Tax Bill Impacts Filing Season
Update: On January 31, 2024, the House passed this bill with a bipartisan vote of 357 to 70. As of February 12, 2024, the future of the bill remains uncertain. It does not appear to be headed for a Senate floor vote any time soon.
On January 29, 2024, IRS Commissioner Danny Werfel encouraged taxpayers to "file when they're ready. Don't wait on Congress. If there's a change that impacts your return, we will make the change, and we will send you the update whether it's an additional refund or otherwise without you having to take any steps."
On January 19, 2024, the bipartisan House Ways and Means Committee advanced H.R. 7024, the “Tax Relief for American Families and Workers Act of 2024,” to the House floor by a vote of 40-3. This tax bill, if passed by Congress and signed by the President, would make changes impacting the 2023 tax year. A brief summary of the bill’s provisions follows. We will provide updates as they arise.
Child Tax Credit
The proposal would increase the child tax credit for some tax filers, through 2025.
The current child tax credit is $2,000 per qualifying child under the age of 17. The credit begins to phase out if income exceeds $400,000 for married filing joint couples and $200,000 for other filers. The credit is primarily designed to offset income; however, a portion of the credit is refundable, meaning that tax filers do not have to have any income to claim that portion of the credit. This is called the “additional child tax credit.”
Under current law, the additional child tax credit is 15 percent of earned income that exceeds $2,500. Earned income includes wages, salaries, tips, net earnings from self-employment, and other taxable employee compensation. Alternatively, tax filers with three or more qualifying children may calculate the additional child tax credit by subtracting the earned income tax credit from the amount of their Social Security taxes. Regardless of the formula used, the current additional child tax credit is limited to $1,600 per child for the 2023 tax year and $1,700 per child in 2024.
The proposal would allow tax filers to multiply the amount calculated for the additional child tax credit by the number of children before applying the limit. Additionally, the refundability limit of the credit would be increased to $1,800 per child for 2023, $1,900 per child for 2024, and $2,000 per child in 2025. The proposal would also apply inflation adjustments to the $2,000 credit, beginning in 2024. Finally, the proposal would allow tax filers to use their earned income from the current or prior year (whichever is greater) when calculating the 2024 and 2025 credit.
In 2023, a parent with two qualifying children and earned income of $10,000 would qualify for a $4,000 child tax credit. However, the additional child tax credit or refundable portion of the credit would be limited to $1,125 (Fifteen percent of [10,000 earned income minus $2,500]). This means the parent would be limited to a total refund of $1,125.
Under the proposal, this same parent would receive a $2,250 refund because the calculated additional child tax credit would be multiplied by the number of children ($1,125 x 2).
The proposal would change the child tax credit only through 2025. In 2026, when the Tax Cuts and Jobs Act has expired, the credit is scheduled to fall back to $1,000 per qualifying child. Additionally, the credit would begin to phase out at $110,000 of MAGI for married filing joint taxpayers and $75,000 of MAGI for single, non-married taxpayers.
In comparison to these proposals, the 2021 COVID-era child tax credit was increased to $3,000 for children ages 6-17 and $3,600 for children ages 5 and under. It was fully refundable and payable in advance.
Additional first-year depreciation (usually called bonus depreciation) allows taxpayers to immediately deduct an increased percentage of the adjusted basis of qualified property in the year the asset is placed into service. Bonus depreciation is automatic unless the taxpayer elects out. Taxpayers must elect out by class. Bonus depreciation is available for most farming assets with a recovery period of 20 years or less, including general purpose farm buildings, equipment, and drainage tile.
Although the Tax Cuts and Jobs Act provided 100 percent bonus depreciation for a time, the applicable percentage has begun to phase down:
Tax Year Placed in Service Date
Percentage of Bonus Depreciation
September 18, 2017 through December 31, 2022
2027 and later
The proposal would restore bonus depreciation to 100 percent for qualified property placed in service in 2023 through 2025. In 2026, the applicable percentage would fall to 20 percent (as currently scheduled), and bonus depreciation would not exist in 2027 or later. For Congress, the discussion of bonus depreciation after 2025 would be folded into the larger discussion of other Tax Cuts and Jobs Act provisions expiring at the end of 2025.
Perhaps more favored by the agricultural sector because of its flexibility, the Section 179 deduction allows taxpayers with an active business to immediately expense the cost of qualifying assets instead of depreciating them over a number of years. The Section 179 deduction is available for most assets used by the taxpayer in an active farming business. Although it applies to single purpose agricultural and horticultural buildings, it does not apply to multi-purpose farm buildings.
For taxable years beginning in 2023, the maximum Section 179 deduction is $1,160,000. That deduction is phased out, dollar-for-dollar, when the value of qualified property placed in service that tax year exceeds $2,890,000. In 2024, the maximum Section 179 deduction is $1,220,000 and the phaseout threshold amount is $3,050,000.
The Section 179 deduction and phaseout threshold are adjusted for inflation each year. The Tax Cuts and Jobs Act made the Section 179 deduction permanent. It is not scheduled to expire after 2025. These deduction limits are applied at the entity level, as well as the owner level. As equipment costs have increased, more farming operations are exceeding the threshold limit. For these farms, bonus depreciation is the only accelerated cost recovery method available. As noted above, in 2024, only 60 percent of the adjusted basis may be deducted using bonus depreciation.
Taxpayers may take the Section 179 deduction for a particular asset (it doesn’t have to apply to the entire class) for any amount they choose and then apply bonus depreciation to the remaining basis. If bonus depreciation is not 100 percent, the taxpayer will take appropriate MACRS depreciation deductions for the remaining basis.
The proposal would increase the Section 179 deduction for the 2024 tax year to $1,290,000, with a phaseout threshold of $3,220,000. These amounts would be indexed for inflation after tax year 2024.
Deduction for Research and Experimental Expenditures
Before 2022, Section 174 generally allowed businesses that incurred domestic research or experimental (R&E) expenditures to presently deduct those expenses in the year they were incurred or to capitalize the expenses and recover them ratably over five years. A 10-year amortization option was also provided. Deductions were reduced by any research credit claimed under Section 41.
In 2017, Congress included a provision in the Tax Cuts and Jobs Act stating that beginning after 2021, R&E expenses must be capitalized and amortized ratably over a period of five years. That change went into effect at the beginning of 2022, meaning that many companies that had been able to presently deduct R&E expenses faced significantly higher tax bills. R&E expenditures are generally all costs incident to the development or improvement of a product, including the salaries of those developing or improving the product. Expenditures for developing new software are included in the definition of R&E expenditures that must be amortized.
The proposal would create Section 174A to temporarily restore the ability of taxpayers to presently deduct domestic R&E expenditures incurred in 2022 through 2025. The proposal includes transition and implementation rules.
Business Interest Deduction Limit
The Tax Cuts and Jobs Act created Section 163(j) to generally restrict the business interest deduction, beginning in 2018, to the sum of (1) business interest income, 30 percent of adjusted taxable income, and floor plan financing interest. This limit applies only to businesses that exceed the gross receipts amount set in Section 448(c). In 2024, this means that businesses with $30 million or less in gross receipts are generally not subject to the business interest deduction limit. Tax shelters are subject to the limit, regardless of gross receipts. Farming businesses (as defined in IRC § 263A(e)(4)) and agricultural cooperatives may elect not to be subject to the business interest limitation. Such farming businesses, however, are then required to use the alternative depreciation system to depreciate any property used in the farming business with a recovery period of 10 years or more.
When created, the law provided that through tax year 2021, adjusted taxable income was computed without a reduction for depreciation, amortization, or depletion. In other words, these amounts were included in the adjusted taxable income against which the 30 percent business interest deduction was calculated.
For tax years after 2021, however, the law provided that adjusted taxable income included the deductions for depreciation, amortization, and depletion. This significantly reduced the business interest deduction allowable to businesses subject to the Section 163(j) limit.
The proposal would calculate adjusted taxable income without including depreciation, amortization, and depreciation through the end of 2025. This provision would allow taxpayers to elect to apply this rule to tax years after 2021.
Under current law, a Form 1099-MISC or a Form 1099-NEC is generally required for certain payments totaling $600 or more in a tax year.
The proposal would increase the threshold for the 1099-MISC and 1099-NEC to $1,000 per taxpayer per tax year, beginning with tax year 2024. This amount would be indexed for inflation for calendar years after 2024. The threshold for backup withholding would be adjusted to correspond to the new information reporting threshold.
Employee Retention Credit
The employee retention credit (ERC) has spawned billions of dollars of fraudulent claims (see IRS Unveils Voluntary Disclosure Program for Erroneous ERC Claims for more information). Under current law, taxpayers can file claims for 2020 through April 15, 2023, and claims for 2021 through April 15, 2025. A five-year statute of limitations applies to ERC claims filed for quarters three and four of 2021. The standard three-year statute of limitations applies to claims for periods before that time.
The proposal provides that no credit or refund of the ERC will be allowed or made unless the claim is filed on or before January 31, 2024. Additionally, the proposal would extend the statute of limitations for assessments relating to ERC claims to six years after the latest of:
- The date the original return was filed,
- The date on which the return is treated as filed under present statute of limitations rules, OR
- The date on which the credit or refund of the ERC is made.
The proposal would also extend the period for taxpayers to claim deductions for wages attributable to invalid ERC claims that are corrected after the standard period of limitations.
Finally, the proposal would significantly increase potential penalties for ERC promoters. A promoter is defined as any person who provides aid, assistance, or advice with respect to an affidavit, refund, claim, or other document relating to an ERC, if the person charges fees based on the amount of the credit or meets a gross-receipts test.
Many provisions within the proposal are related to Taiwan. It also includes several provisions for location-specific disaster relief and several provisions designed to incentivize affordable housing.
It appears that the proposed tax package has widespread support, although no one in Washington appears to be satisfied with all of the provisions. It is not certain at this time whether the bill will pass or if it will pass without significant amendment. If the bill does pass, the timeframe for its passage is unclear. The individual filing season is set to open January 29, 2024, so the clock is certainly ticking.
Taxpayers who would be impacted by these changes may consider waiting to file until it is known whether this bill will become law. Farmers planning to file their returns and pay their taxes by March 1 to avoid estimated tax penalties (which will be higher this year because of inflation adjustments) will face difficulty, even if the bill does not pass, because of uncertainty so close to the deadline. If the bill does pass, necessary software changes and recalculations may make the March 1 deadline impossible for impacted filers.
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.