Lawmakers Announce Framework for Bipartisan Tax Deal

(Parker Tax Publishing January 2024)

On January 16, House Ways and Means Committee Chairman Jason Smith (R-MO-08) and Senate Finance Committee Chairman Ron Wyden (D-OR) announced The Tax Relief for American Families and Workers Act of 2024 ("the bill"). The bill would expand the child tax credit, restore the immediate deduction of specified research or experimental expenditures, reinstate the 100 percent bonus depreciation deduction, and increase the limits on expensing depreciable business assets. It would also accelerate the deadline for filing employee retention credit claims from April 15, 2025, to January 31, 2024. According to its sponsors, lawmakers are seeking to have the bill enacted in time for the January 29 start of the tax filing season. Despite the ambitious timetable, it remains uncertain at press time whether the bill has enough support to pass Congress. H.R. 7024.

Highlights of the bill include:

(1) Expanding the child tax credit for years 2023 through 2025;

(2) Extending 100-percent bonus depreciation for years 2023 through 2025;

(3) Increasing the limits on expensing depreciable business assets;

(4) Delaying the requirement to amortize specified research or experimental expenditures to 2026;

(5) Increasing the threshold for Form 1099 reporting for payments to independent contractors and subcontractors from $600 to $1,000; and

(6) Accelerating the deadline to claim the employee retention credit from April 15, 2025, to January 31, 2024.

The following is a summary of the provisions included in the bill:

Child Tax Credit

Under current Code Sec. 24(d), the maximum refundable child tax credit for a taxpayer is computed by multiplying that taxpayer's earned income (in excess of $2,500) by 15 percent. The bill modifies the calculation of the maximum refundable credit amount by providing that taxpayers first multiply their earned income (in excess of $2,500) by 15 percent, and then multiply that amount by the number of qualifying children. This policy would be effective for tax years 2023, 2024, and 2025.

The maximum refundable child tax credit is currently limited to $1,600 per child for 2023, even if the earned income limitation described above is in excess of this amount. The bill increases the maximum refundable amount per child to $1,800 in tax year 2023, $1,900 in tax year 2024, and $2,000 in tax year 2025. The bill would also adjust the maximum value of the child tax credit for inflation in tax years 2024 and 2025, rounded down to the nearest $100.

For tax years 2024 and 2025, the bill allows taxpayers, at their election, to use their earned income from the prior tax year in calculating their maximum child tax credit if the taxpayer's earned income in the current tax year was less than the taxpayer's earned income in the prior tax year.

Business Tax Provisions

Extension of 100 Percent Bonus Depreciation

Under Code Sec. 168(k), qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft), as well as specified plants planted or grafted after September 27, 2017, and before January 1, 2023, are eligible for 100-percent bonus depreciation. The 100-percent allowance is phased down by 20 percent per calendar year for qualified property acquired after September 27, 2017, and placed in service after December 31, 2022 (after December 31, 2023, for longer production period property and certain aircraft), as well as for specified plants planted or grafted after December 31, 2022.

The bill extends 100-percent bonus depreciation for qualified property placed in service after December 31, 2022, and before January 1, 2026 (January 1, 2027, for longer production period property and certain aircraft) and for specified plants planted or grafted after December 31, 2022, and before January 1, 2026. The bill retains 20-percent bonus depreciation for property placed in service after December 31, 2025, and before January 1, 2027 (after December 31, 2026, and before January 1, 2028, for longer production period property and certain aircraft), as well as for specified plants planted or grafted after December 31, 2025, and before January 1, 2027.

Increase in Limitations on Expensing of Depreciable Business Assets

Under Code Sec. 179, a taxpayer may elect to expense the cost of qualifying property, rather than to recover such costs through tax depreciation deductions, subject to limitation. Under current law, the maximum amount a taxpayer may expense is $1 million of the cost of qualifying property placed in service for the tax year. The $1 million amount is reduced by the amount by which the cost of such property placed in service during the tax year exceeds $2.5 million. The $1 million and $2.5 million amounts are adjusted for inflation for tax years beginning after 2018, and were $1.16 million and $2.89 million in 2023, respectively. 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 bill increases the maximum amount a taxpayer may expense to $1,290,000, reduced by the amount by which the cost of qualifying property exceeds $3,220,000. The $1,290,000 and $3,220,000 amounts are adjusted for inflation for tax years beginning after 2024. The bill applies to property placed in service in tax years beginning after December 31, 2023.

Example: During 2024 a calendar year taxpayer purchases and places in service $4,000,000 of Code Sec. 179 property. The $1,290,000 Code Sec. 179(b)(1) dollar amount for 2024 will be reduced by the excess Code Sec. 179 property cost amount of $780,000 ($4,000,000 - $3,220,000 limitation). Thus, the taxpayer's 2024 Code Sec. 179 limitation will be $510,000 ($1,290,000 dollar limitation - $780,000 excess). The remaining $3,490,000 ($4,000,000 - $510,000 Code Sec. 179 expense) may be eligible for bonus depreciation under Code Sec. 168(k).

Deduction for Research and Experimental Expenditures

Currently, Code Sec. 174(a) 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. Research or experimental costs that are attributable to research that is conducted outside of the United States are required to be deducted over a 15-year period.

The bill delays the date when taxpayers must begin deducting their domestic research or experimental costs over a five-year period until tax years beginning after December 31, 2025. Therefore, taxpayers may deduct currently domestic research or experimental costs that are paid or incurred in tax years beginning after December 31, 2021, and before January 1, 2026. Research or experimental expenditures attributable to research that is conducted outside the United States must continue to be capitalized and amortized over 15 years.

The bill provides temporary rules (in new Code section 174A) for domestic research or experimental expenditures. Under the bill, a taxpayer may:

(1) deduct domestic research or experimental expenditures;

(2) elect to capitalize certain domestic research or experimental expenditures and recover them ratably over the useful life of the research (but in no case over a period of less than 60 months); or

(3) capitalize certain domestic research or experimental expenditures to a capital account.

Similar to Code Sec. 174, domestic research or experimental expenditures include software development costs.

The bill requires a taxpayer to reduce the amount it takes into account as research or experimental expenditures (whether expensed or capitalized) by the amount of the research credit allowable under Code Sec. 41 ("excess research or experimental expenditures") for tax years beginning after December 31, 2022. Taxpayers instead may elect to claim a reduced research credit amount under Code Sec. 41.

The bill treats the requirement to capitalize and amortize research or experimental expenditures paid or incurred in tax years beginning after December 31, 2025, as a change in the taxpayer's method of accounting for purposes of Code Sec. 481. This change is treated as initiated by the taxpayer, is treated as made with the consent of the Treasury Secretary, and is applied prospectively on a cut-off basis with no corresponding catch-up adjustment to taxable income under Code Sec. 481(a).

The bill applies to excess research or experimental expenditures for tax years beginning after December 31, 2022. Elective transition rules are provided for tax years beginning after December 31, 2021.

Extension of Allowance for Depreciation, Amortization, or Depletion in Determining the Limitation on Business Interest

For tax years beginning before January 1, 2022, Code Sec. 163(j) provided that the computation of adjusted taxable income (ATI) for purposes of the limitation on the deduction for business interest is determined without regard to any deduction allowable for depreciation, amortization, or depletion (i.e., earnings before interest, taxes, depreciation, and amortization (EBITDA)). The bill extends the application of EBITDA to tax years beginning after December 31, 2023 (and, if elected, for tax years beginning after December 31, 2021), and before January 1, 2026. Therefore, for tax years beginning after December 31, 2021, and before January 1, 2024, ATI is computed with regard to deductions allowable for depreciation, amortization, or depletion (i.e., earnings before interest and taxes (EBIT)). However, ATI may be computed as EBITDA, if elected, for such tax years. For tax years beginning after December 31, 2023, and before January 1, 2026, ATI is computed as EBITDA. For tax years beginning after December 31, 2025, ATI is computed as EBIT.

Increase in Threshold for Information Reporting on Forms 1099-NEC and 1099-MISC

Under current law, the reporting threshold for payments by a business for services performed by an independent contractor or subcontractor and for certain other payments is generally $600. The bill generally increases the threshold to $1,000 and adjusts it for inflation after 2024. Under current law, the reporting threshold is, in some cases, based on payments during the tax year. The new threshold is based on payments during the calendar year. This section applies to payments made after December 31, 2023.

Employee Retention Tax Credit

Under Code Sec. 6701, a $1,000 penalty may apply to a person who knows or has reason to know that an understatement of the tax liability of another person would result from the use of his aid, assistance, or advice. The bill increases the penalty for aiding and abetting the understatement of a tax liability by a "COVID-ERTC promoter" to the greater of $200,000 ($10,000 in the case of a natural person) or 75 percent of the gross income of the COVID-ERTC promoter derived (or to be derived) from providing aid, assistance, or advice with respect to a return or claim for employee retention tax credit (ERTC) refund or a document relating to the return or claim.

The bill defines a COVID-ERTC promoter as any person who provides aid, assistance, or advice with respect to an affidavit, refund, claim, or other document relating to an ERTC, if the person charges fees based on the amount of the credit or meets a gross-receipts test. The gross receipts test is met if (1) aggregate gross receipts from ERTC-related aid, assistance, or advice equal or exceed half of the person's gross receipts for the relevant year, or (2) both (i) the aggregate gross receipts for the relevant year from such advice exceeds 20 percent of the person's gross receipts for the relevant year and (ii) the person's aggregate gross receipts from all such advice exceeds $500,000 (after application of an aggregation rule). For this purpose, certified professional employer organizations (PEOs) are not treated as COVID-ERTC promoters.

Under Code Sec. 6695(g), a paid tax return preparer may be subject to a $500 penalty for each failure to comply with due diligence requirements relating to the filing status and amount of certain credits with respect to a taxpayer's return or claim for refund. The bill requires a COVID-ERTC promoter to comply with similar due diligence requirements with respect to a taxpayer's eligibility for (or the amount of) an ERTC and applies a $1,000 penalty for each failure to comply. If the COVID-ERTC promoter does not comply with the due diligence requirements, the promoter is also treated as knowing that his aid, assistance, or advice, would (if used) result in an understatement of tax liability by another person, for purposes of imposing the penalty for aiding and abetting the understatement of tax liability.

Under Code Sec. 6111(a), certain material advisors are required to disclose information to the IRS with respect to designated types of transactions (known as "listed transactions") by filing a Form 8918, Material Advisor Disclosure Statement. In addition, Code Sec. 6012(a) requires material advisors to make lists of advice recipients with respect to such transactions available to the IRS upon request. Under the bill, a COVID-ERTC promoter is similarly required to file return disclosures and provide lists of clients to the IRS upon request.

Under Code Sec. 3134(l), the statute of limitations period on assessment for the COVID-related ERTC is generally five years from the date of the claim. The bill extends the period to six years after the latest of: (1) the date on which the original return for the relevant calendar quarter is filed, (2) the date on which the return is treated as filed under present-law statute of limitations rules, or (3) the date on which the credit or refund with respect to the ERTC is made.

Under current law, taxpayers can claim COVID-related ERTC until April 15, 2025. This section provides that no credit or refund of the ERTC will be allowed or made after January 31, 2024, unless the claim for the refund or credit is filed on or before that date.

This section is effective for aid, assistance, or advice provided after March 12, 2020. The due diligence requirement is effective for aid, assistance, or advice provided after the date of enactment. The requirement for a COVID-ERTC promoter to file disclosures or maintain lists with respect to aid, assistance, or advice provided before the date of enactment is effective 90 days after the date of enactment. The extension of the statute of limitations on assessment is effective for assessments made after the date of enactment. Under a transition rule, the requirement for an ERTC promoter to file disclosures or maintain lists with respect to aid, assistance, or advice provided before the date of enactment does not require filing before 90 days after the date of enactment.

Assistance for Disaster-Impacted Communities

Extension of Rules for Treatment of Certain Disaster-Related Personal Casualty Losses. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 provided tax relief to certain individuals in qualified disaster areas. The relief included special rules for qualified disaster-related personal casualty losses, including eliminating the requirement that casualty losses must exceed 10 percent of adjusted gross income (AGI) to qualify for the deduction, requiring losses to exceed $500 per casualty in order to be deductible, and allowing taxpayers to claim the casualty loss deduction "above the line," i.e., without itemizing their deductions.

The bill extends the rules for the treatment of certain disaster-related personal casualty losses as passed in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, including any area with respect to which a major disaster was declared by the President during the period beginning on January 1, 2020, and ending 60 days after the date of enactment of the bill if the incident period of the disaster (as specified by the Federal Emergency Management Agency as the period during which the disaster occurred) begins on or after December 28, 2019, and on or before the date of enactment of the bill.

Exclusion From Gross Income for Certain Wildfire Relief Payments. The bill excludes from gross income any amount received by or on behalf of an individual as a qualified wildfire relief payment. It defines "qualified wildfire relief payment" as any amount received by or on behalf of an individual for expenses, damages, or losses incurred as a result of a qualified wildfire disaster, but only to the extent any expense, damage, or loss is not compensated for by insurance or otherwise. A qualified wildfire disaster is any federally declared disaster (as defined in Code Sec. 165(i)(5)(A)) declared, after December 31, 2014, as a result of any forest or range fire. This section also includes provisions to deny double benefits. This section applies only to qualified wildfire relief payments received by an individual during tax years beginning after December 31, 2019, and before January 1, 2026.

East Palestine Disaster Relief Payments. The bill treats "East Palestine train derailment payments" as qualified disaster relief payments as defined in Code Sec. 139(b). Thus, these payments are excluded from gross income and are subject to other present-law provisions applicable to qualified disaster relief payments. "East Palestine train derailment payments" are any amount received by or on behalf of an individual as compensation for loss, damages, expenses, loss in real property value, closing costs with respect to real property, or inconvenience resulting from the East Palestine train derailment paid by a federal, state, or local government agency, Norfolk Southern Railway, or any subsidiary, insurer, or agent of Norfolk Southern Railway or any related person. "East Palestine train derailment" is defined as the derailment of a train in East Palestine, Ohio, on February 3, 2023. This section applies to amounts received on or after February 3, 2023.

Low-Income Housing Tax Credit

State Housing Credit Ceiling Increase. In calendar years 2018 through 2021, the 9 percent low income housing tax credit (LIHTC) ceiling under Code Sec. 42(h)(3) was increased by 12.5 percent, allowing states to allocate more credits for affordable housing projects. The bill restores the 12.5 percent increase for calendar years 2023 through 2025 and is effective for tax years beginning after December 31, 2022.

Tax-Exempt Bond Financing Requirement. Under current law, to receive LIHTC a building must either receive a credit allocation from the state housing finance authority or be bond-financed. To be bond-financed, 50 percent or more of the aggregate basis of the building and land must be financed with bonds that are subject to a state's private activity bond volume cap. This provision lowers the bond-financing threshold to 30 percent for projects financed by bonds with an issue date before 2026. This section provides a transition rule for buildings that already have bonds issued by requiring that a building must have 5 percent or more of its aggregate basis financed by bonds with an issue date in 2024 or 2025.

This provision is effective for buildings placed in service after December 31, 2023. In the case of rehabilitation expenditures, which are treated as a separate new building, the building is considered placed in service at the end of the rehabilitation expenditures period. The 30 percent requirement is applied to the aggregate basis of both the existing building and the rehabilitation expenditures.

Taiwan-Related Tax Provisions

Special Rules for Taxation of Certain Residents of Taiwan. The bill creates new Code section 894A, providing substantial benefits to Taiwan residents, similar to those that are provided in the 2016 United States Model Income Tax Convention. The provisions fall into four primary categories: (1) reduction of withholding taxes, (2) application of permanent establishment rules, (3) treatment of income from employment, and (4) determination of qualified residents of Taiwan, including rules for dual residents. Since the application of these provisions requires full reciprocal benefits, new Code section 894A does not come into 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.

Under the bill, a reduced rate of withholding tax would apply to certain income from U.S. sources received by qualified residents of Taiwan, such as interest, dividends, royalties, and certain other comparable payments, such as dividend equivalent amounts. Instead of the 30 percent withholding tax presently imposed on U.S. source income received by nonresident aliens and foreign corporations, interest and royalties would be subject to a 10 percent withholding tax rate. Generally, dividends would be subject to a 15 percent withholding tax rate. Dividends would be subject to a lower 10 percent rate if paid to a recipient that owns at least ten percent of the shares of stock in the corporation, subject to limitations. Lower withholding tax rates would not apply to certain amounts, such as those subject to the Foreign Investment in Real Property Tax Act (FIRPTA), received from or paid by an inverted company, and others.

The threshold of whether a qualified resident of Taiwan's income from a U.S. trade or business is subject to U.S. income tax would be raised to the permanent establishment (PE) standard in treaties, rather than the U.S. trade or business standard applied in the Code. If a qualified resident of Taiwan has a PE in the United States, income which is subject to U.S. income tax would be only the qualified resident of Taiwan's taxable income effectively connected to the United States PE.

No U.S. tax would be imposed on certain wages of qualified residents of Taiwan in connection with personal services performed in the U.S. Such wages cannot be paid by a U.S. person or borne by a U.S. PE of a foreign person. This treatment does not apply to certain types of wages, such as directors' fees, pensions, and other wages that are generally taxable under the U.S. Model Tax Treaty.

The bill generally defines a "qualified resident of Taiwan" as any person who is liable for tax to Taiwan because of such person's domicile, residence, place of management, place of incorporation, or any similar criterion, and is not a U.S. person. Additional rules are provided to determine whether certain dual resident individuals are treated as qualified residents of Taiwan. For corporations, a qualified resident of Taiwan must also meet one of the limitation on benefits tests to be a beneficiary of the provision.

United States-Taiwan Tax Agreement Authorization Act. Because the United States is unable to enter into a bilateral tax treaty with Taiwan due to Taiwan's unique status, the bill provides authorization to the President to negotiate and enter into a U.S.-Taiwan tax agreement that includes provisions generally conforming with those customarily contained in U.S. tax treaties.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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