The chairs of Congress's two main tax committees—House Ways and Means Committee Chairman Jason Smith (R-Missouri) and Senate Finance Committee Chairman Ron Wyden (D-Oregon)—announced a bipartisan deal Tuesday to extend a number of expired tax credits and tax breaks.
Provisions include a revival, at least in part, of the expanded Child Tax Credit, research and development write-offs, interest expensing, bonus depreciation, an enhanced Low Income Housing Tax Credit, small business expensing, disaster tax relief, and a tax treaty with Taiwan. The $78 billion bill would be paid for by ending the fraud-plagued Employee Retention Credit earlier than planned.
However, it's unclear if the deal will be passed by Congress, which remains at odds on passing budget and appropriations bills and a continuing resolution to prevent a partial government shutdown. And a group of managers at the Internal Revenue Service issued a warning Tuesday about the potential danger of making such extensive changes just as tax season is set to get underway.
The bill, known as the
The bill would revive immediate expensing for research and development after the Tax Cuts and Jobs Act of 2017 began requiring amortization and capitalization. Businesses of all sizes would be able to immediately deduct the cost of their U.S.-based R&D investments instead of over five years.
It would also revive full interest expense deductibility to provide more flexibility for businesses forced to borrow at higher interest rates to meet their payroll obligations and expand their operations.
In addition, the bill would revive 100% bonus depreciation to restore full and immediate expensing for investments in machines, equipment and vehicles.
Another part of the deal involves Taiwan double tax relief, removing the current double taxation that exists for businesses and workers with a footprint in both the U.S. and Taiwan.
Another provision would expand the small business expensing cap, increasing the amount of investment that a small business can immediately write off to $1.29 million, an increase above the $1 million cap enacted in 2017.
To cut red tape for small business, the bill would adjust the reporting threshold for businesses that use subcontract labor from $600 to $1,000 and index for inflation, the first update to the threshold since the 1950s.
Another provision involves disaster tax relief to help families get back on their feet with disaster tax relief covering recent hurricanes, flooding, wildfires, and the Ohio rail disaster.
The bill would also aim to increase the supply of low-income housing by enhancing the Low-Income Housing Tax Credit, with increased state allocations and a reduced tax-exempt bond financing requirement.
To help pay for the expensive deal, the agreement would end the Employee Retention Tax Credit program. Lawmakers estimate that would save over $70 billion in taxpayer dollars by accelerating the deadline for filing backdated claims to Jan. 31, 2024 under the COVID-era program, which has been prone to major cost overruns and fraud.
"American families will benefit from this bipartisan agreement that provides greater tax relief, strengthens Main Street businesses, boosts our competitiveness with China, and creates jobs," Smith said in a statement. "We even provide disaster relief and cut red tape for small businesses, while ending a COVID-era program that's costing taxpayers billions in fraud. This legislation locks in over $600 billion in proven pro-growth, pro-America tax policies with key provisions that support over 21 million jobs. I look forward to working with my colleagues to pass this legislation."
In exchange for the pro-business parts of the deal, Democrats will be able to claim progress on one of their long-sought priorities: a revival of the expanded Child Tax Credit. "Fifteen million kids from low-income families will be better off as a result of this plan, and given today's miserable political climate, it's a big deal to have this opportunity to pass pro-family policy that helps so many kids get ahead," said Wyden in a statement. "At a time when so many people in Oregon and all across America are getting clobbered by rising rents and home prices, the improvements this plan makes to the Low-Income Housing Tax Credit will build more than 200,000 new affordable housing units. By incentivizing R&D, this plan is also going to promote innovation and help sharpen our economic competitiveness with China and the rest of the world. My goal remains to get this passed in time for families and businesses to benefit in this upcoming tax filing season, and I'm going to pull out all the stops to get that done."
However, a group of IRS managers known as the Professional Managers Association warned about the impact of such extensive changes just as tax season is about to begin.
"PMA fully respects that it is the job of Congress to set the tax law for the nation and we applaud Congress for coming together to work on a deal that supports American families in a way it sees fit," said Kelly Reyes, executive director of the PMA, in a statement Tuesday. "However, this deal could have been done three months ago or it could go into effect next year. It is too late for 2023 taxes. The IRS cannot implement the changes Congress is considering for this filing season without considerable delay, misunderstanding, and waste. Ultimately, we worry this will frustrate and confuse taxpayers more than it will benefit them. Months of work goes into preparing for the filing season. The IRS prints thousands of forms and prepares countless documents. If Congress changes the tax law, all this work must be redone. This will inevitably mean substantive work is delayed and the American people could receive their refunds later than expected. Additionally, thousands of seasonal and permanent IRS employees have already undergone training on the tax law. This training enables them to answer taxpayer questions and process returns correctly. Retraining these employees risks confusion, mistakes, and ultimately, a more frustrating experience for taxpayers."
IRS Commissioner Danny Werfel was
"In terms of tax packages that occur late in the year for us, which means right before filing season starts or right after, the IRS is no stranger to these types of late-breaking changes to the code that impact either the imminent filing season or the filing season that we're in," he responded. "As we've done in previous years, we'll review the legislation, roll up sleeves and get the job done. It's hard for me to fully comment until we see the details of any tax package, but just based on precedent and prior years, the IRS has shown a resiliency and an ability to quickly turn around these types of packages."
The deal may be difficult given the current political environment as the elections heat up.
"While lawmakers today struck a bipartisan tax deal to revive an expansion of the child tax credit and renew business investment deductions, the process has really only just begun," said John Gimigliano, head of legislative and regulatory services at KPMG's Washington national tax practice, in a statement. "A House-Senate deal was an essential first step, but the road ahead is long and there are several election-year stumbling blocks that must still be cleared."
The legislation will be facing timing obstacles as well. "The amount of time left to pass the bill as written is extremely limited," said Kasey Pittman, tax policy director for Baker Tilly's Washington Tax Council, in a statement. "The deal is retroactive; with the 2023 tax filing season opening on January 29, that's an incredibly tight window."
Regarding some of more high-profile impacts, Pittman said, "The changes being made to the Child Tax Credit are relatively modest; however, they are expected to have a substantial impact on low-income families, who may see an increase in their refunds. The 'trio' of business provisions that would alter the treatment of business interest expense, bonus depreciation and research and experimental costs are significant for business owners. The business interest provision will provide some relief to companies who have experienced not only reduced deductibility under current law, but a rapid increase in interest rates over the last couple years."
Finally, regarding the controversial Employee Retention Credit program, Pittman said, "This framework puts a clear end of month deadline on all companies looking to file ERC claims. The proposal also targets ERC promoters, who would be subject to penalties of $200,000 or 75% of their gross income, whichever is greater, if they are found to have aided and abetted the understatement of a tax liability from ERC claims."
Some advocates believe the deal on the Child Tax Credit doesn't go far enough as it won't be fully refundable. "Between rising food prices, the high cost of child care, and the resumption of student loan payments, millions of parents are finding it harder than ever to make ends meet," said Ailen Arreaza, executive director of ParentsTogether Action, a national family advocacy group with more than 3 million parents nationwide, in a statement. "These families, who often don't meet the income requirements to receive the full Child Tax Credit, must be prioritized in the program's expansion. This agreement takes a crucial first step in doing just that by expanding the CTC for some of the lowest income families. If passed, this bill could lift 400,000 children out of poverty. While these improvements will make a meaningful difference in the lives of millions of families, they do not go far enough. The 2021 expansion of the Child Tax Credit was a game changing policy that essentially cut child poverty in half. When Republicans refused to support its extension at the end of 2021, child poverty surged again. We have a proven tool that works almost immediately to ensure kids have enough food to eat and a roof over their heads — it's long past time we use it."
Another advocacy group, the National Taxpayers Union, responded favorably to the bill. "This bill strikes the right balance by providing families with the tax relief they need to get by during tough economic times, while giving the economy a shot in the arm with tax policies that encourage businesses to innovate and invest in our country," said NTU executive vice president Brandon Arnold in a statement. "The best way to tackle inflation at home is by encouraging American businesses and workers to produce more. We are finally getting a broad-based tax package from Congress that will do just that. Further, it's great to see them accomplish these goals without substantially adding to the deficit, by reining in the Employee Retention Tax Credit, which was a well-intentioned pandemic-era program that has run its course and has been abused by fraudsters. This tax package will ensure America's tax code remains globally competitive while helping working families deal with inflation and other economic hardships."
One possible hitch might come with possible changes to the threshold for the Form 1099.
"Historically, businesses that make payments totaling $600 or more to a person or other entity, including contractors, in the course of their trade or business are required to file Form 1099-NEC and 1099-MISC reporting the payments they make to the person in a taxable year," said Kelly Politte, a tax expert from the national law firm Hall Estill. "The bill increases the threshold for filing Forms 1099 to $1,000 beginning in 2024 tax year, with annual adjustments for inflation after 2024. While this proposed increase to the threshold for filing Forms 1099-NEC and 1099-MISC may result in less work and money being spent by businesses in complying with the requirement to file Forms 1099, it is also likely to have an unintended consequence relative to the recipients of the payments reporting payments as income on their tax returns. A primary purpose of the requirement to file Forms 1099 is to ensure that persons who receive payments, including self-employment income, report the income on their tax returns and pay any tax due thereon. While recipients of payments are required to report all their income on their returns regardless of whether or not they receive a Form 1099 reporting the amount they received in a given tax year, the increased threshold for filing a 1099 is likely to result in more people failing to report all of their income on their tax returns (and failing to pay tax on the same) if they aren't receiving Forms 1099 to hold them accountable for reporting the income in the first instance."
