The Tax Relief for American Families and Workers Act
Last Wednesday, January 31, 2024, the House passed a sweeping tax bill on a strongly bipartisan, 357-70 vote. The Tax Relief for American Families and Workers Act mixes business tax breaks with an expansion of the child tax credit. In a historically unproductive Congress, House members voting to approve the $78 billion measure was a rarity. The bill now heads to the Senate, where the timing for a vote is unclear. Senate Majority Leader Schumer said he would confer with tax writers on next steps. Before the House vote Wednesday, Senate Finance Committee Chairman Wyden said, “a strong bipartisan vote in the House could spur the Senate to move more quickly.”
All of the policies listed below, even if enacted by the Senate, are scheduled to phase out by end of 2025.
In addition to the small business provisions, there are changes to the child tax credit (which would be enhanced), tax relief for US and Taiwan businesses, and expanded credits for research and development. Those items are not described here.
Here are key provisions for small business (further described below):
- Business Interest Expense
- H.R. 7024 would allow businesses to include depreciation and amortization when determining their adjusted taxable income for 2024 and 2025.
- Payment Reporting
- H.R. 7024 would increase the reporting threshold on 1099-NEC and 1099-MISC forms for payments from $600 to at least $1,000 beginning in 2024.
- Employee Retention Credit
- H.R. 7024 would eliminate any claims for COVID-related Employee Retention Tax Credits after January 31 2024.
- Bonus Depreciation
- H.R. 7024 would pause the phase-out of the “bonus depreciation” for equipment, machinery, and other qualified assets which was implemented by the 2017 Tax Cuts and Jobs Act. Pausing the phase-out would allow for full bonus depreciation to continue.
Business Interest Expense
If it passes, H.R. 7024 would allow businesses to include depreciation and amortization in their business interest deductions for the years 2024 and 2025. Currently, up to 30% of a taxpayer’s adjusted taxable income can be deducted for interest expenses, but that adjusted taxable income only includes earnings before interest and taxes (“EBIT”). The inclusion of depreciation and amortization would align a business’s adjusted taxable income with its earnings before interest, taxes, depreciation and amortization (“EBITDA”).
Currently, businesses are required to report information on tax forms for payments of at least $600 to an independent contractor. If it passes, H.R. 7024 would increase the reporting threshold to $1,000 in payments over a calendar year.
Employee Retention Tax Credit
The Employee Retention Tax Credit (“ERTC”) is a Covid-19 era tax credit, which paid businesses up to $26,000 per year for qualified wages to employees that were affected by the Covid-19 pandemic during 2020 and 2021. While the program expired on September 30, 2021, the ERTC can still be claimed for employers filing amended returns with an ERTC claim. If passed, H.R. 7024 would bar any claims for an ERTC made after January 30, 2024.
The 2017 Tax Cuts and Jobs Act allowed “bonus depreciation” for equipment, machinery, and certain other qualified assets with a depreciation recovery period of 20 years or less. Under bonus depreciation, businesses could fully expense qualifying expenditures in the year that they place those assets in service. Current law is scheduled for a gradual bonus depreciation phase-out beginning in 2023 before fully phasing out in 2027.
Under current law, businesses were allowed to claim 100% bonus depreciation through 2022 and then could only claim 80% bonus depreciation in 2023, with that amount declining by 20% each year until it was fully phased out in 2027. If passed, H.R. 7024 would temporarily pause the phase out of bonus depreciation in 2024 and 2025 and allow for 100% bonus depreciation in those years (2024 and 2025) and it would retroactively eliminate the partial phase-out in 2023 (i.e., allowing full depreciation for last year as well). Under H.R. 7024, bonus depreciation claims would still be scheduled to drop from 100% in 2025 to 20% in 2026 before fully expiring in 2027.
Support for the House’s Tax Legislation
According to the House Ways & Means Committee, over 250 trade groups have voiced public support for the proposed tax legislation.
Outlook for the House’s Tax Legislation
This legislation is not yet law. The United States Senate must vote on the measure and, if it passes, the President must sign the measure into law. Getting the bill through the Senate will take at least 60 votes and it is far from clear-on whether that is possible. Senators continue to debate spending and immigration legislation. Senate Majority Leader Schumer is setting up votes next week on legislation that would send money to Ukraine and Israel and potentially help secure the US border. But consideration of the tax legislation is not on that schedule. Senators are scheduled to be on recess for two weeks starting February 12th, and aides currently do not expect Senators to complete the tax bill before then.