A bipartisan agreement has been reached to extend and expand crucial tax credits that impact both businesses and families. The deal includes significant changes to the Section 179 Research and Development (R&D) tax credits as well as the Child Tax Credit. The agreement still needs to be finalized and passed by both houses of Congress, then go to the White House for President Biden’s signature. Here are the highlights:

• The R&D tax credit extension restores the immediate expensing of R&D costs. Previously, the Tax Cuts and Jobs Act of 2017 required businesses to amortize these costs over five years. This proposed change delays the date when taxpayers must begin deducting their domestic research or experimental costs over a five-year period until taxable years beginning after December 31, 2025. This will allow taxpayers to deduct domestic research or experimental costs that have been (or will be) incurred in tax years beginning after December 31, 2021, and before January 1, 2026.

• Another notable aspect is the revival of 100% bonus depreciation, which allows full and immediate expensing for investments in machines, equipment, and vehicles. 

• Additionally, the deal includes changes to Section 179, which allows a taxpayer to expense the cost of qualifying property, rather than recovering the costs through depreciation. The proposal increases the maximum amount a taxpayer may expense to $1.29 million (up from $1 million), reduced by the amount by which the cost of qualifying property exceeds $3.22 million (up from $2.5 million). The $1.29 million and $3.22 million amounts are adjusted for inflation for taxable years beginning after 2024. The proposal applies to property placed in service in taxable years beginning after December 31, 2023.

• The Child Tax Credit, which was significantly expanded in the summer of 2021 as part of the American Rescue Plan Act, has been expanded by making more of the credit available as a refund and indexing the total credit to inflation starting in 2024. Additionally, it allows families to use the previous year's income to qualify for the relief. 

• To offset the cost of these extensive changes, the agreement proposes to end the Employee Retention Tax Credit program early, a measure expected to save over $70 billion.  

The actual bill still needs to be written into legislation and votes secured to pass in the House and Senate, which is not guaranteed. But Congressional leaders are hopeful the bill will pass before Americans file their taxes this year. There are concerns about implementing these changes so close to the tax filing season, with some IRS managers expressing worries about delays and confusion this might cause for taxpayers. 

If you have questions about the R&D tax credit extensions, bonus depreciation, small business expense cap, the Child Tax Credit, or the impact of ending the ERC program, please contact Gray, Gray & Gray at 781.407.0300.