House Republicans advanced a trio of tax bills that outline their top tax priorities this year, including restoring important business tax provisions.
The legislation was approved by party-line vote in the Ways and Means Committee on June 13. Republicans have not announced a House vote. Democrats criticized the bills and they are not expected to be enacted in their current form, but they could be a starting point for negotiations with Democrats over a bipartisan tax package later in the year. They also give Republicans a messaging opportunity in front of the 2024 elections.
The provisions are divided into three separate bills:
- The Build in America Act (H.R. 3938), which would:
- Retroactively restore expensing of research and experimentation (R&E) costs under Section 174
- Provide retroactive relief from the limit on interest deductions under Section 163(j)
- Extend 100% bonus depreciation through the end of 2025
- Repeal the recently reinstated Superfund excise tax on crude oil
- Provide relief from recently finalized foreign tax credit (FTC) regulations
- Create a new excise tax for related to acquisitions of agricultural interests by foreign persons from certain countries of concern
- Repeal many of the changes to the electric vehicle credits made in the Inflation Reduction Act (IRA) and the technology neutral energy incentives scheduled to take effect in 2025
- The Small Business Jobs Act (H.R. 3937), which would:
- Increase the reporting thresholds for Forms 1099-NEC and 1099-MISC from $600 to $5,000
- Restore the de minimis threshold for Form 1099-K reporting to 200 transactions and $20,000
- Enhance the exclusion for qualified small business (QSB) gain, including by extending eligibility to S corporations
- Increase the Section 179 expensing thresholds
- Expand opportunity zone tax benefits for certain rural areas and require new reporting
- The Tax Cuts and Working Families Act (H.R. 3936) which would rename the standard deduction the “guaranteed deduction” and increase it in 2024 and 2025
The tax cuts across the three bills would cost an estimated $236.3 billion, while the repeal of the energy credits would raise $216 billion. The tax provisions run the gamut from bipartisan appeal to pure partisan messaging. Proposals such as raising the de minimis threshold for Form 1099-K reporting enjoy widespread support in both parties and have a good chance of enactment this year. Other provisions, such as extending bonus depreciation, restoring R&E expensing under Section 174, and providing relief from the Section 163(j) limit on interest deductions, could gain traction as part of negotiations with Democrats over Democratic priorities. There also provisions Democrats are likely to unequivocally reject, such as a repeal of energy incentives.
The Republican bills omit several priorities that have been under consideration, such as relief from the $10,000 cap on the deduction for state and local taxes (SALT), the extension of the individual provisions from the Tax Cuts and Jobs Act (TCJA), relief for auto dealers on the last-in, first-out (LIFO) method of accounting during supply chain shortage, and technical corrections for retirement tax provisions in the SECURE Act 2.0.
Now that the debt limit has been resolved, there may be opportunities to move bipartisan tax legislation. Democrats and Republicans have repeatedly discussed trading business tax extenders for child tax credit relief, but substantive negotiations have been scarce and a deal has remained elusive. The best hope for a resolution may be in a year-end package.
The following discusses key proposals in more detail and their legislative outlook.
R&E expensing
The legislation would effectively suspend the requirement to amortize Section 174 enacted under TCJA. That change became effective for tax years beginning in 2022, and the suspension would apply retroactively for tax years beginning in 2022 and would expire for tax years beginning in 2026. The legislative language does not technically reinstate the pre-TCJA rules by postponing the effective date of the TCJA change. Instead, it puts in place temporary alternative rules under new Section 174A that are similar to the rules in place before the TCJA.
Software development costs would be included in the Section 174A definition of R&E. Taxpayers would have the option of capitalizing and amortizing all or part of the costs over the useful life of the research (with a 60-month minimum). The legislation would also require taxpayers to reduce all Section 174A amounts by any research credits with rules similar to Section 280C(c).
Grant Thornton Insight
This version of Section 174 relief differs from past proposals, which would have effectively reinstated the rules in place before the TCJA change. The Section 174A rules in this version are similar, but not identical. Section 174A would also fully reinstate anti-double dipping rules with regard to the research and development credit. Under current law, taxpayers may only need to reduce their Section 174 capital account to the extent their research credit exceeds their amortization deduction for that year.
Section 163(j)
The legislation would retroactively postpone a change to the limit on the deduction for net interest expense under Section 163(j), which generally limits the deduction to 30% of adjusted taxable income (ATI). Under current law, for tax years beginning after 2021, ATI must include depreciation and amortization. This lowers taxable income and potentially triggers the limit more quickly. The bill would retroactively extend the exclusion of depreciation and amortization from ATI for tax years beginning before 2026.
Expensing
The legislation would extend 100% bonus depreciation for three years for property placed in service through the end of 2025. The deduction is currently 80% for property placed in service in 2023, and is set to be reduced to 60% in 2024, 40% in 2025, 20% in 2026, and zero in 2027. The legislation would not change the treatment in 2026 and 2027.
The legislation would also increase the $1 million threshold for Section 179 expensing ($1.16 in 2023 with inflation adjustments) to $2.5 million in 2024, indexed for inflation thereafter. The deduction would phase out based on the amount of qualifying property placed in service exceeding $4 million, up from $2.5 million ($2.89 million in 2023 with inflation).
Grant Thornton Insight
Section 179 largely became superfluous in recent years thanks to 100% bonus depreciation, but could become meaningful again for small taxpayers if bonus depreciation rates are allowed to drop.
Foreign tax credit regulations
The legislation targets unpopular foreign tax credit (FTC) regulations that were finalized late in 2021 (see our prior story). The bill would effectively allow taxpayers to elect to apply the rules in place before the new FTC regulations for two specific provisions:
- Determining whether any tax paid or accrued in the Americas (other than Cuba and Venezuela) is an income, war profits, or excess profits tax
- Allocating and apportioning any foreign income taxes paid or accrued due to a remittance of foreign income taxes from certain specified foreign disregarded entities
Grant Thornton Insight
Aspects of the FTC regulations were heavily criticized, but the Biden administration seems unlikely to agree to gut them in legislation, which would also hamstring Treasury’s ability to provide future guidance. Treasury has responded to some of the commentary with targeted relief (see our prior story) and appears more likely to make any concessions through the regulatory process.
QSB stock
The legislation would expand the gain exclusion for QSB stock. Section 1202 generally provides a 100% exclusion for gain on QSB stock (limited to greater of $10 million or 10 times basis) acquired after September 27, 2010 and held for at least five years. The bill would expand the QSB stock to include S corporations, and repeal the AMT preference for the exclusion.
It would also provide a 50% exclusion for stock held three years and 75% for stock held four years. The holding period could include converting the stock into qualified convertible debt instrument.
Grant Thornton Insight
This proposal may struggle to attract Democratic support. The original House version of the reconciliation bill that later became the Inflation Reduction Act would have significantly curbed QSB stock benefits.
Information reporting
The legislation would increase the threshold for reporting payments for services on Form 1099-MISC and Form 1099-NEC under Sections 6041 and 6041A from $600 to $5,000. The $5,000 threshold would be indexed to inflation.
The legislation would also preserve the threshold for Form 1099-K reporting under Section 6050W for third party payment networks. Prior to the American Rescue Plan Act of 2021, reporting was only required for recipients of $20,000 in payments and 200 transactions. The ARP lowered this threshold to $600 regardless of the number of transactions. This change was originally scheduled to take affect for 2023 payments, but was postponed until 2024 under IRS transition relief (see our prior story for more information). The bill would repeal the ARP change and reinstate the $20,000 and 200 transaction thresholds.
Grant Thornton Insight
There is significant bipartisan interest in raising the Form 1099-K reporting threshold, but it is unclear whether there will be enough support to raise it all the way back to $20,000 and 200 transactions. Bipartisan legislation from Sens. Bill Cassidy, R-La., and Sherrod Brown, D-Ohio., would raise the thresholds to $10,000 and 100 transactions. Other Democratic bills would raise it to $5,000.
Energy credits
The legislation would repeal the Section 45Y energy production tax credit (PTC) and the Section 48E energy investment tax credit (ITC). The credits were enacted as part of the IRA and meant to be technology neutral replacements for the Section 45 PTC and the Section 48 ITC for property placed in service after 2024.
The legislation would also repeal all the changes to electric vehicle credits made in the IRA and retroactively reinstate the pre-IRA credits.
Grant Thornton Insight
These changes are more modest than the Republican debt limit bill versions. This legislation leaves in place the enhanced Section 45 PTC and Section 48 ITC for the next two years, as well as enhancements and extensions to a number of other credits. The Limit, Save, Grow, Act of 2023 passed by House Republicans would have raised more than $500 billion by repealing nearly all of the IRA’s energy credits. Even so, this likely a non-starter for Democrats, who appear unwilling to entertain repealing key aspects of what they consider a signature policy achievement.
Superfund excise tax
The legislation would repeal the Superfund excise tax of 16.4 cents a barrel of domestic crude oil and imported petroleum products under Section 4611. The tax was reinstated by the IRA effective for 2023.
Grant Thornton Insight
The legislation would not repeal the Superfund excises taxes on chemicals under Sections 4661 and 4671. The taxes were reinstated by the Infrastructure Investment and Jobs Act (Pub. L. No. 117-58) effective for sales and uses on or after July 1, 2022 (see our prior story).
Key omissions
The legislation does not include several priorities of many members of the Republican caucus, such as SALT cap relief, TCJA individual tax cut extensions, and LIFO relief for automakers. While SALT cap relief is a higher priority for many Democrats, there are also important Republicans from high-tax states who are pushing for relief. Some rank-and-file members also pushed for a promise to hold votes on extending the TCJA and instituting a national sales tax as part of negotiations when they elected the House Speaker.
Grant Thornton Insight
Some of the provisions excluded and included could make certain GOP members unhappy. Republicans have not yet announced any plans to vote on the new bills on the House floor, or whether they plan to combine them or keep them separate. With only a three-vote margin for error, any House vote is difficult. House Ways and Means Committee Chair Jason Smith, R-Mo., is urging passage if only to give Republicans a strong negotiating position in year-end tax talks. McCarthy took a similar stance to secure passage of the debt limit bill, but some Republican members were ultimately unhappy with the final agreement and may be less likely to acquiesce again.
Outlook
The fate of the Republican bills on the House floor is ultimately not critical for the prospects of tax legislation this year. With Democrats in control of the Senate and White House, any legislation must be bipartisan. Debt limit negotiations froze out all other activity for months. With that now resolved, discussions over tax legislation may pick up traction. Time is already running short, however, with the July 4 and August recesses looming.
The provisions with wide bipartisan appeal, such as Form 1099-K relief and SECURE Act 2.0 technical corrections, have the best chance of enactment. Lawmakers have also expressed bipartisan interest in moving a package of housing tax incentives, ratifying a tax treaty with Chile, and conferring tax treaty-like benefits with Taiwan.
The biggest open question remains whether Republicans and Democrats can find agreement on the business extender provisions and child tax credit relief. Both sides have expressed openness to a deal, and a compromise remains possible. But cost could be a major concern and negotiations remain sluggish. A resolution may have to wait until year-end.
Next steps
Bonus depreciation, Section 163(j) and Section 174 may not be addressed until year-end, if at all. Taxpayers should be monitoring the legislative process, but preparing to comply based on current law for estimated taxes and 2022 returns. There may be planning opportunities that can mitigate the impact of some of the new provisions.
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