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Introduction

On January 31, the House voted 357 to 70 to pass H.R. 7024, the Tax Relief for American Families and Workers Act of 2024. This bill, a product of bipartisan agreement, signals a significant shift in tax policy, especially for U.S.-based R&D investments, business interest limitations, and bonus depreciation.

What Happened?

H.R. 7024, agreed upon by House Ways and Means Committee Chairman Jason Smith (R-MO) and Senate Finance Committee Chairman Ron Wyden (D-OR), passed the House with strong bipartisan support. The $79 billion tax package, previously approved by the Ways and Means Committee, now awaits Senate consideration.

Why is it Relevant?

Restoration of Section 174 Expensing: Key for U.S.-based R&D investments, allowing current deductions for domestic R&E costs from December 31, 2021, to January 1, 2026. Foreign R&D expenses, however, will continue under a 15-year amortization. The bill clearly encourages investment in domestic R&D, offering substantial tax relief for U.S.-based activities.

EBITDA-Based Business Interest Limitation (Section 163(j)): Extension of interest deductions for alternative taxable income computed without considering depreciation, amortization, or depletion, applicable for tax years beginning after December 31, 2023. The JCT estimates a reduction in federal revenues by about $399 million over ten years. However, the long-term gains in domestic R&D and business growth may counterbalance this.

100% ‘Bonus’ Depreciation (Section 168(k)): Extension for qualified property placed in service after December 31, 2022, and before January 1, 2026.

Employee Retention Credit (ERC) filing deadline: No new ERC claims will be permitted after January 31, 2024.

What’s Next?

The Senate’s actions on H.R. 7024 remain uncertain, particularly with the upcoming two-week recess. The bill’s strong House support, however, indicates significant momentum. Additionally, Congress faces pending tasks like government funding and FAA excise tax renewal, which could influence tax policy discussions.

KNAV Insights

Whilst all the above-mentioned provisions are taxpayer-friendly and lead to substantial tax savings, the retroactive application of these provisions would mean taxpayers are required to amend the 2022 federal income tax year returns. Additionally, since many states also have rolling conformity to federal law, these retroactive changes may also mean amending quite a few state income tax returns as well. However, accelerating the deadline for filing ERC claims to January 31, 2024, will be detrimental to those taxpayers who are still in the process of filing the ERC credit claims.

Conclusion

The Tax Relief for American Families and Workers Act of 2024 marks a pivotal moment in U.S. tax policy, particularly for domestic investments and business operations. Its passage will significantly impact American businesses. We have an interesting month ahead of us.