On a notable Friday, June 9, 2023, a trio of tax bills was unveiled in the House of Representatives, stirring anticipation for potential changes in federal income tax accounting methods and credits. Although the bills, namely H.R. 3938 "Build It In America Act" and H.R. 3937 "Small Business Jobs Act," are deemed unlikely to pass in their current form, they are poised to serve as a catalyst for future Congressional discussions.
The Build It In America Act, primarily proposed by House Republicans, introduces a series of alterations to § 174, focusing on the expensing of research or experimental (R&E) expenditures, along with modifications to the credit for increasing research activities. One noteworthy aspect is the retroactive restoration of § 174 expensing for the years 2022 through 2025. Additionally, the act explicitly includes software development costs as eligible research or experimental expenditures.
A significant reinstatement under this act is the "reasonable research expenditures" rule, which had been eliminated by the Tax Cuts & Jobs Act. The bill also proposes changes to § 41, incorporating a provision similar to the prior version of the § 280C addback and the reduced credit election. To address concerns regarding the individual Alternative Minimum Tax (AMT) and the § 59(e) election, the act provides clarity that these would not apply to specified research and experimental expenditures when the Tax Cuts and Jobs Act (TCJA) changes are reinstated in 2026.
Further provisions in the Build It In America Act address the treatment of taxpayers using the percentage completion method in 2026, requiring all R&E expenditures to be included in the ratio, not just any amortization. Notably, taxpayers are granted a window for a late § 59(e) election if they amend their returns within one year. However, a late reduced credit election would not be permitted if the bill does not pass before the respective deadlines of September 15th or October 15th.
In cases where taxpayers have already implemented the TCJA version of § 174 for 2022, the transition to the new rules would be based on a modified cut-off basis in the following year. This entails considering the adjusted basis at the end of the first 2022 tax year as the 481(a) adjustment in the immediately succeeding tax year. Nonetheless, some ambiguity surrounds how this provision would apply if a taxpayer had two short tax years in 2022 and has already filed the second year's return. Notably, the change to amortization in 2026 would be made on a cut-off basis, without a § 481(a) adjustment.
Another crucial proposal in the Build It In America Act revolves around bonus depreciation. The act suggests extending the current 100% bonus depreciation provision until the conclusion of 2025, followed by a reduction to 20% in 2026. Special provisions are made for plants bearing fruits and nuts, granting an extension of the 100% bonus depreciation benefit through 2025, with a subsequent stepdown to 20% in 2026. Moreover, longer production period property would be eligible for 100% bonus depreciation through 2026, with the rate gradually decreasing to 20% in 2027.
The bill also addresses the business interest limitation under § 163(j), proposing an extension of the use of tax EBITDA instead of EBIT when calculating the 30% limit. This extension would be applicable until the end of 2025, granting businesses additional flexibility in managing their interest expenses. Lastly, the Build It In America Act includes provisions concerning Inflation Reduction Act (IRA) credits. Specifically, the act aims to repeal several sections of the Inflation Reduction Act prospectively. Notably, this includes the clean electricity production credit, clean electricity investment credit, previously-owned clean vehicles credit, and qualified commercial clean vehicles credit. Moreover, the clean vehicle credit would undergo modifications under this proposed legislation.
Turning attention to the Small Business Jobs Act, also presented by House Republicans, the bill proposes significant increases to the § 179 expensing limit, raising it to $2.5 million, and the investment limit, elevating it to $4 million. These proposed changes would solely apply to assets placed in service in years starting after December 31, 2023, with the inflation adjustment set to restart in 2024. Furthermore, this act envisions the creation of rural opportunity zones, a concept set to run through 2032.
With these fresh ideas on the table, the House bills have laid the groundwork for intriguing and potentially transformative debates in the realm of federal income tax accounting methods and credits. As the legislative journey unfolds, further refinements and compromises may emerge, shaping the future landscape of business tax policies in America.
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