The Senate on August 1^st rejected Democratic leaders’ move to pass the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024), bipartisan tax legislation passed by the House of Representatives, in a 48-44 vote. After months of inaction, today’s vote is seen as an election-season effort by Senate Majority Leader Chuck Schumer (D-NY) to challenge Republicans to vote against an expanded Child Tax Credit (CTC) and several popular-but-expired business tax breaks. The vote will likely kick new action on business tax breaks at least until after the November election, and potentially into the new Congress when a new president and congressional leadership may take over.

What’s in the Bill: This bill is a compromise of tax priorities between Democrats and Republicans that would revive several long-sought business tax breaks.

Notably, this legislation: 

• Restores and extends 100% bonus depreciation for qualified equipment and property purchases through 2025.  
• Revives the expired rule allowing R&D costs to be immediately and fully deducted rather than spread across five years. The break would be applied retroactively through 2022-2023 and extended through 2025.  
• Increases the amount of investment that a small business can immediately write off to $1.29 million, an increase above the $1 million cap enacted in 2017. This amount will increase in the future according to inflation, per a committee summary.
• Returns the 30% limit on business deductions for net interest expense based on EBITDA (earnings before interest, taxes, depreciation, and amortization) through 2025, rather than EBIT (earnings before interest and taxes) limit implemented in 2022.

This legislation would also gradually expand the refundable Child Tax Credit for low-income families from $1,600 to $2,000 until the end of 2025, as well as expand the Low-Income Housing Tax Credit (LIHTC) to states.

This legislation would be offset by an early cut-off of the pandemic-era Employee Retention Tax Credit. While businesses originally had until April 2025 to claim the tax credit, this new legislation will end the credit retroactively to January 31, 2024.

“For those looking for positives heading into 2025, they can note that Smith and Wyden have proven they can work together and find compromise”, said Jason Yaworske, Senior Director at Michael Best Strategies. “However, the failure of the broader Congress to be able to reach either bipartisan consensus or even to fully rally their own parties around a vision for the future of tax policy suggests a more dynamic environment for taxpayers than ever before. Regardless of whether the election produces unified or divided government, a new policy consensus will need to be developed across both individual and corporate tax policy. With the substantially larger policy expirations looming and increasing focus on deficit pressures, taxpayers across the individual and corporate spectrum need to be actively engaging now to mitigate risk and exploit early opportunities ahead of the largest tax policy shakeup in a decade.”

Analysis: As the expiration of the personal provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 approaches in 2025, lawmakers hoped to pass a bipartisan tax bill to serve as a ‘bridge’ to the larger exercise next year. The current bill, negotiated late last year by Ways and Means Chairman Jason Smith and Senate Finance Chairman Ron Wyden, would have extended key pro-growth TCJA business provisions, and temporarily expanded the refundability of the Child Tax Credit (CTC). The bonus depreciation provision is especially important for capital-intensive businesses and overall productivity, while R&D expensing is a long-time feature of our tax code that helps keep American businesses competitive and innovative. Democrats also hoped to keep some of their recent CTC innovations alive for future tax talks.

Finally, lawmakers hoped to crack down on perceived fraud and abuse of the COVID-era Employee Retention Tax Credit. Unfortunately, this bill was borderline ‘too late’ when it passed the House in January, given that its provisions are retroactive. In particular, retroactively expanding the CTC for 2023 would be an administrative nightmare, if possible. Its immediate prospects are dim-to-nonexistent, and if it is revived in the lame duck, it will need substantial revisions and renegotiation.

What’s Next? With the Senate vote on this tax package having failed on procedural grounds, it is unlikely that the Senate will take up another vote on this bill before the election. While action is possible in the lame duck period between the election and next year, it is unlikely that significant changes will be enacted prior to the new Congress and that the 2025 TCJA expirations will become the driving force in tax policy.

If former President Donald Trump wins back the White House and Republicans remain in control of the House and take control of the Senate, Republicans will likely wait until President Trump is sworn in to consider a broader extension and possible expansion of TCJA alongside potential novel tax reforms. If Vice President Kamala Harris wins the presidency, and if Democrats remain in control of the Senate and win the House, the Senate will likely continue to follow Senate Finance Chair Wyden’s lead in crafting priorities, but he will be pushed by more progressives to include a more expanded CTC program and amending income tax levels for high earners. In any configuration of divided control of government, the parties will need to seek out consensus of the type that alluded them here, but with broader reach and higher stakes around the additional 2025 expiring provisions. Like in 2012, any such compromise is likely to come late in the calendar year.

The Michael Best team continues to monitor relevant tax legislation for our clients. To learn more, please contact your servicing team.