In mid-January, the House introduced the Tax Relief for American Families and Workers Act (Act). The Joint Committee of Taxation has released its explanation of the Act, and the House Ways and means Committee has released a report discussing the Act. While there appears to be broad bipartisan support for the Act, its future (whether as a standalone bill or add-on to another bill) is uncertain.

A large portion of the act would amend several provisions originally enacted under the 2017 Tax Cuts and Jobs Act (TCJA), either by extending the term of provisions intended to promote economic growth or delaying the implementation of provisions that were originally enacted as a means to raise revenue. These provisions were previously limited in duration or proposed to apply in the years after the TCJA’s enactment as a means to pass the bill through the reconciliation process, which generally requires that a bill not increase the deficit for a certain number of years.

The Act also includes a number of unrelated proposals, including providing tax relief with respect to residents of Taiwan, modifying the low-income housing credit provisions, and modifying information reporting thresholds, among other items.

Each of these topics are discussed in additional detail below.

      I. Extenders

The Act rolls back limitations on business incentives set to expire under the TCJA. Specifically, the Act proposes (i) an expansion of deductions for research and experimentation (R&E) expenditures, (ii) an extension for bonus depreciation, and (iii) to allowing “adjusted taxable income” under section 163(j) to continue be calculated with deductions for depreciation, amortization and depletion. For a detailed analysis of these provisions, see our prior alert.

In addition to these provisions, the Act would increase the maximum amount a taxpayer can deduct under Section 179 for the cost of qualifying property placed in service during the tax year, to $1,290,000 per tax year (up from $1,160,000) and would increase the phase out threshold to $3,220,000 (up from $2,890,000). These amounts are adjusted for inflation in future years. The proposal would be effective for property placed in service in tax years beginning after December 31, 2023.

      II. Taiwan Relief

The Act includes rules on increasing global competitiveness, which are focused on providing expedited relief from double taxation with respect to cross-border transactions between US persons and certain residents of Taiwan (Taiwan Relief Act) and authorizes the President of the United States to negotiate and enter into one or more non-self-executing tax agreements with Taiwan (Taiwan Authorization Act).

Taiwan Relief Act

Among other things, the Taiwan Relief Act reduces withholding rates with respect to certain categories of US source income, incorporates permanent establishment (PE) rules, and sets forth rules for determining whether an individual or entity is a “qualified resident of Taiwan.” Thus, the Taiwan Relief Act provides benefits traditionally conferred by income tax treaties to certain residents of Taiwan. However, the Taiwan Relief Act is not effective until Treasury has determined, based upon certain reciprocity requirements, that Taiwan has provided reciprocal benefits to US persons.

Qualified Resident of Taiwan. In general a "qualified resident of Taiwan (QRT)" is entitled to the benefits conferred by the Taiwan Relief Act. A QRT generally is any person that is not a US person who is liable for tax in Taiwan and establishes a domicile; residence; management or control; or place of incorporation in Taiwan.

Treatment of Certain US Source Income. The US federal income tax on US source interest (other than original issue discount), royalties, amounts described in section 871(a)(1)(C), and gains described in section 871(a)(1)(D) that are paid to or received by a QRT is reduced from 30% to 10%. In addition, the US federal income tax on US source dividends that are paid to or received by a QRT is reduced from 30% to 15%, subject to exceptions regarding amounts subject to FIRPTA, payments between expatriated entities and related parties, certain amounts included in income under section 860C as it relates to REMICs, and dividends paid by a REIT other than qualified REIT dividends.

To the extent that a QRT is taxable as a corporation in Taiwan, such QRT may be eligible for a 10% rate with respect to US source dividends, provided that certain holding period and ownership requirements are satisfied. However, this further reduction is not available to RICs or REITs.

Permanent Establishments. Generally consistent with the Model Treaty, income of a QRT that is effectively connected with a US PE is subject to US federal income tax on a net basis.

Regulations. The Taiwan Relief Act grants to Treasury the authority to issue regulations or other guidance to carry out the Taiwan Relief Act, and, in doing so, includes a nonexclusive list of issues that regulations should address. Any regulations issued by Treasury must be consistent with the Model Treaty.

      Taiwan Authorization Act

The Taiwan Authorization Act authorizes the President of the United States to negotiate and enter into one or more non-self-executing tax agreements to provide bilateral tax relief with Taiwan beyond the benefits that the Taiwan Relief Act has already conferred. The Taiwan Authorization Act also sets forth the process for both approving and implementing any such agreement. The ability of the President to enter into any such agreement is dependent upon Treasury first determining that Taiwan has provided benefits to US persons that are reciprocal to the benefits provided to QRTs by the Taiwan Relief Act.

      III. Affordable Housing

The Act increases the ceiling for the state low-income housing credit by 12.5% through 2025.

In addition, generally, the low-income housing credit is allowable only if the taxpayer receives a credit allocation from a state or local housing credit agency. However, a building generally is allowed four-percent credits without receiving such a credit allocation if at least 50 percent of the aggregate basis of the building and the land on which the building is located is financed with tax-exempt obligations that are subject to the state private activity bond volume limit (tax-exempt bonds). If less than 50 percent of the aggregate basis of the building and the land on which the building is located is financed with tax-exempt bonds, only the portion of credits attributable to the bond-financed portion of the building is allowed without a credit allocation.

The Act would temporarily lower the 50-percent bond-financing threshold to allow four-percent credits without receiving a credit allocation if:

1. At least 30 percent of the aggregate basis of the building and the land on which the building is located is financed with one or more qualified obligations; and
2. At least five percent of the aggregate basis of the building and the land on which the building is located is financed with one or more qualified obligations that are part of an issue the issue date of which is after December 31, 2023.

This would apply for buildings placed in service in taxable years after December 31, 2023.

      IV. Information Reporting and Eliminating Fraud

Currently, taxpayers generally are required to file a Form 1099-MISC or Form 1099-NEC to report payments aggregating $600 or more in a taxable year to a single payee in the course of the taxpayer’s trade or business. The Act would increase this reporting threshold to $1,000, effective for payments made after December 31, 2023. The Act similarly would change the backup withholding threshold to align with the new $1000 reporting threshold.

In addition, the Act would implement penalties intended to combat fraudulent claims with respect to the employee retention tax credit.

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