On January 19, 2024, the House of Representatives’ Ways and Means Committee advanced HR 7024, titled “Tax Relief for American Families and Workers Act of 2024,” with a decisive vote of 40-3. This bill represents a consensus reached earlier in the week between Chairman Smith of the Ways and Means Committee and Chairman Wyden of the Senate Finance Committee.

In an article by Cady Stanton and Doug Sword, published on the Tax Notes Today website on January 19, 2024, under the title “W&M Advances Tax Deal; May Vote in Late January or Early February (subscription required),” the authors suggest that the bill could potentially be presented on the House floor as early as the week of January 29.

The bill is divided into six titles:

Title I—Tax Relief for Working Families
Title II—American Innovation and Growth
Title III—Increasing Global Competitiveness
Title IV—Assistance for Disaster-Impacted Communities
Title V—More Affordable Housing
Title VI—Tax Administration and Eliminating Fraud

The proposed provisions of the bill in Titles I, II and VI are summarized below. For details on the other provisions, consult the summary posted by the Chairs of the House Ways & Means Committee and Senate Finance Committee announcing the outline of the agreement.

Tax Relief for Working Families

This title encompasses provisions aimed at expanding the refundable portion of the Child Tax Credit, as specified in IRC §24. The following changes would be made to the Child Tax Credit under the bill.

Per-Child Basis Calculation of Maximum Child Tax Credit. The maximum amount of the child tax credit that can be refunded would be determined by multiplying the earned income of the taxpayer exceeding $2,500 by 15% and then multiplying that result by the number of qualifying children. At present, the number of qualifying children does not affect the calculation of the maximum refundable child tax credit. This provision would be in effect from 2023 to 2025. [Act Section 101]
Aggregate Restriction for Refundable Child Tax Credit: In addition to the aforementioned cap, the maximum reimbursable child tax credit is further bounded by a fixed monetary sum per child, which is currently set at $1,600 per child, as per the existing law. The bill proposes to elevate the maximum reimbursable amount per child to $1,800 for 2023, $1,900 for 2024, and $2,000 in 2025, along with an inflation modification for 2024 and 2025. [Act Section 102]
Inflation Adjustment. The amount of the child tax credit, which is currently set at $2,000, would be indexed to inflation for the years 2024 and 2025, with the result rounded down to the nearest $100. [Act Section 103]
Election to Use Prior Year’s Earned Income. Taxpayers will have the opportunity to participate in an election in 2024 and 2025 to utilize the earned income from the preceding year when calculating the child tax credit. This election is available if the taxpayer’s earned income in the current year is lower than the earned income in the previous year. [Act Section 104]
IRS to Attempt to Automatically Issue Refunds to Early 2023 Filers. The implementation of these proposed legislative amendments, should they be enacted, would occur, at best, several weeks into the year 2024. Consequently, a substantial number of taxpayers, particularly those anticipating a tax refund, will likely file their tax returns before the Internal Revenue Service (IRS) is prepared to process returns claiming the revised Child Tax Credit. In order to address this issue, Section 105 of the Act stipulates that, to the greatest extent feasible, the IRS must recalculate the Child Tax Credit based on the aforementioned amendments and any information provided by the taxpayer. In the event that this recalculation results in a refund, the agency is obligated to issue said refund or credit as expeditiously as possible.

American Innovation and Growth

Title II of the Act amends and revises three provisions, one of which had initially taken effect in 2022 (the research and experimental expense provision of IRC §174). Another one had been modified in 2022 (the change in the calculation of Adjusted Taxable Income for use in the limitation on the deduction of business interest under IRC §163(j)). Lastly, the third provision had begun to phase out its benefit in 2023 (the 100% bonus depreciation rule found in IRC §168(j)). In all three instances, the law either permits the taxpayer to elect and use the earlier year TCJA rules or mandates their use for the years from 2023-2025.

Delay in the Requirement to Amortize Research and Experimental Expenditures to 2026

The proposed legislation seeks to amend Section 174 of the Internal Revenue Code (IRC) by introducing a new provision, Section 174(e). This amendment enacts provisions enabling the immediate deduction of research and experimental expenditures as outlined in the newly introduced Internal Revenue Code Section 174A. The revised legislation would apply to periods commencing prior to January 1, 2026, effectively deferring the implementation of the amortization rules stipulated in Section 174 until years succeeding December 31, 2025.

Section 174A(a) would permit an immediate deduction for domestic research or experimental expenditures that are paid or incurred by taxpayers during taxable years starting before January 1, 2026. Domestic research or experimental expenditures that are incurred in relation to a taxpayer’s trade or business would be eligible for this deduction, with the exception of expenditures related to foreign research as described in Internal Revenue Code (IRC) §41(d)(4)(F). [IRC §174A(b) as proposed] Foreign research, as defined by the IRC, refers to “any research conducted outside the United States, the Commonwealth of Puerto Rico, or any possession of the United States.”

Section 174A(c) would provide an election that a taxpayer may make to amortize domestic research or experimental expenditures over a period of not less than 60 months, commencing with the month in which the taxpayer initially realizes benefits from the expenditures. [IRC §174A(c)(1) as proposed] The election must be made for a taxable year no later than the due date (including extensions) of that year’s tax return. A taxpayer must utilize this method in subsequent taxable years unless the taxpayer obtains permission from the Internal Revenue Service to alter the method or period employed with regard to a portion or all of the expenditures. [IRC §174A(c)(2) as proposed]

As an alternative, a taxpayer can decide, in accordance with the proposed IRC §174A(d), to capitalize research or experimental expenses. Such an election would encompass all research or experimental expenditures unless permission is obtained from the IRS to apply the election to only a portion of the expenditures.

In accordance with the transition rules specified in Section 201(f) of the Act, any election made pursuant to Internal Revenue Code (IRC) Sections 174(c) (amortization over a period of up to 60 months) or (d) (capitalization of expenditures) for the initial taxable year commencing after December 31, 2021, shall be considered timely filed on the original tax return if submitted within the one-year period following the enactment date of the Act. This election can be made either by filing an amended return for the taxpayer's first taxable year beginning on the enactment date of the Act or through any other method prescribed by the Internal Revenue Service (IRS).

As stipulated in the proposed Internal Revenue Code (IRC) Section 174A(e)(3), any amounts paid or incurred in relation to the development of any software will be considered a research or experimental expenditure for the purposes of the proposed IRC Section 174A.

The bill stipulates that, in general, these provisions shall be effective for amounts paid or incurred in taxable years commencing after December 31, 2021. [Act Section 201(e)(1)] The bill stipulates that the provision allowing an election to treat particular expenditures as amortized over a span of up to sixty months subsequent to the initial receipt of a benefit will be applicable for the purposes of the research credit to taxable years commencing after December 31, 2022. [Act Section 201(e)(2)]

A transitional provision contained in Act Section 201 (f)(3) grants taxpayers the option to elect the application of IRC §59(e), which pertains to a 10-year write-off, within the one-year period commencing on the date of enactment of the bill by submitting an amended return. It is required in addition for the taxpayer to have otherwise satisfied the eligibility criteria for making such an election in conjunction with the original return (aside from the fact that the election was not submitted with the return).

An additional transitional rule, applicable during the 1-year period commencing from the date of enactment of the Act, as set forth in Act Section 201(f)(4), permits taxpayers to make or revoke, via an amended return, the election to claim the reduced research credit as provided in IRC §280C(c)(2).

Use of Earnings Before Interest, Taxes, Depreciation and Amortization in Computing Adjusted Taxable Income for Use in the Business Interest Limitation Under IRC §163(j)

In accordance with the provisions outlined in the Tax Cuts and Jobs Act as initially enacted, the deductibility of business interest was subject to limitations determined through a calculation of Adjusted Taxable Income (ATI). This calculation initially disregarded various deductions allowed for depreciation, amortization, and depletion, as well as other expenses. However, for taxable years commencing after December 31, 2021, the TCJA stipulated that ATI would be calculated for the relevant year and all subsequent years by incorporating deductions for depreciation, amortization, and depletion.

Section 202(a) of the Act moves to postpone until tax years starting after December 31, 2025 the requirement to count deductions for depreciation, amortization, and depletion in the calculation of Adjusted Taxable Income (ATI). In contrast, the default effective date provision in Section 202(b)(1) of the Act states that this change applies to tax years beginning after December 31, 2023 (including the 2024 calendar year).

Notwithstanding, Section 202(b)(2) of the Act stipulates that taxpayers are afforded the option to apply this alteration to years commencing subsequent to December 31, 2021. This enables taxpayers to deduct additional interest on returns for tax years beginning in 2022 and 2023. The provision mandates that taxpayers wishing to take advantage of this provision shall make the election at the time and in the manner prescribed by the Internal Revenue Service (IRS).

100% Bonus Depreciation to Apply for an Additional Three Years

In accordance with the provisions outlined in the Tax Cuts and Jobs Act, bonus depreciation commenced a phased reduction for the majority of assets placed in service subsequent to December 31, 2022. Specifically, the bonus depreciation amount for 2023 decreased from 100% to 80%. This reduction is scheduled to continue to increase in subsequent years.

In accordance with Section 203 of the Act, bonus depreciation will be maintained at a rate of 100% for assets placed into service by December 31, 2025. Subsequently, the TCJA’s bonus depreciation rate of 20% will be applied to the majority of assets placed in service in 2026, with the exception of long-lived assets. Long-lived assets put into service before January 1, 2027 will retain the benefit of the 100% bonus depreciation rate.

The proposed legislation would be applied retroactively to assets placed in service after December 31, 2022, as specified in Act Section 105(d).

Increase in §179 Expensing Amounts

The proposed legislation outlined in Section 204 of the Act aims to augment the permissible expense deductions for taxpayers under Internal Revenue Code Section 179. Specifically, the proposed legislation seeks to raise the maximum deductible amount for qualifying property in 2024 to $1.29 million. However, it is important to note that this amount will be decreased on a dollar-for-dollar basis by the amount exceeding $3.22 million for qualifying property. Furthermore, these specified amounts will be adjusted for inflation for tax years commencing after December 31, 2023.

Tax Administration and Eliminating Fraud

Title VI of the Act has two topics it covers, one increasing the threshold for reporting certain information reporting and the second dealing with reigning in the Employee Retention Tax Credit.

Increase in the Threshold Amount for Certain Information Returns

Under Act Section 601(a), the threshold amount would increase from $600 to $1,000 worth of payments made during the calendar year to a subcontractor, independent contractor or certain other payments required to be reported on Forms 1099-MISC and 1099-NEC.

As outlined in Section 601(b) of the Act, the threshold amount will be adjusted annually for inflation for calendar years subsequent to two thousand and twenty-four.

The new threshold amounts would apply to payments made after December 31, 2023 per Act Section 601(f).

COVID-19 Enforcement Provisions

In Section 602 of the Act, Congress has proposed the enactment of significant provisions to be utilized for the enforcement of COVID-19-related Employee Retention Credit (ERC) refund claims. Additionally, the Act mandates that all COVID-19-related ERC refund claims must be submitted no later than January 31, 2024.

General Effective Date

Although a number of special effective dates apply to items in Section 602 per the bill, unless otherwise mentioned in the bill the provisions in Section 602 apply to to aid, assistance, and advice provided after March 12, 2020. [Act Section 602(j)(1)]

Key Definitions

A number of key definitions are provided in Section 602 of the Act and apply for the various provisions found in Act 602.

COVID-ERTC Promoter

Many of the provisions apply to consultants who meet the requirement to be a “COVID-ERTC Promoter.” The definition is found in Act Sction 602(e).

A “COVID-ERTC Promoter” means, with respect to any “COVID–ERTC document”, any person which provides aid, assistance, or advice with respect to such document if:

Such person charges or receives a fee for such aid, assistance, or advice which is

Based on the amount of the refund or credit with respect to such document and,
With respect to such person’s taxable year in which such person provided such assistance or the preceding taxable year, the aggregate gross receipts of such person for aid, assistance, and advice with respect to all COVID-ERTC documents exceeds 20 percent of the gross receipts of such person for such taxable year, or

With respect to such person’s taxable year in which such person provided such assistance or the preceding taxable year:

The aggregate gross receipts of such person for aid, assistance, and advice with respect to all COVID–ERTC documents exceeds 50 percent of the gross receipts of such person for such taxable year, or
Both

Such aggregate gross receipts exceeds 20 percent of the gross receipts of such person for such taxable year, and
The aggregate gross receipts of such person for aid, assistance, and advice with respect to all COVID–ERTC documents (determined after application of aggregation rules found at Section 602(d)(3) of the Act) exceeds $500,000. [Act Section 602(e)(1)]

In the case of any taxable year of less than 12 months, these rules shall be applied with respect to the calendar year in which such taxable year begins (in addition to applying to such taxable year). [Act 602(e)(4)]

However, the term “COVID-ERTC Promoter” does not include a certified professional employer organization as defined at IRC §7705. [Act 602(e)(3)]

COVID–ERTC Document

Act Section 602(f) defines a “COVID-ERTC Document” as follows:

…any return, affidavit, claim, or other document related to any COVID-related employee retention tax credit, including any document related to eligibility for, or the calculation or determination of any amount directly related to any COVID-related employee retention tax credit.

COVID-Related Employee Retention Tax Credit

For purposes of Section 602 of the Act, a “COVID-Related Employee Retention Tax Credit” is:

(1) any credit, or advance payment, under section 3134 of the Internal Revenue Code of 1986 (third and fourth quarter 2021 ERTCs), and
(2) any credit, or advance payment, under section 2301 of the CARES Act. (2020 credits, along with credits from the first and second quarters of 2021). [Act Section 602(g)]

Increase in Assessible Penalty on COVID-ERTC Promoters for Aiding and Abetting the Understatements of Tax Liabilities

Section 602(a) of the Act significantly increases the penalty imposed by the Internal Revenue Code §6701 on promoters of COVID-19 employee retention credits (ERCs) who are found to have aided or abetted the underpayment of tax liabilities.

IRC §6701(a) provides that:

(a) Imposition of penalty. Any person--

(1) who aids or assists in, procures, or advises with respect to, the preparation or presentation of any portion of a return, affidavit, claim, or other document,

(2) who knows (or has reason to believe) that such portion will be used in connection with any material matter arising under the internal revenue laws, and

(3) who knows that such portion (if so used) would result in an understatement of the liability for tax of another person,

shall pay a penalty with respect to each such document in the amount determined under subsection (b).

The normal penalty under IRC §6701 is set IRC §6701(b) at $1,000 for such actions involving an individual and $10,000 for such actions involving a corporation.

In accordance with Section 602(a)(1) of the Act, the penalty levied against a COVID-ERTC promoter in relation to any COVID-ERTC document shall be the greater of the following amounts:

$200,000 ($10,000 in the case of a natural person)
75% of the income derived (or to be derived) by the promoter pertaining to the aid, assistance, or advice rendered with respect to the COVID-ERTC document

Section 602(a)(2) of the Act stipulates that the aforementioned does not give rise to any implication concerning the appropriate application of the knowledge requirement as outlined in IRC §6701(a)(3), previously referenced.

Nonetheless, Section 602(b) of the Act stipulates that the knowledge requirement for the Internal Revenue Service (IRS) to impose the penalty shall be deemed satisfied in the event that the promoter fails to comply with the due diligence requirements set forth in Section 602(c)(1) of the Act with respect to any COVID-ERTC document.

Accessible Penalty for Failure to Comply with Due Diligence Requirements

As stipulated in Section 602(c)(1) of the Act, a $1,000 penalty is imposed upon any COVID-19 Employee Retention Tax Credit (ERTC) promoter who neglects to adhere to the due diligence requirements as set forth in Section 602(c)(2) of the Act.

Section 602(c)(2) of the Act stipulates that, unless otherwise specified by the Internal Revenue Service (IRS), the due diligence requirements should be analogous to those set forth in IRC §6695(g). The pertinent text of IRC §6695(g) is as follows:

(g) Failure to be diligent in determining eligibility for certain tax benefits. Any person who is a tax return preparer with respect to any return or claim for refund who fails to comply with due diligence requirements imposed by the Secretary by regulations with respect to determining --

(1) eligibility to file as a head of household (as defined in section 2(b)) on the return, or

(2) eligibility for, or the amount of, the credit allowable by section 24, 25A(a)(1), or 32,

shall pay a penalty of $500 for each such failure.

The enhanced penalty only applies to a COVID-ERTC document that constitutes, or relates to, a return or claim for refund per Act Section 602(c)(3).

This provision applies to aid, assistance, and advice provided after the date of the enactment of this Act. [Act Section 602(j)(2)]

The Act provides a failure to comply with the due diligence requirements “shall not be construed to create any inference with respect to the proper application of section 6701(a)(3) of the Internal Revenue Code of 1986 with respect to any aid, assistance, or advice provided by any COVID-ERTC promoter on or before the date of the enactment of this Act (or with respect to any other aid, assistance, or advice to which such subsection does not apply).” [Act Section 602(l)(1)]

Assessable Penalties for Failure to Disclose Information, Maintain Client Lists, Etc.

The Act implements regulations applicable to COVID-ERTC promoters, mandating the provision of information analogous to that necessitated for listed transactions on any COVID-related employee retention tax incentive. Per Act Section 602(d) the rules apply for purposes of IRC §§6111 (Disclosure of Reportable Transactions), 6112 (Material advisors of reportable transactions must keep lists of advisees, etc.), 6707 (Failure to furnish information regarding reportable transactions) and 6708 (Failure to maintain lists of advisees with respect to reportable transactions).

Act 602(d)(1) provides that COVID-related employee retention tax credit (whether or not the taxpayer claims such COVID-related employee retention tax credit) shall be treated as both a listed transaction and a reportable transaction with respect to any COVID-ERTC promoter if such promoter provides any aid, assistance, or advice with respect to any COVID–ERTC document relating to such COVID-related employee retention tax credit for purposes of the four sections noted above.

Additionally, in accordance with Section 602(d)(2) of the Act, the COVID-ERTC promoter shall be regarded as a material advisor for the purposes of the four aforementioned sections.

The document entitled “The Tax Relief for American Families and Workers Act of 2024,” posted by the Chairs of the House Ways and Means Committee and Senate Finance Committee when the agreement on this bill was announced explains these provisions as follows:

Under current law, certain material advisors are required to disclose information to the IRS with respect to designated types of transactions (known as “listed transactions”) and to make lists of advice recipients with respect to such transactions available to the IRS upon request. Under this section, a COVID-ERTC promoter is similarly required to file return disclosures and provide lists of clients to the IRS upon request. (page 9)

These provision apply to aid, assistance, and advice provided after the date of the enactment of this Act. [Act Section 602(j)(2)]

The Act also provides that any return or list required to be filed or maintained, respectively, with respect to any aid, assistance, or advice provided by a COVID–ERTC promoter with respect to a COVID–ERTC document before the date of the enactment of this Act, shall not be required to be so filed or maintained (with respect to such aid, assistance or advice) before the date which is 90 days after such date. [Act Section 602(k)]

The Act provides that this provision and the later reporting rule “shall not be construed to create any in1ference with respect to whether any COVID-related employee retention tax credit is (without regard to subsection (d)) a listed transaction (or reportable transaction) with respect to any COVID–ERTC promoter…” [Act Section 602(l)(2)]

Similarly, a return or list shall not be treated as required (with respect to such aid, assistance, or advice) by reason of this provision if such return or list would be so required without regard to this provision. [Act Section 602(1)(2)] This prevents a promoter from attempting to argue no filings were required with regard to any items related to their advice prior to the effective date of the Act.

All ERTC Claims Must be Filed No Later Than January 31, 2024

The IRS had suggested to Congress in the second half of 2022 that they should consider cutting off the filing of new claims for the ERTC earlier than the standard limits on claims for refund under the IRC §6511. Under IRC §6511, employers would have been able to file claims for refund through April 15, 2024 for 2020 ERTC claims and April 15, 2025 for 2021 ERTC claims.

This bill proposes to follow the IRS advice and cut off the ability to file for ERTC claims on very short notice. The law provides “no credit or refund of any COVID-related employee retention tax credit shall be allowed or made after January 31, 2024, unless a claim for such credit or refund is filed by the taxpayer on or before such date.” [Act Section 602(h)]

These provisions apply to credits and refunds allowed or made after January 31, 2024. [Act Section 602(j)(3)]

Extension of Statutes of Limitations for IRS Assessments Related to COVID ERC Credits and Claims for Refunds on Wages Paid

In addition to cutting off new claims for refund early, the Act will extend the statute of limitations substantially on IRS assessments for ERC credits paid out, but will also extend the statute to claim income tax refunds related to additional wage deductions allowed when there is a reduction in ERC credits.

Notwithstanding the provisions of IRC §6501, the limitation period for any assessment related to a credit under CARES Act 2301 or IRC §3134 (ERC claims) shall not expire before the date that is six year from the latest of:

The date on which the original return which includes the calendar quarter with respect to which such credit is determined is filed;
The date on which such return is treated as filed under section 6501(b)(2) (generally April 15 of the year following the year in which the quarter to which the filing relates ends if the return is filed before that date); or
The date on which the claim for credit or refund with respect to such credit is made. [Proposed CARES Act 2301(o) and proposed IRC §3134(l)(A)]

The bill adds a similar provision to allow taxpayers facing a disallowance of ERTC to file a claim for refund of income taxes related to now deducting wages that were not deducted due to claiming the ERC. The law provides:

In the case of an assessment attributable to an ERC credit claimed, the limitation on the time period for credit or refund of any amount attributable to a deduction for “improperly claimed ERTC wages” shall not expire before the time period for such assessment expires.
The term “improperly claimed ERTC wages” means, with respect to an assessment attributable to an ERC credit claimed under this section, the wages with respect to which a deduction would not have been allowed if the portion of the credit to which such assessment relates had been properly claimed. [Proposed CARES Act 2301(o)(2) and proposed IRC §3134(l)(B)]

Note that taxpayers and advisers will need to make sure that if they agree to an extension of the statute with the IRS for an exam beyond the 6 year deadline, it appears the taxpayer and adviser must insure that the statute is extended on any claim for refund of “improperly claimed ERTC wages.”

This provision applies to assessments made after the date of the enactment of this Act. [Act Section 602(j)(4)]