Business Tax Provisions in the Tax Relief for American Families and Workers Act of 2024

Business Tax Provisions in the Tax Relief for American Families and Workers Act of 2024

Updated February 13, 2024
Business Tax Provisions in the Tax Relief for American Families
and Workers Act of 2024
The Tax Relief for American Families and Workers Act of
2024, 40% in 2025, 20% in 2026, and 0% for property
2024, released by the Senate Finance Committee on
acquired and placed in service in 2027 and thereafter.
January 16, 2024, and passed by the House on January 31,
2024 (H.R. 7024), would, among other provisions, modify
Full expensing leads to an effective zero tax rate on new
four business tax provisions enacted in P.L. 115-97,
tangible business investment financed with only equity, and
referred to as the Tax Cuts and Jobs Act of 2017 (TCJA).
to negative tax rates when financed in part by borrowing.
Temporary provisions include extending first-year
The regular depreciation rules are accelerated (relative to
expensing, reinstating expensing for research expenses, and
economic depreciation) and also confer a benefit that is
reinstating a broader definition for income for purposes of
estimated to result in a 13.7% tax rate for equity-financed
the limit on interest deductions. The proposal would also
corporate investment, below the 21% statutory rate. For
increase the dollar limit of first-year depreciation aimed at
more on effective tax rates, see CRS Report R45186, Issues
smaller businesses, a permanent provision.
in International Corporate Taxation: The 2017 Revision
(P.L. 115-97), by Jane G. Gravelle and Donald J. Marples.
Extension of First-Year Expensing of
Equipment (“Bonus Depreciation”)
Incentives for equipment investment favor those
The proposal would retroactively extend first-year
investments relative to investment in buildings, although
expensing, commonly referred to as bonus depreciation, for
they lead to uniform treatment with respect to investment in
assets placed in service after December 31, 2021, through
most intangibles which are currently expensed (such as
2025.
advertising to create brand identification, workforce
development, and, until 2022, research expenses).
The cost of assets that provide services over a period of
time, such as machines or buildings, is deducted over a
See CRS Report RL31852, The Section 179 and Section
period of years as depreciation. The schedule of
168(k) Expensing Allowances: Current Law, Economic
depreciation deductions depends on the asset’s life and the
Effects, and Selected Policy Issues, by Gary Guenther for
distribution of deductions over that life. Straight-line
further discussion.
depreciation is used for structures, where equal amounts are
deducted in each year. For equipment, deductions are
Reinstatement of Expensing of Research
accelerated, with larger amounts deducted in earlier years.
and Experimentation Expenditures
Equipment is most commonly depreciated over 5 or 7 years,
The proposal would reinstate expensing of research and
but some short-lived assets are depreciated over 3 years and
experimentation (R&E) expenditures for 2022-2025.
some longer-lived assets are depreciated over 10, 15, or 20
years. Residential structures are depreciated over 27.5 years
Investments in research and development (such as the cost
and nonresidential structures are depreciated over 39 years.
of labor and supplies) have traditionally been expensed
Aside from the desire for economic stimulus, traditional
(immediately deducted), although these investments create
economic theories suggest that tax depreciation should
assets that yield income in the future. The TCJA provided
match economic (physical) depreciation of assets as closely
that, beginning in 2022, domestic costs would be deducted
as possible.
in equal amounts over five years (i.e., five-year
amortization). Foreign costs are subject to 15-year
The expensing provision enacted in 2017 allows immediate
amortization. This treatment does not apply to equipment
deductions for depreciation, which are valuable because of
and structures used for research and development, which
the time value of money. A fixed reduction in tax liability
are recovered using regular depreciation rules.
today is worth more than that same fixed reduction in tax
liability in the future. Expensing provisions allow a firm to
Research expenditures are also eligible for a tax credit, and
deduct the cost of an asset the year it is placed in service.
the amount of expenditures is reduced by the credit for both
Expensing or partial expensing is also commonly referred
expensing and five-year amortization. These features
to as bonus depreciation. The expensing provision does not
together lead to significant negative effective tax rates
apply to structures.
under either expensing or five-year amortization, largely
due to the credit. For effective tax rates, see CRS Report
The TCJA allowed full (100%) expensing of investments in
R45186, Issues in International Corporate Taxation: The
qualifying equipment and property through 2022. The share
2017 Revision (P.L. 115-97), by Jane G. Gravelle and
of investments that can be deducted in the year they are
Donald J. Marples.
incurred is scheduled to decrease to 80% in 2023, 60% in
https://crsreports.congress.gov

Business Tax Provisions in the Tax Relief for American Families and Workers Act of 2024
Some argue evidence suggests that there is underinvestment
from repaying debt in cheaper dollars are not recognized),
in research because the social benefits of the assets exceed
while most interest is not taxed to the lender. For estimates
the private benefits. That is, companies cannot fully capture
of total effective tax rates with full or partial debt finance,
the earnings from investments in research. Both expensing
see CRS Report RL34229, Corporate Tax Reform: Issues
and the R&E credit, they argue, are often justified on this
for Congress, by Jane G. Gravelle. This favoritism may be
basis. For a discussion of this evidence, see CRS Report
offered as a reason for limiting interest deductions.
RL31181, Federal Research Tax Credit: Current Law and
Policy Issues, by Gary Guenther.
First-Year Depreciation Dollar Limits
(Section 179 Expensing)
Reinstatement of the Earnings Before
This provision permanently raises the dollar limits on the
Taxes, Interest, Depreciation, and
amount of investment that can be expensed.
Amortization (EBITDA) for Determining
the Interest Deduction Limit
Regardless of the general rules on depreciation, a provision
The Tax Relief for American Families and Workers Act of
allows expensing of equipment up to a specified dollar
2024 would temporarily reinstate EBITDA as the basis for
amount, a provision aimed at smaller businesses. The TCJA
the 30% limit on interest deducted as a share of income for
raised that limit to $1 million, with the expensing phased
2022 through 2025.
out dollar for dollar after investment of $2.5 million. Those
provisions were indexed for inflation and were $1.16
Prior to the TCJA, the deduction for net interest was limited
million and $2.9 million in 2023. The proposal would raise
to 50% of adjusted taxable income for firms with a debt-
these limits to $1.29 million and $3.22 million in 2024,
equity ratio above 1.5. (Adjusted taxable income is income
respectively, and index them for inflation. Because of the
before taxes, interest deductions, and depreciation,
extension of expensing, this change is not that relevant until
amortization, or depletion deductions.) Interest above the
2026.
limitation could be carried forward indefinitely. The law
limited deductible interest to 30% of adjusted taxable
The expensing for smaller businesses is sometimes done as
income for businesses with gross receipts greater than $25
a simplification measure and sometimes to encourage
million. The provision also had an exception for floor plan
investment for small businesses. However, it also could
financing for motor vehicles. Businesses providing services
discourage investment in the phaseout stage.
as an employee and certain regulated utilities are excepted
from this new limit. Also, certain real property and farming
See CRS Report RL31852, The Section 179 and Section
businesses can elect out of this limit but must adopt a
168(k) Expensing Allowances: Current Law, Economic
slower depreciation method for real property or farming
Effects, and Selected Policy Issues, by Gary Guenther for
assets.
further discussion.
Under prior law and the temporary provisions of the TCJA,
Revenue Costs
this interest limit applies to earnings (income) before
The Joint Committee on Taxation estimates that the total
interest, taxes, depreciation, amortization, or depletion
cost for these provisions is $32.8 billion over 10 years
(referred to as EBITDA). After 2021, the TCJA changed
(FY2024-FY2033). Temporary expensing for depreciation
the measure of income to earnings (income) before interest
and R&D would have their initial losses ($68.3 billion and
and taxes (referred to as EBIT). Because EBIT is after the
$96.6 billion in the first two years) largely offset by future
deduction of depreciation, amortization, and depletion, it
gains because these provisions are timing shifts, with 10-
results in a smaller base and thus a smaller amount of
year estimates at $3.0 billion for bonus depreciation and
eligible interest deductions. The temporary broader base
$8.5 billion for R&D. There would nevertheless be a cost to
(EBITDA), which expired in 2021, allowed more interest
the government in increased interest payments to allow the
deductions. The more generous rules for measuring the
deferral of revenues. The move from EBITDA to EBIT has
adjusted taxable income base are more beneficial to
a 10-year cost of $18.8 billion for FY2024 through
businesses with depreciable assets, although affected
FY2033, with most of the cost ($16.4 billion) in the first
businesses might be able to avoid some of the change in the
two years. The increase in the dollar limit for Section 179
deduction rules by leasing assets from financial institutions,
expensing is estimated at $2.5 billion over 10 years.
such as banks, that generally have interest income.
Macroeconomic Effects
The restrictions on interest, called thin capitalization rules,
The Joint Committee on Taxation has indicated that the
were partially enacted to address concerns about large
macroeconomic effects of the bill, which also includes an
multinational businesses locating borrowing in the United
increase in the child credit, are too small and uncertain to
States as a method to shift profits out of the United States
quantify. The committee indicated that the business
and to foreign, lower-tax jurisdictions. See CRS Report
provisions will cause a shift in investment already planned
R45186, Issues in International Corporate Taxation: The
into the years through 2025.
2017 Revision (P.L. 115-97), by Jane G. Gravelle and
Donald J. Marples, for a discussion.
Jane G. Gravelle, Senior Specialist in Economic Policy
In addition, debt-financed investments are favored by the
IF12572
tax law because nominal interest is deducted (i.e., the gains

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Business Tax Provisions in the Tax Relief for American Families and Workers Act of 2024

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