The Tax Relief for American Families and Workers Act of 2024 was passed by the House of Representatives on January 31, 2024, by a 357-70 vote. It now heads to the Senate where it faces an uncertain future.
The bill calls for various updates, all intended to provide additional tax relief to Americans, and would:
- Increase the child tax credit
- Delay the requirement to capitalize and amortize research and experimentation expenditures over a five-year period
- Extend 100% bonus depreciation through 2025
- Increase the Code Sec. 179 deduction limitation
- Revert to a less stringent business interest expense limitation
- Extend some disaster-related tax relief
The proposed new law is paid for by updates to the employee retention credit, including accelerating the end date by which new claims may be made and increasing the penalties on erroneous or fraudulent credit claims. Most of the major provisions in the bill are retroactively applicable to prior tax years.
Although the bill hasn’t officially become law yet, it’s important to be aware of the potential changes, because they will most likely impact your tax planning. We’ve compiled a summary of the bill’s provisions below so that you can prepare for these new changes accordingly.
Child Tax Credit
The refundable portion of the credit would be increased over a three-year period (2023, 2024, and 2025). For 2023, the maximum refundable portion would be increased from $1,600 per child to $1,800. In 2024, it would increase to $1,900 and then in 2025 it would be $2,000.
The calculation of the refundable credit would change in 2023, 2024, and 2025. In those years, the refundable amount will be determined on a per-child basis, meaning that once the earned income amount in excess of $2,500 is multiplied by 15%, that amount is then multiplied by the total number of children, resulting in the total refundable amount.
The current child tax credit amount of $2,000 per child would be adjusted for inflation in 2024 and 2025.
The final change would allow taxpayers to use earned income from the prior taxable year in calculating the credit if their earned income in the current year is less. This choice would impact the refundable credit amount.
Research and Experimental Expenditures
The bill would allow taxpayers to deduct currently (rather than capitalize and amortize) domestic research and experimental costs that are paid or incurred in tax years beginning after December 31, 2021, and before January 1, 2026. Foreign costs would continue to be capitalized and amortized over a 15-year period.
The bill doesn’t provide any commentary related to claiming the deduction in a tax year for which a return has already been filed. We’re not sure if this will mean amended returns for 2022 will need to be filed or if there will be a way to claim the deduction on a subsequent year’s return.
100% Bonus Depreciation
The bill would extend 100% bonus depreciation for property placed in service after December 31, 2022, and before January 1, 2026 (January 1, 2027, for longer production period property and certain aircraft). The 20% and 0% rates would continue to apply to property placed in service in 2026 and 2027.
Increased Code Sec. 179 Deduction
The bill would increase the amount of the Sec. 179 deduction to $1.29 million in 2024 and increase the beginning phase-out amount to $3.22 million. These amounts would be indexed for inflation for taxable years beginning after 2024.
Business Interest Expense Limitation
The bill would make the limitation on business interest expense deduction less severe. Prior to 2022, when companies computed their adjusted taxable income for the purposes of seeing whether their interest expense deduction was limited, they were allowed to add back depreciation, amortization, and depletion expense. This add back was taken away in 2022, making adjusted taxable income smaller and therefore making it more difficult to deduct the full amount of interest expense paid or incurred.
This provision would take effect for taxable years beginning after December 31, 2023, and before January 1, 2026. Taxpayers can elect to apply the depreciation, amortization and depletion add-back to 2022 and 2023. Similar to the research and experimental provision, nothing in the bill discusses how to change already filed tax returns.
Disaster-Related Tax Relief
The bill would eliminate the requirement that casualty losses must exceed 10% of adjusted gross income (AGI) to qualify for the deduction. Each separate casualty would still be subject to a $500 floor. The casualty loss would be able to be taken even if taxpayers don’t itemize their deductions, meaning they would be allowed to claim the casualty loss in addition to the standard deduction.
The bill would extend the relief to apply to any federally declared disaster during the period beginning on January 1, 2020, and ending 60 days after the date of the enactment of this bill.
The bill also provides for an exclusion from gross income for compensation for losses or damages resulting from certain qualified wildfire relief payments made after December 31, 2019, and before January 1, 2026. It also provides for relief from payments received related to the East Palestine, Ohio, train derailment.
Employee Retention Credit (ERC)
The bill would end the period for filing ERC claims for both 2020 and 2021 as of January 31, 2024. Even if the bill is signed into law after January 31, 2024, the January 31 deadline will likely apply retroactively.
It would also increase the penalty on any “COVID-ERTC promoter” 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 penalty amount would increase from the current $1,000 to “the greater of $200,000 ($10,000 in the case of a natural person) or 75% of the gross income of the ERTC promoter derived (or to be derived) from providing aid, assistance, or advice with respect to a return or claim for the credit refund or a document relating to the return or claim.”
The statute of limitations on ERC claim assessments would also be extended to six years.
Keep in mind that the above is only a framework of what may become law. The ultimate passage of this piece of legislation isn’t certain, and the provisions may change as the Senate continues its negotiations. In the meantime, it’s recommended to reach out to your trusted CPA with any questions on the bill’s provisions.
If you don’t have a tax advisor, Creative Planning can help. We provide a range of tax and accounting services and would be happy to work with you. Schedule a meeting with our team today to learn more about our services.
