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Tax Alert: New Guidance for Section 174

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2/7/2024
H.R. 7024’s Impact on Businesses

The $78 billion tax bill’s impact on businesses relying on R&D and R&E credits is multifaceted, intertwined with the complex interplay between Section 41 and Section 174. While the bill primarily addresses Section 174 (R&E) by deferring the changes brought about from the TCJA to tax years beginning after December 31, 2025, the interconnected nature of these sections means that the temporary fix has implications for both.

For smaller companies burdened by increased tax liability due to the amortization required under Section 174, the bill provides temporary relief for domestic R&E, potentially easing immediate cash flow challenges; however, the sunset provision in 2025 adds a layer of uncertainty to their long-term planning, especially considering the inseparable relationship between Sections 41 and 174.

It’s essential to recognize that the bill did not address the amortization of foreign R&E expenditure, which has to continue to be amortized over 15 years instead of being immediately expensed. This aspect further complicates the landscape for businesses relying on international R&D activities, potentially impacting their competitiveness and investment decisions.

While H.R. 7024 represents a step forward in addressing some challenges faced by businesses, it falls short of providing comprehensive solutions. The temporary nature of the fix underscores the need for sustained and predictable policies that support innovation and R&D investment over the long term. The bill has not passed and faces many hurdles; if not passed, the current law, as it stands, will create serious and unrepairable damage to American businesses, especially for start-ups and middle markets. In navigating these complexities, businesses must continue advocating for stable R&D policies that promote innovation and competitiveness. Collaborative efforts among policymakers, businesses and other stakeholders are crucial in developing effective solutions that address the broader challenges facing the innovation ecosystem.

This page will continue to be updated as more information becomes available. You can read the bill in its entirety here.

Questions? Please reach out to our Credits & Incentives experts!

Tommy Zavieh, National C&I Practice Leader | tommy.zavieh@frazierdeeter.com
Sheila R. Anderson, C&I Partner | sheila.anderson@frazierdeeter.com
Allen Tobin, C&I Principal | allen.tobin@frazierdeeter.com

2/6/2024

Key Business Tax Breaks Moving Quickly Through Congress

Despite the usual partisan deadlock, a major bipartisan tax bill is moving rapidly through Congress. H.R. 7024, the Tax Relief for American Families and Workers Act of 2024, postpones amortization of research and experimental (R&E) expenses, extends 100% bonus depreciation and increases the Sec. 179 expensing limitations. Other relief provisions apply to the business interest limitation, the reporting threshold for third-party information reporting and the low-income housing credit. On the individual side, the bill expands the Child Tax Credit.

The bill, reported out of the House Ways and Means Committee on an impressive 40-3 vote on January 23, was passed by the whole House by the wide margin of 357-70 on January 31. The House version represents an agreement negotiated between House Ways and Means Committee Chair Jason Smith, R-MO and Senate Finance Committee Chair Ron Wyden, D-OR.

Outlook: The decisive House votes will put pressure on Senate Republicans to pass the bill largely intact; however, some key Senators, such as Chuck Grassley, R-IA, have expressed concern about giving Biden a bipartisan victory in an election year. Senate Democrats appear to be on board. Some deliberations in the Senate are anticipated, but there is momentum behind the effort to approve crucial business tax relief measures. Regardless of the outcome, this will offer a glimpse into the potentially more significant disputes over the expiration of the Tax Cuts and Jobs Act (TCJA) that may unfold towards the close of 2025.

Summary of H.R. 7024

Business Provisions

Delay in Required Amortization of Domestic R&E Expenses: The bill would delay the imposition of Sec. 174 five-year amortization for R&E expenses that took effect in 2022 (Click here for earlier coverage.). For research in the US, Puerto Rico or US territories, immediate expensing would be allowed through 2025 under a new Code Sec. 174A that also provides taxpayer elections and transition rules. R&E costs for research conducted outside of the US will continue to be subject to capitalization and 15-year amortization.

Business Interest Limitation Reduced: The TCJA limited the deduction of business interest based on adjusted taxable income. Before 2022, taxable income was calculated based on earnings before interest, taxes, depreciation and amortization (EBITDA). For 2022 and beyond, adjusted taxable income was supposed to be calculated after subtracting depreciation, amortization and depletion, reducing the interest deducted. The new bill would allow an election to use the EBITDA calculation for 2022-2023 and reinstate the EBITDA standard for 2024-2025, thereby allowing higher interest deductions for those years.

Extension of 100% Bonus Depreciation: The proposed legislation extends 100% bonus depreciation for three years, 2023 through 2025. Beginning in 2025, bonus depreciation will be 20% and then will expire in 2027, except for long-lived property, which gets a 100% write-off for 2026 and 20% for 2027, before expiration. Bonus depreciation had begun phasing out by 20% a year through 2026 under the provisions of TCJA and currently is set to be 80% for 2023 if the bill does not pass.

Increase in Sec. 179 Expensing Limits: The bill increases the limits for immediate expensing of tangible personal property, qualified real property and off-the-shelf software to $1.29 million with a $3.22 million purchase limitation beginning in 2024. Under current law, the maximum expensing amount for 2023 is $1.16 million which is reduced dollar for dollar if the yearly cost of qualifying property exceeds $2.89 million.

Threshold for Third-Party Payment 1099s: The reporting threshold for yearly payments to independent contractors, subcontractors or other payees who provide business services is increased from $600 to $1,000 after 2023. The backup withholding threshold also is increased. This provision adjusts these thresholds for inflation after 2024. Third-party payments are reported on Forms 1099-MISC and 1099-NEC.

Low-Income Housing Credit:  The bill extends the 12.5% low-income housing credit ceiling for calendar years 2023 through 2025 and lowers the bond-financing threshold.

ERTC Compliance and Earlier Claims Cut-off Date: Under current law, taxpayers can claim COVID-related employee retention tax credits up until April 15, 2025. This proposed bill bars additional claims after January 31, 2024 (This provision raises revenue to pay for tax relief provisions.). The bill also increases the penalty for ERTC promoters who do not follow due diligence standards and do not file required disclosures. The bill also extends the statute of limitation for assessments for erroneously claimed credits.

Individual Provisions

Child Tax Credit Expansion: The bill increases the maximum refundable child tax credit per child to $1,800 in tax year 2023, $1,900 in tax year 2024 and $2,000 in tax year 2025 and provides inflation adjustments in 2024 and 2025 rounded to the nearest $100. It also changes the way taxpayers calculate the credit by allowing them to multiply their earned income percentage by the number of qualifying children. The bill allows taxpayers to calculate earned income for the additional credit based on the previous year’s income if the current year’s earned income is less. Credits claimed on early-filed 2023 returns may be adjusted by Treasury to reflect these changes.

Casualty Loss Deductions: The bill extends the more favorable personal casualty loss deduction for federally-declared disasters to cover major disasters occurring in 2021-2023. For these disasters, the bill eliminates the requirement that casualty losses must exceed 10 percent of AGI and $500 per casualty and allows taxpayers to claim the casualty loss deduction without itemizing their deductions. Also, the bill excludes from income compensation for losses and damages received on account of the East Palestine train derailment in Ohio in 2023 and wildfire disasters in 2020 through 2025.

International

US-Taiwan Double Tax Relief: The bill creates a new IRC Sec. 894A which provides tax benefits to Taiwan residents similar to those that are provided in the 2016 United States Model Income Tax Convention regarding:

  • Reduction of withholding taxes
  • Application of permanent establishment rules
  • Treatment of income from employment
  • Determination of qualified residents of Taiwan, including rules for dual residents
2/1/2024

House Passes H.R. 7024, Addressing Challenges from the TCJA’s Changes to Section 174

The House’s successful passage of H.R. 7024 marks a pivotal moment in addressing the challenges posed by the changes to Section 174 under the TCJA in 2017.

Notably, the bill reinstates the current year expensing of domestic R&E costs, providing a significant tax break for companies engaged in R&D. The previous alteration, which compelled companies to capitalize all R&E costs, particularly affected start-ups and smaller companies, requiring them to allocate precious cashflow to meet heightened tax liabilities. The restoration of R&E tax credits and immediate expensing aligns with the consistent aim of promoting economic growth, bolstering global competitiveness and fostering the creation of new products, processes and technologies.

The bill now advances to the Senate, where it will encounter additional challenges. The President is urging both the House and Senate to swiftly pass this crucial legislation, expressing readiness to promptly sign it into law.

Contributors

Tommy Zavieh, National C&I Practice Leader

Sheila R. Anderson, C&I Partner

Allen Tobin, C&I Principal

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