By Dana Lee Cole
Hardwood Federation
The year — from a tax policy perspective — started out really 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 a number of 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 phase down at the beginning of 2023 where it dropped to 80 percent. At the beginning of 2024 it took another haircut to 60 percent and is slated to fully phase out in 2027. H.R. 7024 restores this benefit to full strength —100 percent — starting January 1, 2023, and extends the benefit though 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 full cost of R&D expenses in the same year in which the investments are made. The House bill again retroactively restores this key benefit 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 not as generous a metric for calculating interest expenses and so the net effect has been increased costs on U.S. businesses.
• Bump up 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.
In order to stitch together a bipartisan agreement, these business provisions were paired with an increase in the Child Tax Credit and, for the most part Democrats and Republicans came on board. Things were looking very positive…and then came the Senate.
Republican opposition in the upper chamber comes down to roughly 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 around 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 marked up in 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 a critical one 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 in a position to hold the pen on tax policy. In sum, their thinking is why not hold off on this bill now and tackle all of the expired and expiring provisions in one big bill next year.
At this point it is hard to envision a scenario where H.R. 7024 becomes law this year. Nevertheless, the Hardwood Federation team is visiting with Senate offices on a near daily basis urging for action on these critical tax benefits. We will continue to stay after it and keep you apprised of developments.
For more information about the Hardwood Federation, visit hardwoodfederation.wildapricot.org.
