The tax agreement known as the Tax Relief for American Families and Workers Act of 2024 has been moved forward by the House Ways and Means Committee for consideration on the House floor. This proposal aims to reinstate, on a temporary and retroactive basis, two significant business deductions related to cost recovery. Additionally, it seeks to extend the child tax credit until 2025, accompanied by various other modifications. The funding for this act is secured by implementing measures to prevent fraudulent disbursements of a tax credit established during the COVID era.
Although the package falls short of being ideal, it signifies a positive move by adopting a fiscally responsible strategy to enhance cost recovery. A key aspect is its effort to rectify a significant competitive drawback in the existing approach to research and development (R&D) by reverting to the international standard. This involves granting companies the full and immediate deduction of R&D expenses, encompassing salaries for scientists and researchers. Similarly, the package allows companies to fully and immediately deduct investments in equipment and other short-lived assets. Nevertheless, it introduces a temporary extension of these provisions only until 2025, creating uncertainty for taxpayers and somewhat dampening the otherwise robust pro-growth incentives of these policies.
The proposed legislation includes a temporary provision to reinstate full expensing for domestic Research and Development (R&D). Currently, starting from the beginning of 2022, companies are obligated to spread deductions for investments in domestic R&D over a five-year period (15 years for foreign-sited R&D) under the policy known as R&D amortization, instituted by the 2017 Tax Cuts and Jobs Act (TCJA). The tax deal seeks to revert to full expensing for R&D conducted within the United States. This provision would apply retroactively for the 2022 and 2023 tax years and extend until the conclusion of 2025.
The proposed legislation includes a temporary provision to reinstate 100 percent bonus depreciation for equipment and other short-lived capital assets. Under the Tax Cuts and Jobs Act (TCJA), companies were initially allowed to fully deduct the cost of such short-lived investments immediately, starting from the fourth quarter of 2017 until the close of 2022. Subsequently, the deduction began to phase out by 20 percentage points each year. In 2023, companies could deduct 80 percent of their short-lived investment costs immediately, and this deduction is set to decrease further in subsequent years. The bill aims to retroactively restore 100 percent bonus depreciation for investments made since the end of 2022 and maintain this provision at 100 percent until the conclusion of 2025.
For the tax years 2024 and 2025, the proposed bill entails adjustments to the maximum child tax credit to account for inflation, raising it from $2,000 to $2,100 in both years. As of the current 2023 tax year, if the child tax credit surpasses a taxpayer’s tax liability, they are eligible to receive up to $1,600 of the credit as a refund. This refund is determined based on an earned income formula, calculated as 15 percent of earned income exceeding $2,500.
The suggested changes include an increase in the limit on refundability from $1,600 to $1,800 for the tax year 2023, $1,900 in 2024, and $2,000 in 2025. Furthermore, an inflation adjustment is proposed for 2025, aligning the cap with the credit maximum of $2,100. The bill also accelerates the phase-in for taxpayers with multiple children and introduces an option for taxpayers to choose their prior-year earned income for calculating their maximum child tax credit.
It’s important to note that all four of these proposed changes to the child tax credit would expire after the conclusion of the year 2025.
Based on conventional estimates, the tax deal is projected to be roughly revenue-neutral, generating approximately $40 million in revenue from 2024 through 2033. The revenue losses resulting from retroactively altering bonus depreciation, R&D expensing, the interest limitation, and the child tax credit amount to $110 billion. These losses are accounted for in the table for the year 2024 since that is when tax revenues would experience changes.
As previously noted, the major policies incorporated in the tax deal are set to expire after 2025, implying that they do not have a lasting impact on the economy. However, during their effective period, the improved cost recovery for Research and Development (R&D) and machinery investment is anticipated to enhance investment incentives. On a dynamic basis, considering the temporary increase in the capital stock within the budget window, it is estimated that the tax deal would result in a federal revenue increase of $6 billion from 2024 through 2033. The relatively modest magnitude of this revenue feedback highlights how temporary tax policies are not as effective in boosting long-term economic growth.
Revenue Effect (Billions of Dollars) | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | Total |
---|---|---|---|---|---|---|---|---|---|---|---|
Adjust the maximum refundable child tax credit (CTC) based on the number of children | -$6.6 | -$3.3 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | -$10.0 |
Increase maximum refundable CTC ($1,800 in 2023, $1,900 in 2024, and $2,100 in 2025) | -$8.4 | -$4.1 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | -$12.5 |
Increase base CTC amount with inflation ($2,100 by 2025) | -$5.0 | -$5.8 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | -$10.8 |
Cancel R&D amortization from 2022 through the end of 2025 | -$89.1 | -$13.0 | $42.2 | $31.6 | $21.1 | $11.2 | $3.6 | $0.0 | $0.0 | $0.0 | $7.7 |
Restore 100% bonus depreciation from 2023 through the end of 2025 | -$46.5 | -$40.6 | $24.8 | $17.5 | $13.5 | $9.0 | $6.4 | $3.9 | $2.9 | $2.3 | -$6.7 |
Revert interest limit from 30% of EBIT to 30% of EBITDA from 2022 through the end of 2025* | -$24.4 | -$7.1 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | -$31.5 |
Scored Revenue | -$180.0 | -$73.9 | $67.0 | $49.2 | $34.6 | $20.2 | $10.0 | $3.9 | $2.9 | $2.3 | -$63.8 |
Revenue Scored by JCT* | |||||||||||
Increase in limitations on expensing of depreciable business assets | -$0.2 | -$0.4 | -$0.3 | -$0.3 | -$0.3 | -$0.2 | -$0.2 | -$0.2 | -$0.2 | -$0.2 | -$2.5 |
Assistance for disaster-impacted communities | -$2.5 | -$1.5 | -$0.6 | -$0.3 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | -$4.9 |
More affordable housing (low-income housing tax credit and bond financing) | $0.0 | -$0.2 | -$0.4 | -$0.7 | -$0.8 | -$0.8 | -$0.8 | -$0.8 | -$0.8 | -$0.8 | -$6.0 |
Increase threshold for requiring information reporting to $1,000, adjusted for inflation | $0.0 | -$0.1 | -$0.1 | -$0.1 | -$0.2 | -$0.2 | -$0.2 | -$0.2 | -$0.2 | -$0.2 | -$1.5 |
Modifying enforcement provisions for employee retention credits | $14.1 | $30.7 | $24.5 | $7.8 | $1.5 | $0.2 | $0.0 | $0.0 | $0.0 | $0.0 | $78.8 |
Conventional Revenue Total | -$168.6 | -$45.5 | $90.0 | $55.5 | $34.9 | $19.3 | $8.9 | $2.7 | $1.8 | $1.1 | $0.0 |
Dynamic Revenue Total | -$167.7 | -$39.8 | $89.9 | $55.5 | $34.8 | $19.3 | $8.9 | $2.7 | $1.7 | $1.1 | $6.4 |
Distribution (Percent Change in After-Tax Income) | 2024, Static | 2025, Static | Long-Run, Dynamic |
---|---|---|---|
0% – 20.0% | 4.8% | 2.4% | 0% |
20.0% – 40.0% | 1.2% | 0.6% | 0% |
40.0% – 60.0% | 0.4% | 0.2% | 0% |
60.0% – 80.0% | 0.3% | 0.2% | 0% |
80.0% – 100% | 1.0% | 0.5% | 0% |
80.0% – 90.0% | 0.3% | 0.2% | 0% |
90.0% – 95.0% | 0.4% | 0.2% | 0% |
95.0% – 99.0% | 0.8% | 0.4% | 0% |
99.0% – 100% | 2.1% | 1.2% | 0% |
Total | 0.9% | 0.4% | 0% |
While acknowledging positive aspects such as the restoration of expensing for R&D and business equipment investment, the author expresses concern about the temporary and retroactive nature of the changes. The argument is made that permanent and stable policies would provide greater economic gains by treating business investment as a key driver of long-term economic growth.
Disclaimer: This is not legal advice, consult an attorney for legal advice or contact us.
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