Discussions over a potential year-end tax extenders package have been complicated in recent weeks by a potential linkage between Section 174 relief and the enhanced child tax credit.
While legislators from both parties have traditionally supported full expensing of research and experimentation (R&E) costs under Section 174, various Democratic lawmakers in recent months have indicated that they will not support a retroactive extension of Section 174 unless it is paired with expensive enhancements to the child tax credit (CTC). The potential costs for an extension of the enhanced CTC would vary based upon the length of the extension, as the Committee for a Responsible Federal Budget recently indicated the one-year cost of reviving the enhanced CTC would be roughly $130 billion, while the 10-year cost would amount to roughly $1.2 trillion. These figures may prove too expensive for some Republican lawmakers to stomach.
Republicans have specifically indicated they are less likely to make major concessions for business tax priorities that have traditionally been supported by Democrats — including R&E relief and extending 100% bonus depreciation, which is scheduled to revert to 80% for property placed in service in 2023. Republicans also would also like to soften the limit on interest deductions under Section 163(j), though this item may not be enough of a priority to exchange for CTC enhancements.
The results of the election could also complicate the tax extenders process — especially if Republicans win back one or both chambers of Congress and want to wait for January to secure a better deal. Delaying the passage of relief until 2023 could be an issue for 2022 financial statements.
While a deal remains very possible, the outlook is uncertain enough that taxpayers should be considering how a failure to reach an extender deal could affect their estimated tax payments, financial statements and business plans. Taxpayers also should be assessing the impact of amortizing R&E costs. Taxpayers also could consider accelerating investments to place property in service before the scheduled expiration of 100% bonus depreciation.