Bipartisan Tax Package Announced; Approved by House Ways & Means Committee
After months of anticipation, Senate Finance Committee Chairman Ron Wyden (D-OR) and House Ways & Means Committee Chairman Jason Smith (R-MO-08) have announced The Tax Relief for American Families and Workers Act of 2024, a bipartisan tax agreement totaling roughly $80 billion. The bill was approved by the House Ways & Means Committee on Friday, January 19.
You can view a section-by-section summary of the bill and the Amendment in the Nature of a Substitute here. A markup hearing for the legislation took place on Friday, January 19 at 9am ET within the House Ways & Means Committee.
The impetus for this agreement is expiring provisions from the Tax Cuts & Jobs Act of 2017 (TCJA) and both sides can claim legislative victories in this agreement. The urgency behind addressing the business tax concerns of many has plagued legislators for years, particularly frustrations within the business community over the extended deduction timeline for research and development expenses. Throughout negotiations over the years, Democratic lawmakers have stressed that an agreement over child tax credit expansion was necessary for any agreement.
In summary, the $78 billion package would temporarily expand the child tax credit, as well as boost the low-income housing tax credit. Further, it would restore several key business tax deductions pertaining to research and development activities, bonus depreciation, and bonus interest expenses.
Key Business Provisions
Deduction for Research and Experimental Expenditures. Current law from the TCJA provides that research or experimental costs paid or incurred in tax years beginning after December 31, 2021, are required to be deducted over a five-year period. This provision from 2017 – a way to help lawmakers spread the costs of the law over time – was incredibly unpopular by many in the business community unable to prioritize research and experimental activities due to financial constraints.
This new proposal allows businesses to immediately deduct the cost of their domestic research or experimental costs in the year they are occurred during tax years 2022 through 2025. It also allows deductions for software development expenses, but prohibits deductions for land or property acquisitions. Notably, the new proposal does not modify the existing requirement for research activity expenses conducted outside of the United States to be deducted over 15 years.
Bonus Depreciation. Prior to the 2017 tax overhaul, businesses had been permitted to immediately deduct some of the costs of qualifying depreciable property, such as equipment and vehicles. The 2017 TCJA modified this 100% bonus depreciation rate to decrease by 20% annually, beginning in 2023, until completely phasing out after 2026.
This proposal restores full and immediate bonus depreciation for qualifying property placed in service in 2023 through 2025. For property with a longer production period placed in service in 2023, the benefit is extended through 2026.
Business Interest Expenses. The TCJA limited the amount businesses could deduct to 30% of “adjusted taxable income” (ATI), though it did include an exception for small businesses. Previously, businesses had been permitted to deduct the cost of interest paid or accrued on a valid debt in a tax year. This new proposal allows depreciation and amortization to be factored in determining ATI in tax years 2024 and 2025.
Depreciable Business Asset Expenses. Current law allows a taxpayer to expense up to $1 million of the cost of qualifying property placed in service for the taxable year. That amount is reduced by the amount by which the cost of such property placed in service during the tax year exceeds $2.5 million. In general, qualifying property is 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.
The new proposal increases the maximum amount for expensing to $1.29 million, reduced by the amount by which the cost of qualifying property exceeds $3.22 million. This change applies to taxable years after 2024 and applies to property placed in service in taxable years after December 31, 2023.
Increase in Limitations on Expensing of Depreciable Business Assets. The provision increases the maximum amount a taxpayer may expense to $1.29 million, reduced by the amount by which the cost of qualifying property exceeds $3.22 million. The $1.29 million and $3.22 million amounts are adjusted for inflation for taxable years beginning after 2024. The proposal applies to property placed in service in taxable years beginning after December 31, 2023.
Key Housing & Families Provisions
Child Tax Credit. Currently the maximum refundable child tax credit is limited to $1,600 per child for 2023. The new proposal increases the amount to $1,800 per child in tax year 2023, $1,900 in tax year 2024, and $2,000 in tax year 2025. Further, this rate would adjust the $2,000 value of the child tax credit for inflation in tax years 2024 and 2025, rounding down to the nearest $100.
Low-Income Housing Tax Credit. From 2018 to 2021, the Low-Income Housing Tax Credit (LIHTC) was increased by 12.5% - from 9% - allowing states to allocate more tax credits for affordable housing projects. This proposal restores the 12.5% increase for calendar years 2023 through 2025 as is effective for taxable years beginning after December 31, 2022.
Key International Provisions
U.S. – Taiwan Double Tax Relief. The proposal includes the “United States-Taiwan Expedited Double-Tax Relief Act,” which creates Section 893A of the International Revenue Code and provides individuals targeted and expedited relief from double taxation on U.S.-Taiwan cross border investment.
Tax Agreement with Taiwan. Given Taiwan’s unique status, the United States is currently unable to enter into a bilateral tax treaty with the nation. This proposal includes the “United States-Taiwan Tax Agreement Authorization Act” which authorizes the President to negotiate and enter into a special agreement, provided certain metrics are met.
What Was Missed
Transmission Investment Tax Credit. Many in the energy sector feel left out from the current agreement. Upon announcement of the agreement, transmission advocates wrote to congressional negotiators seeking inclusion of a transmission investment tax credit, which they say will provide certainty to developers, create jobs, and result in energy cost savings to ratepayers.
MLP Expansion. Another priority for the energy sector that was left out was the expansion of the tax treatment of Master Limited Partnerships (MLP). MLPs have historically only been accessible to the real estate and the capitol-intensive domestic energy sectors. With continued market consolidation amongst MLPs, there has been strong support of expanding the tax treatment to other sectors, such as renewables. Energy sector leaders still seek inclusion of the bipartisan Financing Out Energy Future Act in any tax bill, as this legislation addresses the key concerns of MLPs.
SALT. The package does not currently include changes to the $10,000 cap on state and local tax (SALT) deductions. The Bipartisan SALT Caucus supports repealing the cap and some GOP members are pushing to get a SALT measure included. Congressman Smith has conceded publicly that adding SALT to the package would “sink the bill.” Rep. Bill Pascrell (D-NJ-09) offered an amendment during Friday’s markup to expand the state and local tax deduction that was defeated by the Ways & Means Committee.
Current Obstacles
Legislative Vehicle & Calendar Time. These hurdles represent two of the most valuable commodities on Capitol Hill: a must-pass bill to attach this tax agreement to and time on the legislative calendar to consider this major tax package. With yet another extension on appropriations through early March and an unknown on when the Farm Bill will be taken up, lawmakers are running up against a shortened window for legislative business during a presidential election year. A floor vote in the Senate also opens the legislation up to amendments, which is a very time consuming process. Both Smith and Wyden have stressed their ambitious interest in sending the proposal through both chambers of Congress and to the President before the tax filing season begins on January 29.
Lawmaker Support. Senate Majority Leader Chuck Schumer (D-NY) announced his support soon after the deal was announced by the bipartisan, bicameral pair of lawmakers. Speaker Mike Johnson (R-LA-04) has remained silent on the matter; his Democratic counterpart, Congressman Hakeem Jeffries (D-NY-08), has also expressed his interest in reviewing the legislation more closely before weighing in. Mike Crapo (R-ID), the current Ranking Member of the Senate Finance Committee, as well as Congressman Richard Neal (D-MA-01) have both said the measure could be improved, but neither provided specifics.
What’s Next
The House Ways & Means Committee held its markup hearing for the legislation on Friday, January 19 and lawmakers passed the bill in a bipartisan vote. This was the first opportunity for rank and file lawmakers to formally consider the bill and present any adjustments for the committee’s consideration.
The agreement is anticipated to undergo a "suspension" vote in the House, necessitating a two-thirds majority to suspend the rules and accelerate the chamber's review of the proposal. This tactic bypasses the ultra-conservative Rules Committee – a route typically required for bringing legislation to the floor of the House.
The Senate Finance Committee will consider the legislation if and when it passes the House, and it may consider many changes not incorporated by the House.
