With pre-pandemic business tax credits expiring, Republicans and Democrats have come together to support a new framework for tax reform—one that offers several benefits to companies across the U.S. The $70 billion Tax Relief for American Workers and Families Act promotes innovation and supports working families and communities struck by disaster.
As the 2023 tax filing season approaches, the framework is quickly gaining momentum in Washington. Senate Finance Committee Chairman Ron Wyden (D-OR) and House Ways and Means Committee Chairman Jason Smith (R-MO) announced the legislation on January 16. On January 19, the House Ways and Means Committee approved the tax relief package with overwhelming 40-3 bipartisan support. On January 31, the U.S. House of Representatives passed the bill in a 357-70 vote, fast-tracking the legislation through a “suspension of rules” process that requires backing from two-thirds of the chamber. Now, the bill heads to the Senate, where lawmakers will need to act quickly to avoid confusing taxpayers and tax preparers come March and April.
Curious about what the proposed tax breaks mean for your business and 2023 filing? Below we walk through the potential benefits of the bipartisan bill and the likelihood of the framework being signed into law.
New tax legislation brings key benefits to businesses
The act aims to encourage innovation and promote economic growth by:
- Temporarily restoring full expensing for domestic R&D. Since the start of 2022, companies have been required to spread deductions for investments in domestic R&D out over five years (15 years for foreign-sited R&D). The tax deal would return to R&D expensing for R&D occurring within the United States, applying retroactively for the 2022 and 2023 tax years and continuing until the end of 2025
- Restore a less restrictive limitation on business deductions for net interest expense, returning to a 30 percent limit based on EBITDA (earnings before interest, taxes, depreciation, and amortization) rather than EBIT (earnings before interest and taxes); the tighter limitation based on EBIT took effect beginning in 2022, and the proposal would allow companies an election to use the looser limitation for 2022 and 2023 and require the EBITDA-based limitation for 2024 and 2025
- Extending 100% bonus depreciation through 2025, allowing businesses to fully and immediately expense qualified property, such as machines, equipment, and vehicles.
- Increasing Section 179 deduction, providing businesses with greater flexibility in deducting investment costs for qualifying property.
The bill also introduces measures to support the growth of small businesses by:
- Increasing the amount of investment that a small business can immediately write off to $1.29 million, an increase above the $1 million cap enacted in 2017.
- Cutting red tape for small businesses by adjusting the reporting threshold for businesses that use subcontract labor from $600 to $1,000 and index for inflation – the first update to the threshold since the 1950s.
Will the proposed tax changes make their way through Congress in time?
The race is on to pass the Tax Relief for American Workers and Families Act in time for its policy changes to impact 2023 filings. Despite its favorable committee approval and speedy House vote, the bill could face challenges on its path to being signed into law.
The Institute for Taxation and Economic Policy criticized the tax changes, saying they would benefit companies like Google, Apple, and Meta that the organization feels already pay too little in taxes. Republicans and Democrats are also hotly debating the Child Tax Credit portion of the bill.
Still, dozens of organizations have shown their support for the legislation, including Americans for Tax Reform, the National Taxpayers Union, the Taxpayers Protection Alliance, the America First Policy Institute, and Independent Women’s Voice.
Beyond party-line debates, there is also the hurdle of implementing the new policy so close to tax time. National Taxpayer Advocate Erin Collins is concerned about the IRS being able to adjust to significant tax law changes during tax season and worries that the proposed legislation would “negatively impact the filing season.” At the same time, IRS Commissioner Danny Werfel has dealt with less-than-ideal timing of Congressional tax law changes in the past.
Next steps for the tax relief program
While the Senate could vote on the tax relief package in the next few weeks, the process may be slowed down by debates over fine-tuning the amount of the child tax credit and the deduction limits on state and local taxes.
“My goal remains to get this passed in time for families and businesses to benefit in this upcoming tax filing season, and I’m going to pull out all the stops to get that done,” said Senator Wyden in a statement.
If moving the bill through Congress extends beyond this month, it could face additional hurdles as the election year heats up.
The impact on 2023 business tax filings
Curious about how the Tax Relief for American Workers and Families Act could impact your 2023 filing? Perkins is keeping a close eye on the proposed legislation. To discuss whether an extension is the right move for your company, reach out to us today.