Bipartisan Tax Deal Would Delay Full Implementation of Secs. 174 and 163(j), Extend Bonus Depreciation, and End ERC Early

On January 16, 2024, Congress announced the details of a bipartisan tax deal that would extend several taxpayer-friendly provisions while eliminating the ability for businesses to claim the Employee Retention Credit. As written, the bill contains provisions related to:

IRC Sec. 174: The bill would retroactively delay the full implementation of capitalization and amortization of domestic research and experimental expenses until taxable years beginning after December 31, 2025; applicable for tax years beginning on or after January 1, 2022. Foreign research and experimental expenses would still be required to be capitalized and amortized over 15 years.

IRC Sec. 163(j): Under the bill, businesses could retroactively continue to determine their business interest deduction limitation based on their adjusted taxable income as calculated without regard to interest, taxes, depreciation, amortization, or depletion (EBITDA) until tax years beginning after December 31, 2025. This change would apply to taxable years beginning after December 31, 2023, but taxpayers would be able to elect it for taxable years beginning after December 31, 2021, and before January 1, 2024.

Bonus Depreciation: The bill would retroactively allow taxpayers to claim 100% bonus depreciation for property placed in service between January 1, 2023, and December 31, 2025. Property placed in service after December 31, 2025, and before January 1, 2027, would be allowed 20% bonus depreciation. For property placed in service after January 1, 2027, no bonus depreciation would be allowed. 

IRC Sec. 179: The bill would also increase the IRC Sec. 179 limit from $1 million to $1.29 million and the phase-out threshold amount from $2.5 million to $3.22 million for property in service in taxable years beginning after December 31, 2023. Both would be increased annually for inflation.

Employee Retention Credit: To fund the cost of extending these tax breaks, the bill would end businesses’ ability to claim the Employee Retention Credit (“ERC”) effective January 31, 2024, and significantly increase penalties for ERC promoters. The bill would also extend the statute of limitations for ERC claims to six years from the date the claim was filed. 

Low-Income Housing Tax Credit: The bill would retroactively restore the 12.5% increase to the LIHTC ceiling for calendar years 2023 through 2025, effective for taxable years beginning after December 31, 2022. It would also lower the qualifying LIHTC bond-financing threshold from 50% to 30% for projects financed by bonds with an issue date before 2026.

Child Tax Credit: The bill would gradually increase the refundable portion of the Child Tax Credit (“CTC”) over 2023, 2024, and 2025 to $2,000, allow for lower-income families to qualify for larger credit amounts, allow taxpayers to choose current or prior-year income to calculate the CTC for 2024 or 2025, and adjust the CTC amounts for inflation for 2024 and 2025.

Taiwan Double-Tax Relief: The bill would pass the United States-Taiwan Expedited Double-Tax Relief Act. This provision effectively acts as a treaty between the United States and Taiwan.

Disaster Relief: The bill would extend most provisions of the Taxpayer Certainty and Disaster Act of 2020 and exclude from income certain qualified wildfire relief and East Palestine train derailment payments. 

It is important to remember that this bill is not yet law. The bill must go through the legislative process now and be passed by both chambers of Congress, and changes may be made during this process. There is some hope that the bill’s passage will be expedited through Congress using special rules or other legislative vehicles before the start of the filing season on January 29, 2024, but that window is quickly closing.