With Tax Law Changes Still Uncertain, When Should You File Your Tax Return?
William Bodnar, CPA
On January 31, 2024, the U.S. House of Representatives overwhelmingly passed the Tax Relief for American Families and Workers Act of 2024 (the Act). The Act contains several significant tax changes that benefit business owners, as well as providing increases to the child tax credit. The Bill is currently stalled in the Senate where it is expected to be taken up in early March. This blog focuses on the most significant business provisions.
Bonus Depreciation
The Act reinstates bonus depreciation to 100% for 2023 through 2025 tax years. Under the 2017 Tax Cuts and Jobs Act (TCJA), the 100% bonus depreciation allowance was scheduled to phase out through 2027 (reduced to 80% in 2023, 60% in 2024, 40% in 2025, finally 20% in 2026). In the provisions to the Act, bonus depreciation allowance will be reduced to 20% after 2025 through 2026, and then expire. Unless Congress would act to reinstate bonus, the depreciation calculations would revert to the normal modified accelerated cost recovery system (MACRS) rules.
179 Deductions
In addition to the bonus depreciation provisions, the IRC Section 179 deduction for businesses to expense certain qualifying property was increased from $1.22 million to $1.29 million and applies to property placed in service after 2023.
Reduction in Research and Experimentation (R&E) Expenses
For taxpayers engaged in research and development activities, the Act restores the ability to currently deduct R&E expenses (Section 174 costs). This provision is retroactive to January 1, 2022, and is applicable through the 2025 tax year. The TCJA required the Section 174 R&E expenses to be capitalized and amortized over 60-months beginning in 2022. Prior to 2022, taxpayers had the choice to elect to amortize the R&E costs over 60 months. Taxpayers that followed the new law and amortized R&E costs over five years would presumably be required to file an amended return, unless the IRS provides a means for claiming the deduction in a subsequent year’s return. It should be noted that R&E costs performed outside of the U.S. continue to be amortized over a 15-year period.
Legislative Changes
A third significant change for businesses is that the legislation restores the addition of depreciation, amortization and depletion expenses when calculating “adjusted taxable income” to determine the allowable business interest expense limitation under IRC Section 163(j). This calculation limits the deductibility of business interest in a given tax year. Any unallowed deductions are carried forward to succeeding tax years. The changes will increase the adjusted taxable income, allowing taxpayers a larger current interest deduction. These changes are effective for tax years beginning after December 31, 2023, and before January 1, 2026.
Termination of Employee Retention Credit
Finally, the authors of the Act intend to “pay for” these provisions through a termination of the filing for the Employee Retention Credits (ERC), effective January 31, 2024.
When Should You File?
Now the big question: should you file your tax returns now or wait for the passing (or not) of this Bill?
With possible tax law changes, clarity is king, so if your timing allows for it, an extension would be highly recommended.
Since this proposed change is currently slated to be a retroactive change to include 2023 and possibly 2022, in the case of the capitalized R&E expenses, we currently do not know how the IRS will handle the change during the current filing period. It’s possible that returns filed after the date the Bill passes will follow a new set of rules, and returns filed before that date will be grandfathered into the “old rules”.
It is also possible that the IRS will consider returns filed before the law change, which used the “old rules” to be filed incorrectly under the 2023 tax rules and would then need to be amended. Due to this uncertainty, Louis Plung & Company recommends filing an extension if any of the provisions of this law change affect your business. We will continue to keep you updated as information becomes available.
If you have additional questions, please reach out to your Louis Plung & Company Tax Advisor.
