Tax Extenders Legislation Fails to Pass

2024-08-15

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Earlier this month, the Tax Relief for American Families and Workers Act of 2024 (AFWA) failed to pass in the Senate on a procedural vote. The legislation represented the final opportunity before the presidential election to extend essential tax provisions. It was designed to implement certain changes and extensions that would benefit individual and business taxpayers, including the retroactive reinstatement to 2022 of R&D expenses, restoration of 100% bonus deprecation from 2023 through 2025, and revert changes to 163j calculations. Additional changes included increases to the federal Low Income Housing Tax Credit, Section 179D thresholds, and the information return (1099) threshold. The unfortunate outcome of this event is that those taxpayers on extension holding out for this bill to pass will now face potentially higher income in 2023 & 2024. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.

Section 174 Expensing – Research & Development Tax Credit

The Research and Development tax credit is a powerful federal tax incentive designed to reward organizations that engage in qualified innovation activities. Specifically, Section 174 allowed the deduction of eligible expenses paid in the year incurred. This was extremely useful for many businesses because they could immediately recoup costs and use the tax benefit to fund ongoing innovation projects. The immediate deduction was necessary for those with substantial costs to fund ongoing efforts.

However, when the Tax Cuts and Jobs Act (TCJA) was passed in 2017, one of the ways it funded the corporate tax rate cut was to change Section 174 expensing. In 2022, the rule was changed, requiring companies to amortize these expenses over a 5-year period (for domestic expenses) and a 15-year period (for international costs). The change means that companies must wait a minimum of five years to receive the tax benefits that would previously be received in the same year. This led many to re-evaluate innovation activities to determine how to fund them under the new rules.

Many had hoped the AFWA would retroactively reinstate immediate expensing to 2023 and extend it until the end of next year. Since it failed to pass in the Senate, companies must now report a higher taxable income. It is tough news for those who decided not to make large, estimated tax payments, hoping the AFWA would pass. These companies will likely owe significantly more in federal income taxes in 2024.

100% Bonus Depreciation

Bonus depreciation is another powerful tax savings tool because it allows a company to immediately write off a more significant amount of an asset’s costs in the first-year purchase. Other expenses would be required to be amortized and deducted over a longer time period. This is beneficial because it allows a more significant amount to be deducted against income tax than would otherwise be permitted under “normal” depreciation rules. Before the TCJA, only qualified new assets placed into service in 2017 were allowed to claim 50% bonus depreciation.

However, when the TCJA passed, it increased bonus depreciation to 100% for qualified property placed into service before December 31, 2022. In addition, it applied not only to new qualifying property but was expanded to include used property. It also expanded the type of property, which was eligible to include qualified film, television and live theatrical productions. The increase meant companies could depreciate the full asset cost in the first year, creating a significant tax benefit.

Many had hoped 100% bonus depreciation would be retroactively reinstated to 2023 and extended to January 1, 2026. Since it failed to pass, companies will now be forced to revisit depreciation schedules to match existing requirements, which are 80% bonus depreciation for 2023 and 60% depreciation for 2024. This also means many companies will be forced to report a higher federal income tax amount for 2024. There are similar concerns for corporate taxpayers who will have to face higher taxes.

Contact Us

The failure to pass the American Families and Workers Act of 2024 will create complications for those expecting some tax relief. In other words, now is the time to consult with a qualified tax advisor to determine how you will be impacted.

If you have questions about the information outlined above or need assistance with another tax or accounting issue, JLK Rosenberger can help. For additional information, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.