In 2024, tax experts will face the difficult challenge of projecting future tax liabilities during an uncertain period. Some of the biggest concerns stem from the Tax Cuts and Jobs Act’s triad of business provisions and their future.
The end of 2025 is when bonus depreciation, amortization of R&D expenses, and the cap on business interest deductions are all supposed to expire. Practitioners must know the planning tools to support or safeguard important client tax positions regardless of the legislative outcome. At the same time, Congress deliberates over how these items will be treated going forward (i.e., whether to reinstate 100% bonus depreciation, the deduction of R&D expenses, and the full deduction of interest expense).
Updated Notices
The change to amortize R&D expenses under Section 174 of the Internal Revenue Code has presented challenges for many taxpayers. To separate costs that could be classified as otherwise deductible ordinary and necessary business expenses under Section 162, businesses should assess how they have historically treated R&D expenses.
This was an insignificant differential before the Tax Cuts and Jobs Act. But now that amortization has changed, this evaluation might be helpful.
Waiving the Requirement to File a Method Change
- IRS removed the constraint that many taxpayers had worried about, which was that taxpayers would not be able to register a change in 2023 if they had already filed one in 2022, by waiving the requirement to file a method change for the same item within five years of an earlier change.
- Businesses may mitigate the consequences of interest expense constraints by making decisions that allow for the capitalization of costs, even if they may still employ an accounting method adjustment to safeguard how they treat R&D spending. Because there isn’t much instruction available in this area, every such election should be made carefully. Thankfully, these elections are frequently held annually, allowing a company to adjust its policies if new laws or administrative guidelines are passed by the government.
Bonus Depreciation
Anxiety has arisen around the timing of capital investments and asset deployment into service due to the yearly decline in bonus depreciation. The bonus depreciation has been scaled down from 100% to 60% by 2024. 60% bonus depreciation is better than standard depreciation but is still not as good as full expensing from prior tax years.
In the interim, elections, and adjustments to the automated accounting technique might result in increased depreciation. Congress is also considering bringing back 100% bonus depreciation.
In the past, the IRS and Treasury have given taxpayers adopting legislative changes to depreciation favorable procedural instructions. Tax professionals and their clients should revisit depreciation to speed up recovery in terms of time and depreciation amounts, similar to the recommended scrub of R&D spending. A cost segregation analysis can also be beneficial for a sizable building, corporate headquarters, or office park.
- Increase access to the child tax credit with a progressive increase in the refundable component for 2023, 2024, and 2025.
- Eliminate the penalty for more prominent families: Ensure that the child tax credit phase-in is administered evenly to households with numerous children.
- One-year income lookback: Allow taxpayers to compute the child tax credit using current or prior-year income in 2024 or 2025, similar to bipartisan action taken six times in the previous 15 years.
- Inflation relief: Beginning in 2024, the tax credit will be adjusted to reflect inflation.
- Research and Development (R&D) expensing allows firms of all sizes to immediately deduct the cost of their R&D expenditures rather than waiting five years, promoting American innovation and enhancing our competitive position against China and the rest of the world.
- Interest deductibility: Continued flexibility for firms that borrow at higher interest rates to satisfy payroll obligations and expand operations.
- 100% expensing: Restore complete and prompt expensing for machinery, equipment, and vehicle expenditures.
Taiwan double tax relief: Strengthen America’s competitive position against China by eliminating the present double taxation for enterprises and personnel having operations in both the United States and Taiwan.
- Expand the small company expensing ceiling: Increase the investment that a small firm may immediately write off to $1.29 million, up from the $1 million maximum set in 2017.
- Reduce red tape for small firms by increasing the reporting threshold for enterprises that utilize subcontract labor from $600 to $1,000 and indexing for inflation, the first change since the 1950s.
- Help households get back on their feet by providing catastrophe tax assistance for recent storms, flooding, wildfires, and the Ohio train disaster.
- Increase the availability of low-income housing by expanding the Low-Income Housing Tax Credit, a successful public-private collaboration with more significant state allocations and a lower tax-exempt bond financing threshold.
- Saving approximately $70 billion in public cash by extending the deadline for filing backdated claims under the COVID-era Employee Retention Tax Credit to January 31, 2024, a program plagued with cost overruns and fraud.
Way Forward
A company’s tax situation may be improved and clarified during this uncertain time by using several procedural tools, which can be used to evaluate capital investments, determine any potential limitations on interest expense, or apply adjustments to the handling of R&D expenses. These tools will help taxpayers regardless of the outcome of any legislative agreements or new tax legislation enacted by the incoming administration.