House Bills Spur Discussion of Business Tax Extenders
On Friday, June 9, 2023, the House of Representatives unveiled three proposed tax bills. We view these bills as an opening offer, unlikely to pass in their present form, but they will inform later Congressional debate. In this summary, we will focus on the aspects of these bills related to federal income tax accounting methods and credits. Only H.R. 3938 “Build It In America Act” and H.R. 3937 “Small Business Jobs Act” impact these areas.
In the Build It In America Act, House Republicans have proposed several changes to § 174 regarding expensing research or experimental (R&E) expenditures as well as changes to the credit for increasing research activities. The act would retroactively restore § 174 expensing for 2022 through 2025. The bill clarifies that software development costs will continue to be treated as research or experimental expenditures. The reasonable research expenditures rule, which had been eliminated by the Tax Cuts & Jobs Act, would make a comeback under this act. Furthermore, § 41 would include a provision like the prior version of the § 280C addback and the reduced credit election. To address concerns regarding the individual Alternative Minimum Tax (AMT) and the § 59(e) election, the act clarifies that they would not apply to specified research and experimental expenditures when the Tax Cuts and Jobs Act (TCJA) changes are reinstated in 2026. Similarly, taxpayers using the percentage completion method in 2026 would include all R&E expenditures in the ratio, not just any amortization. Curiously, taxpayers would be allowed a late § 59(e) election if they amend their returns within one year. However, a late reduced credit election would not be permitted if this bill does not pass before the respective deadlines of September 15th or October 15th.
In cases where taxpayers have already implemented the TCJA version of § 174 for the year 2022, the transition to the new rules would occur on a modified cut-off basis in the following year. The adjusted basis at the end of the first 2022 tax year would be considered the 481(a) adjustment in the immediately succeeding tax year. However, there is some ambiguity regarding how this provision would apply if a taxpayer had two short tax years in 2022 and has already filed the second year’s return. Finally, when switching back to amortization in 2026, the change would be made on a cut-off basis (no § 481(a) adjustment).
Another significant change proposed by the Build It In America Act pertains to bonus depreciation. The act proposes an extension of the current 100% bonus depreciation provision until the end of 2025, after which it would decrease to 20% in 2026. Plants bearing fruits and nuts would also receive an extension of the 100% bonus depreciation benefit through 2025, followed by a stepdown to 20% in 2026. Longer production period property would use 100% bonus depreciation through 2026 with the stepdown to 20% in 2027.
The act also addresses the business interest limitation under § 163(j). It proposes an extension of the use of tax EBITDA instead of EBIT when calculating the 30% limit. This extension would apply until the end of 2025, providing businesses with additional flexibility in managing their interest expenses.
Lastly, the act includes provisions related to Inflation Reduction Act (IRA) credits. Specifically, several sections of the Inflation Reduction Act would be repealed prospectively. These include the clean electricity production credit, clean electricity investment credit, previously-owned clean vehicles credit, and qualified commercial clean vehicles credit. The clean vehicle credit would also undergo modifications.
In the Small Business Jobs Act, House Republicans proposed increases to the § 179 expensing limit to $ 2.5 million and the investment limit to $ 4 million. This provision would apply only to assets placed in service in years beginning after December 31, 2023 and the inflation adjustment would also restart in 2024. This bill would also create rural opportunity zones running through 2032.