Main Street could be trapped in gridlock by the end of next year due to the need to advance business-friendly tax goals.
For House Republicans, their top legislative priorities will likely include expanding business-friendly provisions in The Tax Cuts and Jobs Act that was enacted in 2017 by the Trump Administration 2017. But a split Congress implies that legislation favouring business will take more work. This is the case despite the recent victory of Raphael Warnock, which has given the Democrats an edge within the Senate. Arizona Senator Kyrsten Sinema’s decision last Friday to quit the Democratic Party and become independent further aggravates the problem of legislative handicapping.
“With a divided government, I think it will be a challenge to do large pieces of tax legislation,” said Dave Camp, a senior policy advisor at the PwC’s Washington National Tax Services practice who was an ex-Republican representative in Congress as well as chairman of the House Ways and Means Committee.
More importantly, tax and policy experts anticipate House Republicans to concentrate on various positioning decisions in the coming year. These will set the tone for their pro-business agenda before the 2020’s presidential elections.
“There are a host of provisions in the tax code that businesses would like to see changed or revised,” said Rochelle Hodes, a Crowe’s Washington National Tax office tax specialist. Even with their slender number of votes, Republicans can reach out to their business constituency by introducing a variety of business-friendly measures that might be favourable in the coming elections, she added.
Research and Experimental (R&E) expenses. A portion of the proposals for 2023 is indeed contingent on the outcomes of the current session. Even initiatives with bipartisan support might be delayed for at least the near term by competing priorities.
“To have enough bipartisan support for them to pass may require passing other tax proposals including reinstatement of some of the child tax credit benefits for parents,” said Stefan Gottschalk, Washington National Tax Director for the firm of accounting and consulting Baker Tilly.
If it is not discussed during this session, an option likely to be considered next year is how R&E expenses are deducted, Gottschalk explained. Before 2022, the total amount of these costs were immediately deductible. Beginning in 2022, companies have to amortize domestic expenses over five years and foreign R&D costs over 15 years.
“Many organizations representing business interests have been very vocal about the opposition,” Hodes added.
Rules around bonus depreciation
Another area that appears to be gaining bipartisan support is the deductions for equipment purchases. In the year ahead, U.S. companies can deduct 100% on eligible equipment purchases. In 2023, this percentage will drop to 80%, and it increases afterwards, which companies oppose the change, said Gottschalk.
At the CNBC CFO Council Summit in Washington, D.C., various policymakers discussed the tradeoffs needed to pay for taxes for businesses and childcare that need to be reached in a deal.
The outgoing Republican chairman of the House Ways and Means Committee, Kevin Brady of Texas, said the top corporate tax priority in the tax law of 2017, which are subject to phase-outs such as R&D costs as well as bonus depreciation, has the chance to be considered in a lame session of Congress. However, Republicans and Democrats are not on the same page regarding cost. Brady estimates the bonus depreciation cost as $20 billion, compared to $ 120 billion to pay for the entire tax credit for childcare.
“I am a strong advocate of the tax credit that is being reinstated. I believe it was one of the most damaging parts of the tax bill 2017,” said Democratic Senator Ron Wyden of Washington. “I have colleagues who are very enthused about the tax credit for childcare. I do, too. … It is my opinion that I would love for these two to be areas linked,” Wyden said, saying that one option could be to provide short-term, rather than long-term, extensions for both.
Interest expense limitation rules
Another bipartisan bill that is under discussion concerns the deduction of business interest. “The Tax Cuts and Jobs Act made significant changes to Section 163(j) by limiting the deductibility of business interest beginning after Dec. 31, 2017,” Camp declared.
“While there was some relief under the Cares Act, the business restriction was set at 30 per cent of earnings before tax and interest (EBIT) from 2022 onwards for those businesses that earn greater than $ 27 million. Business is seeking to the application of the conventional earnings standard of earnings before tax, interest, depreciation and amortization (EBITDA),” he declared.
Deductions for business
One provision in The Tax Cuts and Jobs Act is scheduled to expire in 2025, and that of the Section 199A deduction for businesses incorporated as pass-through entities. This deduction permits taxpayers who are not corporate to take a deduction of up to 20 per cent of their qualified business income in addition to up to 20 per cent of qualified real estate investment trust dividends as well as eligible publicly traded partnership earnings, according to the IRS.
“It’s an extremely significant issue to U.S. businesses. Around 70% of U.S. businesses would be affected,” said Dustin Stamper, the director of Grant Thornton’s Washington National tax office.
In the last month, The National Federation of Independent Business, an advocacy group for small businesses, has announced a multi-million dollar national marketing campaign to gain the support needed to make the deduction permanent. However, the initiatives are not likely to gain traction with an unpopular Congress at most in the short term. “I think the two sides are too far apart,” Stamper declared.
Global minimum tax
Republicans are likely also announcing grandstanding regarding the proposal of a global 15% minimum tax, a plan proposed by the Organization for Economic Cooperation and Development.
“There are some minimum tax rules in place, but they are somewhat in conflict with the version of global minimum taxes that we’ve reached an agreement on with the rest of the world through OECD,” Stamper added. “As the rest of the world moves forward, it could pressure U.S. multinationals and the U.S. government to respond.”
The Biden administration needed help to utilize to use the Inflation Reduction Act to bring the U.S. into compliance, Stamper explained. “So this will be a major conflict among the Obama administration and House Republicans. Based on their current positions, it’s going be difficult to imagine how they can meet and get things accomplished.”
Small-business-specific initiatives
John Gimigliano, head of legislative services at KPMG’s Washington National Tax practice, is also expecting to see House Republicans put their energies into aiding small-scale businesses, particularly in the event of a recession, as many business owners anticipate that it will happen next year. Making legislation pass will be a challenge, but Gimigliano anticipates Republicans to organize hearings and other initiatives that may lead to legislation benefiting small-scale businesses.
Additionally, he expects the Republican-controlled House to focus on how best to allocate the powerful burst of funding the IRS received through the Inflation Reduction Act. A significant concern for small-sized companies, mainly, is that it could cause more audits. Gimigliano hopes that this issue will be taken care of by House Republicans in conjunction with the need to ensure that the money is used in “a way that’s productive and not unfair to taxpayers.”
