What Does the Passing of the American Families and Business Act of 2024 Mean for Your Manufacturing Company?

The House of Representatives recently passed a bill that would extend several beneficial tax provisions that have recently expired, while also expanding numerous others. The Tax Cuts and Jobs Act (TCJA) of 2017 introduced numerous tax provisions that have recently begun to expire or be modified, leading to increased tax burdens for many taxpayers. Now, the Tax Relief for American Families and Workers Act of 2024 aims to eliminate some of these burdens by extending some of the TCJA beneficial provisions while also expanding on others. It’s important to explore the notable aspects of these provisions so that you can understand how they will affect your business.

Deduction for Research and Experimental Expenditures

In 2022, one of the most impactful law changes in recent years occurred, with the expiration of the immediate deductibility of Research and Experimental Expenditures under Internal Revenue Code §174. Prior to December 31, 2021, research or experimental costs could be immediately deducted for tax purposes in the year incurred. However, for tax years beginning after December 31, 2021, these costs are required to be amortized over a five-year period if attributable to activities within the United States and 15 years if attributable to activities outside of the United States. As a result of this change, many taxpayers, specifically manufacturers, experienced increased tax bills in 2022 due to the delayed timing of the deduction.

The bill reverts to the old rules and once again allows taxpayers to immediately deduct these costs for tax years beginning before January 1, 2026.

Extension of 100% Bonus Deduction

Under the TCJA, qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023, was eligible for 100% bonus depreciation. Beginning in 2023, this amount is reduced by 20% each year until it completely phases out in 2026. The proposed bill calls for the reinstatement of 100% bonus depreciation for qualified property placed in service after December 31, 2022, and before January 1, 2026.

Calculation of Adjustable Taxable Income (ATI) for Section 163(j)

For tax periods beginning before January 1, 2022, the computation of adjusted taxable income (ATI) for determining the limitation on deductible business interest did not consider the deductions for depreciation, amortization and depletion. The current law, however, requires that the computation of ATI for purposes of determining the business interest limitation must factor in the deductions for depreciation, amortization and depletion. This has led to many taxpayers being unable to claim a business interest deduction. The Act will allow for ATI to continue to be calculated without regard to deductions for depreciation, amortization and depletion for years beginning after December 31, 2023.

Increased Section 179 Thresholds and Limitations

Internal Revenue Code §179 allows taxpayers to immediately expense qualifying property rather than recovering the cost through depreciation. For the 2023 tax year, the amount a taxpayer is eligible to expense under IRC §179 for total qualified property placed in service not exceeding $2.89 million is $1.16 million. With the new Act, the maximum deduction increased from $1.16 million to $1.29 million while also increasing the phaseout threshold for property placed in service from $2.89 million to $3.22 million for tax years beginning after December 31, 2023. Additionally, the $1.29 million and $3.22 million will be adjusted for inflation for tax years beginning after December 31, 2023.

As with many tax laws, understanding the complexities can be troublesome for many manufacturing companies. Therefore, before undertaking any action related to potential changes, we recommend contacting a CPA like the professionals at Dannible & McKee, LLP.

 

Contributing author: Sean R. Conners, CPA, is a tax manager who has eight years of experience in individual and corporate taxation and tax planning. Sean also specializes in multi-state taxation and concentrates on the manufacturing industry. For more information on this topic, you may contact Sean at sconners@dmcpas.com or (315) 472-9127.