What to do While Waiting for the Proposed Tax Legislation?

By Christopher Migliaccio, JD, Partner and Leo Parmegiani, CPA, MST, Partner

The House of Representatives passed, with broad bipartisan support, the Tax Relief for American Families and Workers Act of 2024, on January 31, 2024. The bill includes a number of tax provisions that would retroactively apply to the 2023 tax year (and some to 2022 as well). President Biden has said he would sign it if it makes it to his desk. However, the bill has stalled in the Senate. The Senate returned from recess on February 26, but with the focus turned to foreign aid, border security and government funding bills, it’s unclear if the bill will be addressed immediately.

This leaves taxpayers in a conundrum – if they normally file their tax return timely, the clock is ticking. Partnership and S Corporation returns for calendar year taxpayers are due March 15 and individual and C Corporation returns are due April 15. But there’s still a very good chance that the rules for the 2023 tax year will change in ways favorable to the taxpayer.

Who’s Affected?

The current tax bill would affect a broad range of taxpayers. Key provisions impacting tax returns include:

• The expanded child tax credit
• The return or expansion of several key business provisions (R&D expensing, bonus depreciation, favorable interest deduction rules, §179 expensing)

The Senate’s current timing is such that it’s likely any tax return filed before March 15 will have to be filed under the current rules. Any bill agreed upon will need to go back to the House if there are any changes and would need the President’s signature. Then the IRS would have to update tax forms to incorporate these changes and the updated forms would need to be integrated into tax preparation software. The IRS does have the option of extending tax deadlines as a result of late changes but would be under no obligation to do so (although they have done so in the recent past).

Taxpayer Options

Taxpayers ultimately have two options – file a return timely that may later need to be amended or extend their return.

It’s important for taxpayers to review the provisions of the current bill and understand the significance to their 2023 tax return. While the provisions are broad, the impact will be different for each taxpayer.

• Is 100% bonus depreciation (instead of 80%) a game changer?
• Has the business been claiming R&E credits and the change to §174 will prevent significant additional income?
• Do the current interest deduction rules severely limit the available current deductibility?

If so, it may be worth extending the 2023 return, as amended returns can be costly, requiring new returns both for the business and for flow-through entities such as partnerships and S Corporations, for the owners as well. In some cases, amended tax returns for partnerships are not even an option and administrative remedies are required.

Accordingly, consideration should be given to the specific provisions impacted and how a 2023 return incorrectly filed could impact later years. For example, if a taxpayer capitalizes R&E credits on their 2023 return, will the IRS provide transitional relief, or will an amended return be required to avoid having to continue to depreciate the asset over five years?

An Update on the SALT Cap

The Tax Cuts and Jobs Act of 2017 (TCJA) introduced a $10,000 cap on the deduction of state and local taxes on federal income tax returns. This has long been a point of contention for taxpayers in high tax states such as California, New York, New Jersey and Connecticut. As part of the discussions on the Tax Relief for American Families and Workers Act of 2024, a separate bill was introduced that would have increased the cap on state and local taxes able to be deducted by married taxpayers from $10,000 to $20,000. However, the bill failed a procedural vote in the House and does not appear to be part of Senate discussions at this time.

Contact Us

PKF O’Connor Davies is monitoring the situation in Washington, DC. As it changes, we will keep you informed.

Christopher Migliaccio, JD
Partner
cmigliaccio@pkfod.com

Leo Parmegiani, CPA, MST
Partner
lparmegiani@pkfod.com