 and 2025.
- Section 179 Expensing would be capped at $1.29 million (currently $1 million) when choosing to expense the cost of qualifying property instead of recovering the costs through tax depreciation deductions. The amount would be reduced by the cost of the qualifying property that exceeds $3.22 million (currently $2.5 million). Higher depreciation results in lower tax obligations, bringing more savings to companies that have purchased qualifying property (defined as 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).
- Form 1099 would only be required for payments made to independent contractors totaling $1,000 or more, for payments made after December 31, 2023. The current threshold for Form 1099 is $600.
- Employee Retention Credit statute of limitations for assessments would be extended from five years from the date of the claim to six years. However, taxpayers would only be able to claim ERCs until January 31, 2024 (formerly April 15, 2025). In addition, the penalties for ERC promoters who do not comply with due diligence requirements will be increased.
- Disaster Relief rules that eliminated the requirement that casualty losses must exceed 10% of adjusted gross income would be extended for disasters beginning on or after December 28, 2019 and before the enactment of the proposed legislation. In addition, disaster relief payments made to victims of wildfires and victims of the train derailment in East Palestine, OH would be excluded from gross income for tax purposes.
- Low-Income Housing Tax Credit (LIHTC) ceiling would be increased to 12.5 percent (from 9 percent) for calendar years 2023 through 2025. To receive bond financing, only 30 percent or more of the aggregate basis of the building and land would need to be financed with bonds that are subject to a state’s private activity bond volume cap. (Current threshold is 50 percent or more.)
- Taiwan residents would benefit from a reduced withholding tax rate of 10 percent (currently 30% for nonresident aliens and foreign corporations) on interest and royalties from U.S. sources. Dividends would also be subject to a lower 10% rate (currently 15%) if paid to a recipient that owns at least 10 percent of the shares of stock in the corporation. It is important to note that these provisions require full reciprocal benefits and would not be effective until Taiwan provides the same set of benefits to U.S. persons.
While the proposed legislation does have bipartisan support, it is unclear if the support is sufficient enough to pass the bill into law. Grassi’s Tax advisors are monitoring the situation closely and will keep you updated on any new developments that affect your tax obligations.
