The pressing query that pervades public discourse concerns the ability of the US Senate to rescue the Tax Relief for American Families and Workers Act of 2024, recently passed by the House of Representatives with a notable bipartisan majority of 357 to 70. Notably, the legislation encompasses the reinstatement of immediate expensing for domestic research expenditures. However, its prospects in the Senate are shrouded in uncertainty. The Senate Finance Committee’s recent convening, titled “American Made: Growing U.S. Manufacturing Through the Tax Code,” aimed to signal the progress of the Act in the Senate. Despite these efforts, doubts persist regarding the enactment of the urgently needed tax policy related to the immediate expensing of research expenditures for the present tax year. There exists a potential scenario wherein the passage of the Act could be postponed until the 2025 tax year, despite resounding support from all speakers at the hearing on the imperative nature of the legislation.
Senator Ron Wyden (D-OR), the Chairman of the Senate Finance Committee and co-author of the Act alongside Representative Jason Smith (R-MO), underscored the urgent necessity for the Act’s passage. He underscored that a delay in the legislation’s enactment would result in dire consequences for millions of small businesses. Furthermore, Senator Crapo (R-ID), the Ranking Member of the Senate Finance Committee, articulated his endorsement for extending or permanently integrating the Act’s three principal business tax provisions. He even proclaimed himself as the most zealous advocate for the proposed business tax legislative changes in Congress. He commended the speakers for showcasing the critical nature of extending the three business tax provisions from the Tax Cuts and Jobs Act.
The Act comprises three substantial tax provisions: immediate expensing of domestic Section 174 research and experimental expenditures, a surge in bonus depreciation for qualified property to 100%, and the allowance of the interest expense limitation to be based on 30% of adjusted taxable income before depreciation and amortization. Although familiar to the business sphere, these provisions faced arduous limitations in the 2022 and 2023 tax years. The consistent argument among speakers was that research expenditures necessitate long-term investment, rather than year-to-year funding. Representatives of businesses spanning from small to large urged the Senate Finance Committee to reinstate immediate expensing for domestic research and enshrine it as a permanent change, providing stability and security for businesses nationwide.
Shannon Janis, Vice President of Global Tax at Onsemi, underscored that the mandate for the amortization of research expenditures positioned the United States 30th out of 37 advanced world economies in terms of research incentives. She conveyed apprehension that the absence of immediate expensing for research would lead to a shift of innovation to Europe, Asia, and other regions. Ms. Janis urged the committee to restore immediate expensing of research expenditures to buttress essential innovation within the United States.
The Act’s potential impact on the federal deficit might be impeding its advancement. Nevertheless, the estimated 10-year revenue effect of the Act indicates a reduction of the federal budget by $399 million. This projection encompasses over $77 billion in revenue generated from combatting fraud pertaining to the enforcement provisions surrounding the COVID-related employee retention credit. This not only offsets the three business tax provisions but also finances modifications to the child tax credit and affordable housing income tax credits. Supporting immediate research expensing emerges as a judicious course of action, particularly when funded by curbing government waste and and COVID-19 pandemic program fraud.
The reluctance to move the Act forward appears to be intertwined with the approaching November 2024 elections, which could potentially alter the composition of the White House and Congress, thereby influencing the passage of more partisan bills in the future. While there are minimal technical issues with the proposed bill, it seems that both parties may consider the looming elections as a factor that could sway the fate of the legislation.
The delay in effecting crucial business tax legislative changes could substantially impede innovation in the United States and jeopardize the prospects of small to mid-size businesses. Immediate deduction of research expenditures is imperative for business growth. Congress must take action promptly to ensure that businesses of all scales can continue to innovate and that the United States maintains its standing as a global competitor.
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