I. Introduction
On January 31, 2024, the House passed the Tax Relief for American Families and Workers Act of 2024 (the “Act”); the Act is now off to the Senate and will hopefully receive a vote before their recess begins on February 12th.
The Act covers a variety of tax topics, including the child tax credit, the incremental research credit (more commonly known as the research and development (or R&D) credit), bonus depreciation, and the employee retention credit (or ERC). These specific topics will be discussed in more detail in this tax update.
II. Child Tax Credit Updates
Under the Act, the child tax credit—a tax credit to provide financial relief to caretakers of children and dependents for their care expenses—would be expanded and changed in various ways. For one, the refundable portion of the credit would be determined on a per-child (instead of per-taxpayer) basis. This change would apply for 2023, 2024, and 2025.
Additionally, the maximum amount of the refundable portion of the credit would be based on statutorily set amounts instead of inflation adjusted amounts. The maximum amount for 2023 (which is currently at $1,600) would instead be increased to $1,800, with additional $100 increases each for 2024 and 2025. The overall maximum amount of the credit will be adjusted for inflation for 2024 and 2025. It is currently set at $2,000.
III. R&D Credit Updates
The R&D credit provides a credit against qualified research expenses so that companies can invest in innovation and technological and economic growth. However, the impact of the R&D credit has been dampened by a requirement for the relevant expenses to be amortized over a five-year period for tax years after 2021, instead of immediately deducted. The Act would delay this rule until 2026.
IV. Bonus Depreciation Updates
In 2017, the Tax Cuts and Jobs Act expanded the bonus depreciation rules by allowing property placed in service between September 17, 2017 and December 31, 2022 to immediately receive 100% bonus depreciation. This rate was reduced by 20% for each tax year after 2022. The Act would extend the 100% bonus depreciation rate through 2025. After this, the rate would revert to what it would have been under the Tax Cuts and Jobs Act, i.e., 20% in 2026 and 0% in 2027.
IV. ERC Updates
a. Immediate End to the ERC Program
The Act would end the ERC program as of January 31, 2024; if the Act is passed by the Senate, this ending would be retroactive. This program was created in response to the COVID-19 pandemic to assist certain employers who kept employees on the payroll even when their operations were fully or partially suspended, or their revenue significantly declined, during the pandemic. Currently, the ERC program is set to expire on April 15, 2024 (for 2020 claims) and April 15, 2025 (for 2021 claims).
Furthermore, the Act includes provisions related to ERC promoters (third-party processers of ERC claims); specifically, it significantly increases potential penalties such promoters could face for fraudulent claims, and it creates new disclosure requirements. This is in response to a large number of fraudulent ERC claims the IRS has become aware of that stem from third-party ERC companies, many of which are no longer even in business. These provisions will go a long way to assist employers who were taken advantage of during the ERC program’s run and hold ERC mills accountable for fraudulent actions.
The Act also extends the statute of limitations period for ERC claims to six years.
b. The Voluntary Disclosure Program (VDP) for ERC Claims
With the end of the ERC program imminently approaching, and the IRS’s understandable interest in finding fraudulent claims, it is important to keep in mind another ERC-related program that the IRS announced at the end of last year: the Voluntary Disclosure Program (or VDP).
The VDP, which was announced in December 2023 with release of the IRS’s Announcement 2024-3, is a repayment program for those businesses “that filed for and erroneously received the ERC” in order to “resolve their civil tax liabilities…and avoid potential civil litigation, penalties, and interest.”
The VDP not only helps the taxpayer to avoid these consequences, it also allows the taxpayer to keep 20% of the ERC erroneously claimed. In other words, a taxpayer that enters into the VDP will only need to repay 80% of the credit they claimed.
To be eligible for the VDP, (i) the taxpayer cannot be under criminal investigation, (ii) the IRS cannot have information about the taxpayer’s noncompliance, (iii) the taxpayer cannot be under an employment tax examination, and (iv) the taxpayer cannot have previously received notice and demand for repayment of its ERC.
Time is of the essence for the VDP since its deadline is March 22, 2024. Not only that, but the IRS has announced it will be sending out at least 20,000 ERC disallowance letters (in addition to the ones it has already sent out in the recent past) to taxpayers who have already claimed the ERC. If a taxpayer receives one of these letters, they will no longer be eligible for the VDP.
This program, like any IRS program, has its nuances, which are best navigated by a tax professional. If a taxpayer goes into the program blind, they risk providing the IRS with more information than is necessary, which leaves them exposed. By entering into the VDP, a taxpayer does not make itself immune from criminal prosecution for fraud, nor does the IRS waive any of its rights to judicial review.
VI. Conclusion
With the expanded child tax credit and bonus depreciation rule, and the punting of the burdensome R&D amortization rule, the Act aims to provide much needed relief for American families and workers following the pandemic, inflation, and other overwhelming events in our country. However, by ending the ERC program early, the Act takes away the opportunity for eligible employers to receive a credit they had been promised but hadn’t yet been able to claim; though ending it early does save the government money and may give the IRS more time to sort through its backlog of ERC claims (and weed out fraudulent ones in the process).
All of the topics in this tax update are only some of those covered by the Act. If that showcases anything, it’s that tax bills are usually quite expansive, detailed, nuanced, and—even for some experts—confusing in their application. If any of these topics seem like they may be beneficial to you or your business, it is vital to get with a tax professional to help you work through them and get the best benefit you can get for your taxes.
