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.

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Frequently Asked Questions

FAQs

Is the IRS cancelling the ERC program early?

The IRS released updated guidance on the Employee Retention Credit program on September 14, 2023. The news release below explains that the IRS has placed an immediate moratorium through the end of the year on the processing of new ERC claims in effort to curb fraudulent applications by bad actors. While a moratorium may sound alarming, this intentional pause is a common practice used by the IRS.

This is a developing situation, and we will continue to provide updates as new information is released. This what we know so far:

  • This news confirms that the ERC is still a valid and valuable tax incentive for qualified businesses – this is not a cancellation of the program.
  • The IRS moratorium will delay taxpayers from receiving their ERC funds, but it does not prevent taxpayers from continuing to file for the credit.
  • The IRS may ask for more information to process future ERC claims, which we are prepared to provide as it is already part of our normal substantiation process.
  • We will only release a credit for your business if we are confident you meet the IRS requirements. The positions we take are in line with the updated guidance that the IRS has provided.
  • A large portion of the businesses we evaluate for ERC do not meet IRS eligibility requirements. If we filed a credit on your behalf, it is because we are confident you qualify. You should not be concerned about the credits you have claimed. The positions we have taken continue to be in line with the updated guidance that the IRS has provided.
  • The IRS is taking steps to help taxpayers remediate any inappropriately claimed credits in good faith. The IRS encourages taxpayers to evaluate their eligibility for the credit. If you know anyone concerned with a credit they claimed individually or through a company other than ERC Pros, we can offer assistance through our ERC Substantiation Services.

On January 31, 2024, the House passed the Tax Relief for American Families and Workers Act of 2024, which proposed an end to the ERC program effective January 31, 2024. This is now pending approval from the Senate. Please note that we will not be processing any new ERC claims until a final vote is reached. Our team of attorneys and CPAs is closely monitoring the situation. For more information about this new legislation, read this Tax Update from our legal team on our blog.

Who can withdraw an ERC claim?

Employers for whom all of the following is true:

  • The claim was made on an amended employment return (Forms 941-X, 943-X, 944-X, CT-1X);
  • The amended employment return only added the claim for the ERC – no other adjustments were made;
  • The employer seeks to withdraw the entire amount of the ERC claim; and
  • The IRS had not paid the claim, or the check for the refund has not been cashed or deposited.
Who cannot withdraw an ERC claim?

Employers who have already cashed their refund checks or who claimed the ERC on their original employment tax return.

Why did the IRS create this withdrawal option?

The IRS created the withdrawal option to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims.

Why is this so important?

Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose penalties or interest, which can save you a lot of money.

How does an employer withdraw an ERC claim?
A: Review the instructions carefully at: Withdraw an Employee Retention Credit (ERC) claim | Internal Revenue Service (irs.gov) Section A: You haven’t received a refund and haven’t been notified your claim is under audit.
  • Make a copy of the adjusted return with the claim you wish to withdraw.
  • In the left margin of the first page, write “Withdrawn.”
  • In the right margin of the first page:
  • Have an authorized person sign and date it.
  • Write their name and title next to their signature.
  • Fax the signed copy of your return using your computer or mobile device to the IRS’s ERC claim withdrawal fax line at 855-738-7609. This is your withdrawal request. Keep your copy with your tax records. **If you can’t fax your withdrawal request, you can mail it to the address in the instructions for the adjusted return that applies to your business or organization. Before doing so you should make a copy of the signed and dated first page to keep for your records. It will take longer for the IRS to receive your request if you mail it. Mail your package via certified mail to track and confirm delivery.
Section B: You haven’t received a refund and you’ve been notified your claim is under audit. If you’ve been notified that the IRS is auditing the adjusted employment tax return that includes your ERC claim, prepare your withdrawal request using the steps in Section A, but don’t submit to the withdrawal fax line or mail it using the address below. Instead:
  • If you’ve been assigned an examiner, communicate with your examiner about how to submit your withdrawal request directly to them.
  • If you haven’t been assigned an examiner, respond to your audit notice with your withdrawal request, using the instructions in the notice for responding.
Section C: You received a refund check but haven’t cashed or deposited it.
  • Prepare the claim withdrawal request using the steps in Section A, but don’t fax the request.
  • Write “Void” in the endorsement section on the back of the refund check.
  • Include a note that says, “ERC Withdrawal” and briefly explain the reason for returning the refund check.
  • Make copies for your tax records of the front and back of the voided check, the explanation notes and the signed and dated withdrawal request page.
  • Don’t staple, bend, or paper clip the voided check; include it with your claim withdrawal request and mail it to the IRS at:

Cincinnati Refund Inquiry Unit

PO Box 145500

Mail Stop 536G

Cincinnati, OH 45250

**Mail your package via certified mail to track and confirm delivery.

What happens after submitting the withdraw request?

The IRS will send you a letter telling you whether your withdrawal request was accepted or rejected. Your approved request is not effective until you have your acceptance letter from the IRS. If your withdrawal is accepted, you may need to amend your income tax returns if you already included the claim for the ERC in the filing. If you need help, seek out a trusted tax professional.

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