House Passes Tax Relief for American Families and Workers Act

This afternoon, the House of Representatives voted to pass the Tax Relief for American Families and Workers Act with a vote of 357-70.  As we discussed in a previous post, this bill is very taxpayer friendly with most of the significant provisions being retroactively applied to prior tax years.  The ten-year impact of the bill is approximately $78 billion.  For producers, the biggest benefits include:

• Increase in the maximum refundable portion of the child tax credit from $1,600 to $2,000, phased in through 2025. The refundable portion would be based on the number of eligible children claimed as dependents and not calculations based on income.  The changes are retroactive to 2023, with the maximum refundable portion of the credit being $1,800.
• For 2023, the much beloved 100% depreciation that has allowed so many machine sheds and so much tile on cash rented farms be written off, fell to 80%. A sliding scale to zero at a reduction of 20% per year was in place for the next 4 tax years.  The bill would extend 100% bonus depreciation retroactively to include property placed in service through December 31, 2025.
• Companies, including many in ag, that invest in research and development received a nasty surprise last year when Section 174 became effective. Many of these companies were forced to capitalize and amortize their R&D expenses instead of deducting them as they have in the past.  In many cases it led to taxable income in situations where it was not expected.  The bill delays the application of this law to tax years beginning after December 31, 2025. No guidance has been provided as to how to claim a deduction in a tax year for which a return has already been filed, but one could expect the filing of an amended return would correct.
• Limitations on the deduction of business interest hurt many of our marketing and supply companies in the calculation of their tax provisions this year. Interest rates are obviously higher and changes in the way that you determine allowable interest expense were not favorable. For the first time, depreciation and amortization could not be added back into the limiting calculation.  This tax bill revisits this calculation and allows for an EBITA based calculation to be reinstated for the interest limit for years beginning after December 31, 2023 and before January 1, 2026.  Taxpayers who saw negative impacts from the 2023 calculation could elect to restore the depreciation carve out for tax years beginning after 2021 and before 2024.
• The Section 179 threshold would be increased effective for 2024 tax year as well as the minimum required payment amount for filing of Forms 1099.

So how will these incentives be paid for?  The Joint committee on Taxation estimates that the early termination of the Employee Retention Credit program will result in a savings of nearly the full cost of the bill, with the JCT projecting $400 million of excess costs.  ERC promotors face stiff penalties and filings for credits would end today…January 31, 2024.

The Bill now progresses to the Senate.  Will it pass? Both sides of the aisle have incentives in either direction – 1) get something favorable done in an election year or 2) politicize three provisions that no one likes or benefits from (bonus depreciation, interest limitation and R&D capitalization) to make the other side look bad in an election year.  The IRS has already opened filing for the 2023 year and passage will impact a great number of returns, primarily through the child tax credit expansion and bonus depreciation.    If this passes, the IRS will have to rework its systems before it can accept returns as will the tax software providers.  It is possible we will see delays in the filing date and even more compression of tax season than has become the new norm.  BE PATIENT.  This is not the year to be in a hurry to file and it is much easier to wait than to amend.