What to Expect from the Tax Relief for American Families and Workers Act
House Ways and Means Committee Chairman Jason Smith and Senate Finance Committee Chairman Ron Wyden announced agreement on a bipartisan tax framework to help families and main street businesses that is anticipated to be introduced as The Tax Relief for American Families and Workers Act of 2024. MGO will continue to monitor the development of the anticipated bill and proposals and provide related updates and information to our clients and network.
Here is a sneak peek into some of the expected goals of the tax framework:
IRC §174 Treatment
- Boost innovation and competitiveness by allowing U.S. R&D expenses to be deducted in the year incurred — in comparison to the current 174 mandatory capitalization over five years, that has been in effect since the 2022 tax year. This change is anticipated to be retroactive to the beginning of 2022 and go through 2025. This should create an opportunity to decrease taxable income on an amended 2022 income tax return.
- 174 capitalization would still be required for foreign expenditures over 15 years.
Business Tax Relief
- Retroactive deferral until 2026 of the reduction in the 100% bonus depreciation deduction.
- Removal of depreciation, amortization, and depletion deductions from the calculation of adjusted taxable income for the IRC 163(j) business interest expense limitation. This change is also anticipated to be retroactive to the beginning of 2022 and be effective through 2025. This may create an opportunity to decrease taxable income and/or increase tax attributes for the 2022 tax year through an amended 2022 income tax return.
IRC §179 Current Expense Deduction
- Increase in the maximum amount to $1.29 million and the investment limitation cap to $3.22 million for property placed in service in 2024, with inflation adjustments for post-2023 tax years.
Reporting Threshold Adjustments
- Increase in the reporting threshold for filing Form 1099-NEC and 1099-MISC from $600 to $1,000, applicable to payments made after 2023, with inflation adjustments from 2024.
U.S.–Taiwan Cross-Border Activities and Investments
- The bill creates a new section 894A of the Internal Revenue Code (“IRC”), providing substantial benefits to Taiwan residents (“qualified residents of Taiwan”), similar to those that are provided in the 2016 United States Model Income Tax Convention (“U.S. Model Tax Treaty”). Since the legislation requires full reciprocal benefits, it does not come into full effect until Taiwan provides the same set of benefits to U.S. persons with income subject to tax in Taiwan, similar to the reciprocal operation of a tax treaty.
Child Tax Credit Enhancement
- Increase in the maximum refundable Child Tax Credit from $1,600 to $1,800 in 2023, $1,900 in 2024, and $2,000 in 2025.
- Revision of the refundable portion, calculated on a per-child basis.
Disaster Relief Provisions
- Retroactive exclusion of qualified wildfire relief payments from gross income.
- Introduction of disaster-related personal casualty loss provisions and treatment of disaster relief payments for victims of the East Palestine, Ohio, train derailment.
Low-Income Housing Credit Enhancement
- Enhancing the Low-Income Housing Tax Credit, by restoring the 12.5% LIHTC ceiling for taxable years beginning after December 31, 2022.
What should your business do in the meantime?
R&D/174 Proposed Changes – There likely is no immediate timeline sensitivity for the 174 capitalization requirement currently, unless you are a fiscal year filer or have an upcoming tax provision. In the event you have a return being filed in Q1, we recommend connecting with your tax credits service provider to discuss timeline for a formal analysis and processes. Please note that the anticipated changes are only to U.S. expenditures and therefore any foreign-based expenditures would still require capitalization over 15 years. A formal 174 analysis is recommended to support the research expenditures and to be able to apply the most favorable treatment of either immediately deducting or deferring, in the event of a bill passing and depending on whether the expense is a domestic or international expense.
It is also recommended to assess how the modification of the research and experimentation expense treatment would affect an amended 2022 return and forecasts for the 2023 tax year, especially for businesses that had material domestic research and experimentation expenditures. If all research and experimentation expenditures in the 2022 tax year were foreign, there will be no related change.
Other Business Tax Reliefs and Proposed Modifications – Please connect with your specialty tax service provider to discuss the timeline for your return filings and address forecasts and changes that may be created from these proposed changes. We have summarized a few recommendations and examples:
- All U.S. citizens and U.S. resident taxpayers with activities within Taiwan should review their activities in light of these provisions to determine if reduced withholding taxes or minimization of creating a taxable presence is possible. All Taiwan residents with activities in the U.S. should review U.S. activities for similar issues.
Private Client Services
- Assess how the proposed enhancements of the Child Tax Credit and Assistance for Disaster-Impacted Communities affect your personal deductions and 2023 tax liability.
State and Local Taxation
- Evaluate variances in state conformity for the various changes. While some states have rolling conformity and will match changes at the federal level, others have fixed conformity and will not necessarily adopt these changes without further legislation.
- Evaluate the need to file an amended return to “unwind” the 2022 Sec. 174 research and development amortization to deduct those costs in full for 2022. This could provide significant refund opportunities.
- Assess how the removal of depreciation, amortization, and depletion deductions from the calculation of adjusted taxable income for the IRC 163(j) business interest expense limitation affects taxable income and liability.
It is essential to note that despite this bipartisan breakthrough, the absence of an actual bill and the uncertainties surrounding the enactment of these provisions in a divided Congress should remain critical considerations.
As experienced advisors, MGO can help model the best position for you through the 2023 tax year and beyond — potentially saving you significant amounts of money. Our holistic tax advisor and business advisor-first philosophy factors into not only the direct effects of the current legislation (i.e., the proposed tax framework summarized in this article), but also the impact on other areas of your tax returns (e.g., international, transfer pricing, state and local tax) and what potential savings you can obtain by claiming credits and incentives. Please feel free to reach out to any of our MGO professionals below to get the experienced insight that you deserve.
Contact our leaders in the following areas for their specialty or to further address proposals in the tax framework discussed.