Waiting on a Tax Bill

2024 from a tax policy perspective—started well. In a rare show of bipartisanship, the House of Representatives overwhelmingly passed H.R. 7024-the Tax Relief for American Families and Workers Act. The vote was 357-70. To summarize, the bill features several positive provisions for small and medium-sized businesses that populate our sector, including: 

• Retroactive extension of the 100 percent bonus depreciation tax benefit, otherwise known as “full expensing.” This benefit allows companies to fully write off the cost of machinery and equipment in the same year those costs are incurred. Full expensing began to decrease at the beginning of 2023, when it dropped to 80 percent. At the beginning of 2024, it took another cut to 60 percent, and it is slated to phase out fully in 2027. H.R. 7024 restores this benefit to full strength—100 percent—starting January 1, 2023, and extends the benefit through 2025. 
• Renewal of the Research and Development (R&D) tax credit, which expired in 2022. Like bonus depreciation, this provision allows companies to write off the total cost of R&D expenses in the same year the investments are made. The House bill retroactively restores this key benefit again and extends it through 2025.  
• Reversion back to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for calculating interest expense deductibility. Under the Tax Cuts and Jobs Act (TCJA), this standard was shortened to EBIT, which is a less generous metric for calculating interest expenses. So, the net effect has increased costs for U.S. businesses.  
• Increase in the Sec. 179 deduction limits. Right now, businesses may expense the cost of depreciable business assets up to $1.16 million. The bill raises that cap to $1.29 million.  

These business provisions were paired with an increase in the Child Tax Credit, and, for the most part, Democrats and Republicans approved the bill. Things were looking positive until the Senate posed a significant challenge to this bipartisan progress. 

Republican opposition in the upper chamber comes down to one part substance, one part process, and one part politics. On substance, there is concern around certain aspects of the Child Tax Credit provisions, namely the “look back” language, which allows families to use a prior year’s income to calculate the credit if their current year’s income is reduced. There is also some concern about how the bill is “paid for.” In terms of process, Senate Finance Committee Ranking Member Mike Crapo (R-ID) has raised the legitimate point that the legislation should proceed through regular order and be amended by the Senate Finance Committee. Senate Democrat leadership has avoided this step out of concern that too many changes to the bill would upset the delicate arrangement forged in the House that allowed the bill to pass the lower chamber.

And finally, politics are ever present in all negotiations here in Washington—whether it’s a tax bill, appropriations, a farm bill, or anything in between. Next year is critical for tax policy as many benefits in the TCJA are set to expire—even our own Sec. 119A deduction for S-Corporations and pass-through entities. Senate Republicans are banking on the prospect of retaking control of the upper chamber after the November election and being able to hold the pen on tax policy. In sum, it appears Republicans want to hold off on this bill now and tackle all the expired and expiring provisions in one big bill next year.  

It is hard to envision a scenario where H.R. 7024 becomes law in 2024. Nevertheless, the Hardwood Federation team is visiting with Senate offices on a near daily basis urging for action on these critical tax benefits. We remain committed to following its progress and will provide timely updates on any developments.