In a significant bipartisan move, lawmakers have unveiled a comprehensive $78 billion tax package that promises to reshape various aspects of the US tax landscape. This multifaceted deal brings forth a range of adjustments, specifically impacting the Employee Retention Credit (ERC) program and the expensing of R&D costs under IRC Section 174. This bill, if passed and signed into law, would set a deadline for filing additional ERC claims that would be just days after the new law becomes effective. Taxpayers would only have until January 31, 2024 to file.
A recap of major provisions of this new proposed legislation, which is making its way through both chambers of Congress simultaneously, is included below.
End of the Employee Retention Credit Program
In a notable shift, the tax package proposes the termination of the Employee Retention Credit Program. The decision to end the program signals a shift in priorities and raises questions about alternative approaches to supporting businesses and preserving jobs in the future. Under current law, businesses had until April 15, 2024, for 2020 and April 15, 2025, for 2021 to file ERC claims. This bill would not allow additional claims after January 31 of this year. It also would increase penalties for tax preparers failing to undertake due diligence in submitting those COVID-related claims.
Revamping Research and Development (R&D) Expensing
The tax package introduces changes to the research and development tax credit for businesses. Notably, it would allow for immediate expensing, a move that can have significant implications for companies investing in innovation.
Research and Experimental Expenditures:
- Current law requires the deduction of research or experimental costs over five years (15 years for costs related to research conducted outside the US).
- The new provision delays the five-year amortization period approach until taxable years beginning after December 31, 2025.
Business Interest Limitation and Allowance for Depreciation:
- Earnings before interest, taxes, depreciation, and amortization (EBITDA) can currently be considered for calculating adjusted taxable income (ATI) for the limitation on business interest.
- The provision extends the application of EBITDA to taxable years beginning after December 31, 2023 (or, if elected, for taxable years beginning after December 31, 2021) until January 1, 2026.
Bonus Depreciation:
- 100-percent bonus depreciation would be extended for qualified property placed in service after December 31, 2022, and before January 1, 2026.
- 20-percent bonus depreciation would be retained for property placed in service after December 31, 2025, and before January 1, 2027.
Limitations on Expensing of Depreciable Business Assets:
- The maximum amount a taxpayer may expense under IRC section 179 would be increased to $1.29 million, with a reduction if the cost of qualifying property purchased exceeds $3.22 million.
- The adjusted amounts are applicable for taxable years beginning after 2024, and the proposal applies to property placed in service after December 31, 2023.
Other Tax Changes
This bill would also boost the Low-Income Housing Tax Credit and expand the Child Tax Credit. Increasing the Low-Income Housing Tax Credit would aim to encourage the provision of rental housing for lower-income individuals and families. Another pivotal component of the tax package is the expansion of the Child Tax Credit. The proposal suggests incremental increases in the refundable portion of the credit, specifically targeting lower-income families who may not owe income taxes.
What Should I Do Now?
Most urgently, taxpayers still in the process of filing ERC claims need to ensure that they are filed on or before January 31, 2024.
Businesses and individuals should stay informed about these amendments to ensure accurate filings and avoid potential penalties. As the tax landscape continues to evolve, working with a tax advisor to stay updated on such regulatory adjustments is important, which becomes crucial for financial planning and adherence to legal obligations. Please contact Calvetti Ferguson for assistance and guidance.
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