Summary

On January 31, 2024, the United States House of Representatives passed the Tax Relief for American Families and Workers Act of 2024 (TRAFW Act), which is now under consideration in the Senate. The TRAFW Act, in addition to other changes, would implement several important business tax changes.

The Upshot

• The TRAFW Act would increase the amount of business interest that a taxpayer can deduct for tax years beginning after December 31, 2021 and prior to January 1, 2026.
• The TRAFW Act would permit 100% bonus depreciation of qualified property placed in service after December 31, 2022, and prior to January 1, 2026.
• The TRAFW Act would increase the amounts eligible for immediate expensing for qualifying property placed in service in 2024 and would allow taxpayers to deduct amounts paid for domestic research or experimental costs for tax years beginning after December 31, 2021.
• The TRAFW Act would allow domestic research and development expenses to be deducted.

The Bottom Line

Ballard Spahr LLP’s Tax Group will continue to monitor the TRAFW Act’s legislative progress and provide updates regarding any changes to the Internal Revenue Code.

On January 31, 2024, the United States House of Representatives passed the Tax Relief for American Families and Workers Act of 2024 (TRAFW Act), which is now under consideration in the Senate.

The TRAFW Act, in addition to other changes, would implement the following four changes to the Internal Revenue Code (Code):

1. Increase the amount of interest that can be deducted for tax years beginning after December 31, 2021 and prior to January 1, 2026;
2. Provide for 100% bonus depreciation for qualified property placed in service after December 31, 2022, and prior to January 1, 2026;
3. Increase the dollar amounts eligible for 100% expensing for qualifying property placed in service in 2024;
4. Allow taxpayers to deduct amounts paid for domestic research or experimental costs for tax years beginning after December 31, 2021; and
5. Impose penalties on Employer Retention Tax Credit (ERTC) promoters.

Increase in Interest Deductions

Under current law, a taxpayer is generally able to deduct interest expenses attributable to its trade or business up to the sum of: (1) the taxpayer’s business interest income for the tax year, (2) 30% of the taxpayer’s adjusted taxable income for the tax year, and (3) interest on any floor plan financing for the tax year. Business interest income generally is a taxpayer’s interest income in a tax year that is attributable to a trade or business.

“Adjusted taxable income” is calculated without regard to: (1) any item of income, gain, deduction, or loss that is not properly allocable to a trade or business; (2) any business interest or business interest income; (3) the amount of any net operating loss deduction; or (4) the amount of any deduction allowed under Code Section 199A. (Generally, Code Section 199A permits a sole proprietor, partnership, S-corporation, or certain trusts, to take a deduction for up to 20% income from a qualified trade or business.) In addition, for tax years beginning after December 31, 2021, adjusted taxable income is reduced by deductions allowable for depreciation, amortization, or depletion. The net effect of this calculation is that adjusted taxable income corresponds closely to earnings before interest and taxes, or “EBIT.”

The TRAFW Act would amend the definition of adjusted taxable income so that deductions allowable for depreciation, amortization, or depletion are not taken into account, thereby increasing the amount of interest that a taxpayer can deduct. Adjusted taxable income under the TRAFW Act would more closely resemble a taxpayer’s earnings before interest, taxes, depreciation, and amortization, or “EBITDA.”

The TRAFW Act’s permitted increase in interest deductions would apply to tax years beginning after December 31, 2023, and before January 1, 2026. However, the TRAFW Act would also permit a taxpayer to elect to apply the EBITDA adjusted taxable income definition to tax years beginning after December 31, 2021, thereby permitting a taxpayer to increase its interest deductions and reduce taxable income for the 2022 and 2023 tax years.

In the absence of IRS relief, partnerships subject to the centralized partnership audit regime would be required to file an administrative adjustment with respect to the 2022 tax year to increase its business interest deductions for the 2022 tax year.

Extension of 100% Bonus Depreciation (Code Section 168(k))

The TRAFW Act would permit 100% bonus depreciation of qualified property placed in service after December 31, 2022, and prior to January 1, 2026 (or January 1, 2027, for longer production period property and certain aircraft). In general, qualified property refers to machinery, equipment, computer software, water utility property, qualified film property, longer production period property, or certain aircraft.

Under current law, a taxpayer generally can take bonus depreciation deductions for the cost of qualified property placed in service in a tax year beginning prior to January 1, 2027. However, bonus depreciation is calculated on a phase-down, sliding scale. Qualified property placed in service after December 31, 2022, and prior to January 1, 2024, is subject to 80% bonus depreciation, and bonus depreciation is phased down by 20% for qualified property placed in service each tax year thereafter until it phases out to 0% for property placed in service for tax years beginning after January 1, 2027.

The TRAFW Act would eliminate this phase-down by providing that all qualified property placed in service after December 31, 2022, and prior to January 1, 2026, is subject to 100% bonus depreciation. This change enables taxpayers to deduct 100% of the costs of qualified property placed in service during 2023, 2024, or 2025. Qualified property placed in service after December 31, 2025, and prior to January 1, 2027, would remain eligible only for 20% bonus depreciation.

Increase in Bonus Expensing Limitations (Code Section 179)

Under current law, a taxpayer may elect to expense (as opposed to capitalizing and depreciating) 100% of the cost of qualifying property. Qualifying property generally includes depreciable tangible personal property (e.g., machinery, vehicles, furniture, or equipment), off-the-shelf computer software, and qualified real property that is purchased for use in the active conduct of a trade or business. For qualifying property placed in service in 2024, a taxpayer may expense up to $1,220,000 of the cost of qualifying property, subject to a phase-down for costs that exceed $3,050,000 with respect to qualifying property. This limitation and phase-down is applied on an aggregate basis per tax year.

Under the TRAFW Act, qualifying property placed in service in 2024 would be subject to an increased expensing limitation of $1,290,000, and an increased phase-down threshold of $3,220,000, thereby increasing the amount a taxpayer could expense with respect to qualifying property placed in service in 2024. For tax years beginning after 2024, the expensing limitation and phase-down threshold would be adjusted for inflation.

Allowable Deduction for Domestic Research or Experimental Costs

The TRAFW Act would retroactively “correct” one of the least popular provisions from the 2017 Tax Cuts and Jobs Act (TJCA) by allowing taxpayers to deduct amounts paid for domestic research or experimental costs for tax years beginning after December 31, 2021.

Before the TJCA, research or experimental costs generally were deductible when incurred. Effective for tax years beginning after December 31, 2021, the TJCA amended Code Section 174 to require taxpayers to capitalize and amortize such expenditures ratably over a five-year period for research conducted in the United States or a 15-year period for research conducted outside of the United States.

The TRAFW Act would allow taxpayers to deduct domestic research or experimental costs incurred after December 31, 2021, through December 31, 2026, but would continue to require foreign research or experimental expenditures to be amortized over 15 years. A transitional rule would allow a taxpayer that amortized its domestic research or experimental costs incurred in 2022 tax year to treat the TRAFW Act provision as a Code Section 481(a) adjustment for the 2023 tax year. Such a taxpayer would be able to take the adjustment into account ratably in its 2023 and 2024 tax years.

ERTC Promoter—Penalties

As we highlighted in a prior alert, the TRAFW Act takes aim at perceived taxpayer abuses of the Employee Retention Tax Credit (ERTC). In certain circumstances, the TRAFW Act would permit assessable penalties against ERTC promoters for:

1. aiding and abetting understatements of income;
2. failure to conduct due diligence with respect to filing tax returns;
3. failure to report certain information for reportable transactions;
4. failure to maintain certain information for listed transactions.

Collectively, these penalties can potentially exceed $200,000 for each improper ERTC refund claim.

Under the TRAFW Act, “ERTC Promoter” is defined as any person that:

1. charges a fee based on the amount of ERTC claimed or meets a gross receipts test (defined below), and
2. provides aid, assistance, or advice with respect to an affidavit, refund, claim or other document relating to an ERTC, or with respect to eligibility or the calculation of the amount of the ERTC.

The gross receipts test is satisfied if:

1. a person’s aggregate gross receipts derived from providing ERTC aid or advice exceeds half of the person’s total gross receipts for the relevant year, or
2. both:
   1. a person’s aggregate gross receipts for the relevant year from ERTC aid or advice exceed 20% of the person’s total gross receipts for the relevant year; and
   2. the person’s aggregate gross receipts from ERTC aid or advice for the relevant year exceed $500,000.

The TRAFW Act would provide that if an ERTC promoter is determined to have aided and abetted an understatement of tax liability (as determined in Code Section 6701), then the ERTC Promoter is subject to an assessable penalty of the greater of:

1. $200,000 ($10,000 in the case of a ERTC Promoter who is a natural person); or
2. 75% of the gross income of such ERTC Promoter from providing such aid and assistance (the “Aiding and Abating Penalty”).

The TRAFW Act further provides that an ERTC Promoter would be required to satisfy certain due diligence requirements (generally set forth in Code Section 6695(g)) with respect to providing advice regarding the ERTC and tax return preparation. Failure to meet such due diligence requirements would result in a $1,000 assessable penalty and create a presumption that the ERTC Promoter meets certain knowledge requirements necessary for imposition of the Aiding and Abating Penalty.

The TRAFW Act would additionally create a presumption that an ERTC (whether or not a taxpayer claims the ERTC) is treated as a listed transaction and reportable transaction with respect to an ERTC Promoter that provides any aid or assistance with respect to the ERTC. If enacted, ERTC Promoters potentially would be subject to penalties for failure to disclose or retain information related to such reportable and listed transactions. The penalty provisions enacted by the TRAFW Act would be effective for aid, assistance, or advice provided after March 12, 2020.

Lastly, the TRAFW Act would extend the statute of limitations for an IRS assessment attributable to ERTCs to six years after the later of:

1. the filing date of the original return for the quarter in which ERTC was claimed;
2. the date on which the return subject to assessment is deemed to be filed under present-law (Code Section 6501); or
3. the date on which the claim for ERTC or refund for ERTC is made.

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