Tax Reform Makes Progress… Slowly
Pursuing tax policies that support hardwood business operations has long been a priority issue for the Hardwood Federation. Extending or making permanent the business-friendly tax benefits of the Tax Cuts and Jobs Act of 2017 (TCJA) has been on our radar since Donald Trump was elected President last November. The HF Team has been on the Hill and engaged with similarly minded coalitions for months advocating for extension and permanency. And progress is being made. Slow progress to be sure, but small steps add up to big change.
The first significant goal was met in May when the House of Representatives voted 215-214 to advance a comprehensive budget reconciliation bill that encompasses GOP policy priorities. The legislation includes robust tax provisions that revive and extend key business tax benefits, including full expensing, the research and development tax credit and the Section 199A deduction for S-Corporations and pass throughs. To pay for these provisions and others, the measure cuts spending for Medicaid and food assistance programs in addition to eliminating renewable energy tax credits authorized by the Inflation Reduction Act.
Key business tax benefit provisions included in the bill include:
100% Bonus Depreciation/Full Expensing: Language allows taxpayers to immediately expense 100 percent of capital investments in machinery and equipment made on or after January 20, 2025, and before January 1, 2030. House GOP leaders entered the reconciliation process hoping to extend this benefit permanently but opted for a 5-year extension based on cost concerns. We understand there is a strong appetite in the Senate to modify this provision to make it permanent.
Research & Development (R&D) Credit: The provision allows taxpayers to fully write off their R&D costs in the same year in which those costs are incurred. This benefit actually expired in 2022. The bill makes the R&D credit retroactive to January 1, 2025, and extends it through December 31, 2030. Again, the Senate is interested in making this benefit permanent.
Section 199A: The 20 percent deduction for S-Corporations and other pass-through structures expires at the end of this year. This benefit would not only be made permanent, but it is also increased to 23 percent.
Section 179: The proposal increases the maximum amount a business may write off certain expenses to $2.5 million and increases the phaseout threshold amount to $4 million.
EBITDA: The bill restores EBITDA as the measure for calculating business interest expense. The current standard established by TCJA is EBIT, which is not as generous and serves to make companies less competitive, particularly in a high-interest rate environment.
FDII and GILTI: Under the TCJA, after 2025, the foreign-derived intangible income (FDII) deduction was scheduled to be reduced from 37.5 percent of FDII to 21.875 percent, and the global intangible low-taxed income (GILTI) inclusion deduction amount was scheduled to be reduced from 50 percent to 37.5 percent under Sec. 259(a)(3). The bill would repeal those reductions.
BEAT tax: Under Sec. 59A, the base-erosion and anti-abuse (BEAT) tax is scheduled to increase from 10 percent to 12.5 percent after 2025, and regular tax
liability will be reduced (and the BEAT minimum tax amount therefore increased) by the sum of all the taxpayer’s income tax credits for the tax year. The bill would eliminate that increase and the provision reducing regular tax liability by the sum of the taxpayer’s tax credits.
Estate and Gift Tax Exemption: The basic estate and gift tax exemption amount and the generation-skipping transfer tax exemption would be permanently increased to $15 million. TCJA had temporarily increased it to $10 million (adjusted for inflation), but that increase is expiring next year. The $15 million exemption amount would be indexed for inflation after 2025.
State and Local Tax (SALT) Deduction: Language in the bill raises the SALT deduction cap from $10,000 to $40,000.
The legislation is now pending in the Senate where the upper chamber will attempt to revise the measure. Again, Senators have opined that they would like to make full expensing and the R&D credit permanent. But given the extremely narrow margin in the House—the bill passed by one vote—it will be interesting to see how the Senate proceeds knowing that significant revisions may disrupt the fragile framework in the lower chamber that enabled this bill to pass. The Hardwood Federation will be working with our Senate champions to encourage permanent extension of these two key business tax benefits.
In addition to restoring important business tax benefits that our sector relies on, the bill includes beneficial language on federal forest management. Included in the House Natural Resources Committee’s portion of the budget reconciliation package are provisions that direct both the U.S. Forest Service and the Bureau of Land Management to boost timber harvesting on lands these entities oversee by 25 percent over 2024 levels. House Natural Resources Committee Chairman Bruce Westerman (R-AR) is a strong proponent of forest heath and increasing active management of our federal forest landholdings. The Federation will also be tracking this provision as the budget reconciliation process moves forward in the Senate.
Although prospects for reauthorizing a comprehensive 5-year Farm Bill are appearing bleaker by the day, House leaders did opt to include certain Farm Bill programs in the House-passed budget reconciliation bill. Unfortunately, many of the programs that the hardwood sector supports and benefits from are not part of the bill. However, the measure does include positive language doubling funding for the Market Access and Foreign Market Development programs. As we know, these two funding sources support the American Hardwood Export Council operations to open up markets overseas for U.S. produced hardwood lumber products.
As of this writing, the goal of Senate leaders is to have this legislation passed through the upper chamber by
July 4. However, we suspect that as you read this, the Senate will still be engaged in complex negotiations to find the right balance of changes that will pass the Senate and not lose votes when it is sent back to the House for concurrence. The Federation Team will continue to be actively engaged in efforts to bring tax relief to hardwood companies.
