Even though the House of Representatives passed the Tax Relief for American Families and Workers Act of 2024, including the reinstitution of immediate expensing for domestic research expenditures, in a staggering bipartisan vote of 357 to 70, it still remains unclear if the Senate can pass this crucial legislation.
The Senate Finance Committee held a meeting last week titled: “American Made: Growing U.S. Manufacturing Through the Tax Code.” While many hoped the committee hearing was a sign for the act to move forward in the Senate, it remains uncertain whether the much-needed tax policy involving the immediate expensing of research expenditures will be pushed back until the 2025 tax year, even though all panelists at the hearing unanimously agreed that there is a critical need for this legislation in the current year.
The chair of the Senate Finance Committee, Senator Ron Wyden (D-Ore.), a co-writer of the act with Representative Jason Smith (R-Mo.), highlighted that millions of small businesses are anxiously awaiting the passage of the act as many of those same small businesses will cease to exist if the legislation is postponed. In addition, the Ranking Member of the Senate Finance Committee, Senator Crapo (R-Idaho), addressed the panel by not only stating his agreement in extending or making permanent the three major business tax provisions included in the act but also promoting that he may be the strongest advocate in Congress concerning the proposed business tax legislation changes. Crapo continued the discussion by praising the panelists for their examples of why extending the three business tax provisions from the Tax Cuts and Jobs Act is so critical.
The three major tax provisions included in the act that would impact businesses across the United States, include:
- Immediate expensing of domestic Section 174 research and experimental expenditures
- Increasing bonus depreciation for qualified property to 100% (currently only 60% for the 2024 taxable year), and
- Allowing for the interest expense limitation to be based on 30% of adjusted taxable income before depreciation and amortization.
While all of three of these provisions are familiar to the business community, they started to become severely limited in the 2022 and 2023 taxable years.
A consistent theme from all the panelists was that research expenditures are not made on a year-to-year basis, but instead require investment over an extended period. Panelists representing small to large businesses urged the Senate Finance Committee members to restore immediate expensing for domestic research and to make this change permanent in order to provide security and stabilization for businesses across the United States.
CEO Mark Widmar of First Solar FSLR +6.9% manages the largest solar manufacturer in the Western Hemisphere. First Solar’s primary competition is in China, and Mr. Widmar fears the current requirement to defer research expenses instead of immediate expensing will cause a further delineation between the U.S. and other innovative countries. Due to the new requirement to defer research expenditures in the 2022 taxable year, the company has ceased to invest in a new Ohio manufacturing plant worth $400 million and has significantly decreased its $200 million annual research spending. The current legislation not only delays First Solar’s ability to increase innovation in the U.S. when compared to its Chinese competitors but will also result in the loss of over 1,000 jobs.
Shannon Janis, vice president of global tax at Onsemi, highlighted that since the change to require the amortization of research expenditures, the United States has slipped to No. 30 out of 37 when measuring research incentives among the advanced world economies. She expressed her concern that if the ability to immediately expense research was not restored quickly, research would quickly shift to Europe, Asia, and other companies. Janis urged the committee to restore the immediate expensing of research expenditures to ensure imperative innovation in the United States.
Peter Huntsman, Chief Executive Officer of Huntsman Corporation, reiterated the need for stability in federal income tax legislation by highlighting China’s manipulation of the pricing of ethylene carbonate, a much-needed chemical for EV batteries. As a result, Huntsman was forced to suspend a $50 million project in Conroe, Texas, which would have increased U.S. manufacturing and production of the desired chemical. Huntsman emphasized the company’s horizon in research investments spanned 20 years at a time and would be severely limited if the company were required to analyze and make investments on a year-by-year basis.
If the act is supported by both the chair and ranking member of the Senate Finance Committee and clearly will help growth and innovation to prosper in the United States, could the budgetary impact of the act on the federal deficit be slowing down the process? The short answer is no. The overall estimated 10-year revenue effect of the act would decrease the federal budget by $399 million. The projection reflects over $77 billion of revenue being generated from eliminating fraud in relation to enforcement provisions surrounding the Covid-19-related employee retention credit, allowing not only the three business tax provisions to be offset, but also funding the modifications to the child tax credit and affordable housing income tax credits. Supporting immediate research expensing to foster U.S. innovation over the next two years appears to be an obvious choice, especially if it is primarily paid for by reducing government waste and fraud surrounding a Covid-19 pandemic program.
So, what is the hesitancy in moving the act forward? It depends on who you ask, but it appears that technical problems with the proposed bill are minimal. If you listen to the hearing, the one minor item of note concerned the “lookback” provision, which would allow families to utilize their current year or prior year earnings when calculating the enhanced child tax credit included in the bill. Instead, it could be likely that both parties feel they are close enough to the November 2024 elections, which could alter the representation in the White House and Congress, allowing a more partisan bill to move through in the future.
Similar to the panelists on the committee, we can only hope that Congress hears the voice of the people in that delaying crucial business tax legislative changes for two years could drastically hinder innovation in the United States and put the future of many small to mid-size businesses into jeopardy. The immediate deduction of research expenditures is imperative for the growth of business. However, the ability for businesses to access cash and pay a drastically increased tax bill can be distinctly different between large and small businesses. It is essential that Congress acts now to ensure small and mid-size businesses can continue to innovate alongside large multinational businesses, while allowing the United States to remain a global competitor.
Update
Top Senate tax writers indicated last week that more than 60 senators support the Tax Relief or American Families and Workers Act of 2024. There have been reports that Majority Leader Schumer plans to put the bill on the Senate floor for a vote in early April. The Senate is on recess until the week of April 8th. It is suspected that a dozen or more Republican votes will be needed to pass the bill with 60 votes. Senator Wyden has offered to remove the lookback provision currently included in the bill if it helps get the bill passed. Senator Mike Crapo has declined to predict the outcome of such a vote at this time.
This article was originally published by Lynn Mucenski Keck in Forbes on March 19, 2024.
Contact Us
For more information on this topic, please contact a member of Withum’s Business Tax Services Team.
