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1 1 (February 13, 2024)

handle is hein.crs/goveoid0001 and id is 1 raw text is: Congressional Research Service Informing the legislative debate since 1914 0 Updated February 13, 2024 Business Tax Provisions in the Tax Relief for American Families and Workers Act of 2024 The Tax Relief for American Families and Workers Act of 2024, released by the Senate Finance Committee on January 16, 2024, and passed by the House on January 31, 2024 (H.R. 7024), would, among other provisions, modify four business tax provisions enacted in P.L. 115-97, referred to as the Tax Cuts and Jobs Act of 2017 (TCJA). Temporary provisions include extending first-year expensing, reinstating expensing for research expenses, and reinstating a broader definition for income for purposes of the limit on interest deductions. The proposal would also increase the dollar limit of first-year depreciation aimed at smaller businesses, a permanent provision. Extension of First-Year Expensing, of Equiprment (Bonus Deprediation') The proposal would retroactively extend first-year expensing, commonly referred to as bonus depreciation, for assets placed in service after December 31, 2021, through 2025. The cost of assets that provide services over a period of time, such as machines or buildings, is deducted over a period of years as depreciation. The schedule of depreciation deductions depends on the asset's life and the distribution of deductions over that life. Straight-line depreciation is used for structures, where equal amounts are deducted in each year. For equipment, deductions are accelerated, with larger amounts deducted in earlier years. Equipment is most commonly depreciated over 5 or 7 years, but some short-lived assets are depreciated over 3 years and some longer-lived assets are depreciated over 10, 15, or 20 years. Residential structures are depreciated over 27.5 years and nonresidential structures are depreciated over 39 years. Aside from the desire for economic stimulus, traditional economic theories suggest that tax depreciation should match economic (physical) depreciation of assets as closely as possible. The expensing provision enacted in 2017 allows immediate deductions for depreciation, which are valuable because of the time value of money. A fixed reduction in tax liability today is worth more than that same fixed reduction in tax liability in the future. Expensing provisions allow a firm to deduct the cost of an asset the year it is placed in service. Expensing or partial expensing is also commonly referred to as bonus depreciation. The expensing provision does not apply to structures. The TCJA allowed full (100%) expensing of investments in qualifying equipment and property through 2022. The share of investments that can be deducted in the year they are incurred is scheduled to decrease to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% for property acquired and placed in service in 2027 and thereafter. Full expensing leads to an effective zero tax rate on new tangible business investment financed with only equity, and to negative tax rates when financed in part by borrowing. The regular depreciation rules are accelerated (relative to economic depreciation) and also confer a benefit that is estimated to result in a 13.7% tax rate for equity-financed corporate investment, below the 21% statutory rate. For more on effective tax rates, see CRS Report R45186, Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97), by Jane G. Gravelle and Donald J. Marples. Incentives for equipment investment favor those investments relative to investment in buildings, although they lead to uniform treatment with respect to investment in most intangibles which are currently expensed (such as advertising to create brand identification, workforce development, and, until 2022, research expenses). See CRS Report RL31852, The Section 179 and Section 168(k) Expensing Allowances: Current Law, Economic Effects, and Selected Policy Issues, by Gary Guenther for further discussion. Reinstatement of Expensing of Research and Experimentation Expenditures The proposal would reinstate expensing of research and experimentation (R&E) expenditures for 2022-2025. Investments in research and development (such as the cost of labor and supplies) have traditionally been expensed (immediately deducted), although these investments create assets that yield income in the future. The TCJA provided that, beginning in 2022, domestic costs would be deducted in equal amounts over five years (i.e., five-year amortization). Foreign costs are subject to 15-year amortization. This treatment does not apply to equipment and structures used for research and development, which are recovered using regular depreciation rules. Research expenditures are also eligible for a tax credit, and the amount of expenditures is reduced by the credit for both expensing and five-year amortization. These features together lead to significant negative effective tax rates under either expensing or five-year amortization, largely due to the credit. For effective tax rates, see CRS Report R45186, Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97), by Jane G. Gravelle and Donald J. Marples.

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