On Jan. 31, 2024, the House passed the Tax Relief for American Families and Workers Act of 2024 by a vote of 357-70. The vote reflects broad bipartisan support for the legislation. There is also broad support for the legislation in the Senate, although several senators have suggested proposing some amendments to the Senate version.
In the meantime, Congress is also working on appropriations for the FY 2025 budget, border security, and funding for Ukraine and Israel. Those negotiations are not going very well at the time of this writing.
The tax legislation also includes several provisions that would be retroactive to 2023 tax returns or even earlier. The 2024 tax filing season began on Jan. 29, 2024. The Internal Revenue Service and tax software publishers have already issued their materials for use in filing 2023 tax returns. Congress has done retroactive tax changes in the past well into the following year; however, it creates the potential for a need for mid-tax season revisions to forms and instructions, revisions to tax software, and the need to file amended tax returns.
Child Tax Credit
Democrats would like to restore the Child Tax Credit to a form similar to that in effect during COVID, with significant increases in the amount of the credit, increases in refundability, and perhaps even a return to advance payments. The proposed legislation achieves only some of those goals. Senate amendments may try to enhance the credit further.
Under current law, the CTC is a maximum of $2,000 per child, subject to phase out for income in excess of certain thresholds. For 2023, up to $1,600 of the credit may be refundable. For taxpayers with one or two children, the refundable amount is limited to the lesser of the balance of the credit to which the taxpayer would otherwise be entitled based on the number of qualifying children, or 15% of the amount by which the taxpayer’s earned income exceeds $2,500. For taxpayers with three or more children, the refundable amount gets more complicated, taking into account Social Security taxes and the Earned Income Tax Credit.
As proposed in the new legislation, the refundable amount would be determined on a per-child basis. Once the earned income amount in excess of $2,500 is multiplied by 15%, the refundable amount is determined by multiplying that amount by the number of children. The change applies for 2024 and 2025 and retroactively to 2023. There are also statutory increases in the refundable credit to $1,800 for 2023, $1,900 for 2024, and $2,000 for 2025.
The $2,000 basic amount of the CTC will also increase with inflation for 2024 and 2025. Also, similar to the COVID years, for 2024 and 2025 taxpayers may elect to use earned income from the prior tax year in calculating the credit if the taxpayer’s earned income in the current year is less than earned income in the prior year.
Research and experimental expenses
Under the Tax Cuts and Jobs Act, research and experimental expenses could be immediately expensed. This expired after 2021 and amortization over a five-year period became required. Research or experimental expenses outside of the U.S must be amortized over a 15-year period.
A priority for Republicans in the proposed legislation was to restore immediate deduction for domestic activities through tax years beginning before Jan. 1, 2026. It provides no change for outside the U.S. The change would therefore be retroactive to 2022 and 2023. This would create the potential need for amended tax returns unless the IRS provides another remedy.
Business interest limitation
The Tax Cuts and Jobs Act placed a limit on the business interest deduction. For tax years before 2022, the calculation of adjusted taxable income for purposes of the business interest expense limitation was made without regard to any deductions for interest, taxes, depreciation, amortization or depletion. For tax years after 2021 depreciation, amortization, and depletion were removed from the carve-out, increasing the potential business interest limitation.
The proposed legislation would restore EBITDA adjustments for tax years beginning after Dec. 31, 2023, and before Jan. 1, 2026. However, it would also permit taxpayers to elect to restore the EBITDA adjustment for tax years beginning after 2021 and before 2024. This election would likely also require an amended return unless the IRS provided another remedy.
The Tax Cuts and Jobs Act generally allowed qualified property to be immediately expensed if placed in service after Sept. 17, 2017, and before Jan. 1, 2023. There was a gradual reduction in first-year expensing, with 80% expensed in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and then eliminated thereafter.
The proposed legislation would extend full first-year expensing to property placed in service before Jan. 1, 2026. The 20% and 0% phase-outs would be retained for 2026 and 2027.
This change is also retroactive to 2023 but would not be reflected in IRS forms or tax software until enacted.
Code Sec. 179 expensing
Smaller businesses have been permitted to expense the cost of certain qualifying property under Code Sec. 179 within certain inflation adjusted limits for several years. For 2024 the amount of the deduction was capped at $1.22 million, with the limit reduced dollar-for-dollar by the amount of the expense in excess of $3.05 million.
The proposed legislation would increase these amounts to $1.29 million and $3.22 million respectively for property placed in service in 2024, with inflation adjustments continuing in subsequent years.
Employee Retention Credit
The IRS has been overwhelmed by what it believes are improper claims for the Employee Retention Tax Credit related to the COVID years. The agency has tried to deal with the problem by putting a moratorium on processing these claims and permitting taxpayers to withdraw claims that they now believe might have been improper. Under current law, employers can continue to make ERTC claims until April 15, 2025.
The proposed legislation would increase penalties on fraudulent promoters of ERTC claims, extend the limitation period on assessments of ERTC claims to six years, require promoters of ERTC claims to report to the IRS, and shorten the period for making claims for the ERTC to Jan. 31, 2024. It is not clear if this date would be adjusted, since this date has now passed without being enacted.
Congress has from time to time enacted disaster relief provisions focused on particular disasters or for specific periods of time. The proposed legislation would extend prior disaster relief provisions to federally declared disasters during the period beginning on Jan. 1, 2020, and ending 60 days after the date of enactment of the legislation. This relief includes forgiveness of early-withdrawal penalties for qualified disaster relief distributions, the recontribution of amounts withdrawn for home purchases, an increase in the amount of permitted loans from qualified plans, an employee retention credit for employers in affected areas, and special casualty loss rules for affected individuals.
There are also special provisions related to qualified wildfire relief payments made after Dec. 31, 2019, and before Jan. 1, 2026, and relief payments related to the East Palestine, Ohio, train derailment. These disaster relief provisions could also result in the need to amend tax returns.
Filing thresholds for Forms 1099-MISC and 1099-NEC
Under the proposed legislation, the $600 filing threshold for Forms 1099-MISC and 1099-NEC would be increased to $1,000 for payments made after Dec. 31, 2023, and further adjusted for inflation after 2024. The IRS has also acted to delay the implementation of a $600 filing threshold for Form 1099-K.
The proposed legislation would increase the 9% low-income housing tax credit ceiling to 12.5% for 2013 through 2025. It would also lower the bond-financing threshold to 30% for projects financed by bonds with an issue date before 2026.
Although popular, as of this writing it was not year clear when or if these provisions will be enacted. The longer Congress takes to enact the legislation, the more problematic some of the retroactive provisions become. Taxpayers affected by some of these proposed changes for 2023 tax returns may wish to hold off filing those returns until it becomes a little more clear whether these provisions will be enacted.
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