News & Insights

In a rare bipartisan move, Democrats and Republicans in the House and Senate have unveiled a long-sought tax bill — the Tax Relief for American Families and Workers Act (the “Act”) — that renews certain business tax breaks and includes an expansion of the Child Tax Credit.

Lawmakers on both sides of the aisle have been rushing to pass the bill in order to avoid a looming government shutdown — enacting a separate short-term stop-gap spending measure on Jan. 18 that is effective through early March.

Key provisions of the bipartisan tax deal would extend as far as the end of 2025, when major portions of the U.S. tax code put in place by the 2017 tax law are scheduled to return to previous levels.

In general, the deal provides three key tax breaks that Southern California businesses have been pursuing:

• Immediate deductions for domestic research and development costs. The agreement would restore full research and experimental expensing through 2025. Currently, these costs must be amortized over five years.
• An extension of the 100% bonus depreciation for most qualified property placed into service before Jan. 1, 2026. This is an important provision, especially the commercial real estate industry. Bonus depreciation had been limited to 80% of qualified costs last year and was scheduled to be reduced to 60% this year.
• An extension of the allowance for amortization, depreciation or depletion when calculating business interest. This is generally applicable for tax years beginning between Dec. 31, 2023 and Jan. 1, 2026, with an election available for tax years beginning between Dec. 31, 2021 and Jan. 1, 2024.

In another perk for businesses, as part of the Act companies operating in both Taiwan and the United States will get relief under a bilateral tax treaty — eliminating double taxation.

Additionally, the Act raises a tax reporting requirement for businesses sending forms to independent contractors from $600 to $1,000 and then adjusts it for inflation after 2024. It also would increase the amount of investment a business can immediately deduct instead of depreciate over time from $1 million to $1.29 million, and provides tax breaks for certain federally designated disasters, including wildfires.

Aimed at boosting the production of affordable housing as part of the new measure, the Low-Income Housing Tax Credit provision would restore a 12.5% increase to the amount of credit states can allocate that have previously expired. According to the Senate Finance Committee, this could secure the construction of more than 200,000 new units of affordable housing. The measure also lowers the 50% bond test threshold to 30% for 4% LIHTC bond projects, allowing for more production and lower costs.

Importantly for California taxpayers, the existing $10,000 limit on the deduction of state and local taxes would remain in place under the terms of the deal.

To pay for the deal, tax writers are proposing to eliminate by the end of this month the COVID-era employee retention tax credit — a refundable tax credit for certain eligible entities that were impacted by the pandemic — which many claim embodies government waste and fraud. An early close of this controversial program, originally slated to end April 15, 2025, is expected to save more than $70 billion.

While many hurdles remain and details are still emerging, the House and Senate tax writers are optimistic they can reach a broad agreement on this far reaching tax measure by the end of this month.

Phil Jelsma is a partner and chair of the tax practice team at Crosbie Gliner Schiffman Southard & Swanson (CGS3). The article was published in The Daily Journal and The Daily Transcript (subscriber only).