Bipartisan tax deal framework released

This morning, Senate Finance Committee Chair Ron Wyden (D - OR) and House Ways and Means Committee Chair Jason Smith (R - MO) announced the framework of a bipartisan, bicameral tax package. The plan, titled The Tax Relief for American Families and Workers Act of 2024 (the Act), provides low-income families additional access to the Child Tax Credit, addresses three critical business tax breaks curtailed by the Tax Cuts and Jobs Act (TCJA) of 2017, and several other tax provisions.

Prospects for passage

While the compromise contains several provisions with significant bipartisan support, the prospects for the deal’s passage are unknown. Senate Finance Committee Chair Wyden is advocating for swift action, as he’d like the bill to be signed into law before the start of the 2023 tax filing season, which is set to begin on Jan. 29, 2024.

The bill does not yet have the momentum it needs to be signed into law. Notably, the ranking members of the bicameral committees, Senate Finance Committee ranking member Mike Crapo (R - ID) and Ways and Means Committee ranking member Richard Neal (D - MA), have not signed on to the compromise. Additionally, the bipartisan state and local tax (SALT) caucus is likely to take issue with the current proposal, as it does not provide any relief for the $10,000 SALT cap. Even if negotiators can secure widespread support, the bill will either need to pass as a standalone measure, which would likely require two-thirds approval in the House, or it would need to attach to another legislative vehicle.

Congress’ immediate priority is passing a short-term continuing resolution (CR) to avoid a government shutdown. The current CR funds four of the 12 appropriations bills through Jan. 19 and the other eight through Feb 2. Leaders have agreed on a plan that would extend funding at current levels through March 1 and March 8, respectively.

2026 sunsets

Most of the proposed adjustments are effective through the 2025 tax year. Enactment of the current proposal will dial up the pressure on lawmakers next year, as there are numerous additional TCJA individual tax provisions in effect that are currently set to expire after the 2025 tax year. 

What is included in the deal

Child tax credit

Currently, taxpayers can claim a refundable Child Tax Credit (CTC), the maximum computed as the lesser of the taxpayer’s earned income that exceeds $2,500 by 15 percent, or $1,600. The agreement would increase the maximum refundable amount per child to $1,800 for 2023, $1,900 for 2024, and $2,000 for 2025. For the 2024 and 2025 tax years, taxpayers could also choose to compute their maximum credit by using the previous taxable year’s earned income. Additionally, the credit, which has been $2,000 since the TCJA’s enactment, would be indexed for inflation for the 2024 and 2025 tax years.

• Impact on taxpayers – Eligible taxpayers will now be entitled to a larger CTC for the 2023 through 2025 tax years. The Senate Finance Committee estimates this provision will provide the families of 15 million low-income children with a larger child tax credit, 400,000 of which would be lifted out of poverty by the proposed changes.

Business interest deduction limitation

The TCJA implemented a limitation on the deduction for business interest expense, restricting a taxpayer’s ability claim a deduction to 30% of adjusted taxable income (ATI). ATI was initially calculated based on earnings before interest, taxes, depreciation and amortization (EBITDA) but changed to a more restrictive calculation based on earnings before interest and taxes (EBIT) for tax years 2022 and beyond. The proposal would reinstate the EBITDA calculation for the 2024 and 2025 tax years and provide taxpayers the option of choosing between using EBIT or EBITDA for 2022 and 2023.

• Impact on taxpayers – The rapid rise of interest rates over the last two years, coupled with the more restrictive limitation calculation, has resulted in a substantial increase in the number of taxpayers whose interest expense was limited. This change, if enacted, should provide some relief, particularly to industries that are heavily leveraged.

Research and experimental expenditures

The TCJA requires taxpayers to amortize domestic research and experimental costs over a five-year period and foreign costs over a 15-year period beginning in 2022. Previously, these costs were expensed in the year incurred. The framework would retroactively delay the capitalization requirements for domestic research and experimental costs through the 2025 tax year. The requirement that costs incurred in connection with foreign-performed research be amortized over 15 years would remain unchanged.

• Impact on taxpayers – These changes would encourage continued domestic investment in innovation and provide welcome relief to affected taxpayers, particularly in the industrial, technology, and healthcare industries. Guidance from the IRS would be needed to instruct taxpayers how to handle such costs that were capitalized on a previously filed tax return.  

Bonus depreciation        

The TCJA gave taxpayers the ability to immediately expense the full cost of qualified property placed in service, rather than depreciating it over its useful life. The benefit, referred to as bonus depreciation, was in place through 2022. Beginning in 2023, bonus depreciation was reduced by 20% per year until it completely phased out in 2027. The Act, if enacted, would extend 100% bonus depreciation through 2025.

Bonus depreciation by year

•  Impact on taxpayers – The extension of bonus depreciation would provide taxpayers with additional opportunities to expense purchases of qualified property. This acceleration of deductions tends to encourage new investments, spurring economic growth.

Small business asset expensing

Currently, eligible small businesses can elect to expense, rather than depreciate, the cost of qualifying property they place in service up to $1 million (indexed for inflation). The maximum $1 million figure is reduced dollar-for-dollar by the amount which the cost of qualifying property placed in service by the taxpayer during the taxable year exceeds $2.5 million (indexed for inflation). For taxable years beginning after 2023, the framework increases the $1 million figure to $1.29 million, and the $2.5 million amount to $3.22 million, with both figures adjusted for inflation for tax years beginning after 2024.

• Impact on taxpayers – The changes to the Section 179 deduction would allow taxpayers to claim a greater up-front deduction for the cost of qualifying property placed in service during the tax year. As bonus depreciation eventually phases out, this provision will become increasingly valuable to qualifying taxpayers.

Employee Retention Credit (ERC)

The CARES Act created the Employee Retention Credit (ERC), a payroll tax credit designed to incentivize employers who were subject to COVID-19-related government orders suspending their business or experienced a significant decline in revenue. Taxpayers currently have until April 15, 2024 and April 15, 2025 to claim a credit for the 2020 and 2021 tax years respectively, via an adjusted payroll tax return.

The framework would end the program as of Jan. 31, 2024. The compromise would also increase the penalty for ERC promoters deemed to have aided and abetted the understatement of a tax liability from $1,000 to the greater of $200,000 or 75% of the promoter’s gross income derived from the ERC claim. The proposal would also require promoters to make disclosures, and provide client lists, to the IRS regarding their activities, with a $1,000 failure-to-file penalty. Lastly, the proposal would extend the statute of limitations for assessment of ERC claims to six years from five.

• Impact on taxpayers – Taxpayers would now have a mere two weeks to file any ERC claims (the current moratorium on the processing of new claims would not prevent a taxpayer from filing) for which they are eligible. The extension of the statute of limitations for assessment theoretically increases the chances that a taxpayer’s claim will be audited. As has been well-publicized, the ERC has been a matter of intense IRS scrutiny. For our latest insights, please see our most recent tax article.

Other provisions

• Low Income Housing Tax Credit – Among other changes to the credit, the proposal increases the 9% ceiling amount for the acquisition, rehabilitation or new construction low-income housing projects to 12.5% for the 2023 through 2025 tax years. The Senate Finance Committee stated this change would “secure the construction of more than 200,000 new units of affordable housing.”
• Transaction reporting – The framework increases the threshold for filing Forms 1099-NEC and 1099-MISC to $1,000 per payment and would index the threshold to inflation. Currently, the limit is $600 and is not indexed; however, application of the current threshold has been temporarily delayed. For more on the delay, see our tax insight.
• Casualty and theft losses – Relief would be provided to victims of certain federally declared disasters by, among other things, extending the period during which taxpayer-friendly rules for deducting certain personal casualty losses apply, and excluding qualified wildfire relief payments from gross income.
• Taiwan – The proposal incorporates provisions that, among other things, would broadly relieve Taiwanese companies operating in the United States from double taxation.

What’s next?

As noted above, prospects for passage remain highly uncertain. However, we continue to monitor developments regarding this monumental proposal, and we will keep you apprised of changes in status as warranted. Please reach out to your tax advisor about how any of the above may impact your tax situation.

Questions? Reach out to your Baker Tilly advisor if you have questions on how this may impact you.

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