House, Senate tax chiefs announce deal on business deductions, low-income credits

Top tax writers in Congress announced a deal Tuesday morning to beef up the child tax credit (CTC) and reinstate business deductions that were taken away to pay for the reduction of the corporate tax rate in the 2017 Tax Cuts and Jobs Act.

The CTC expansion would increase the maximum credit per child to $2,000 from $1,600 through 2025 while restoring business deductions for research and development costs, interest payments and capital investments.

The deal also has provisions on increasing the low-income housing tax credit and a carve-out to protect Taiwanese companies from double taxation following an effort by the U.S. to reshore segments of the high-end semiconductor industry, much of which is based there.

Additionally, the proposal boosts the amount in capital expenditures that small businesses can immediately write off to $1.29 million from $1 million, along with increasing the reporting threshold for subcontractor work to $1,000 from $600.

To pay for the roughly $80 billion deal, tax writers plan to nix the employee retention tax credit, which they say has been aggressively marketed within the tax industry and has been a locus of fraudulent business activity in the wake of the pandemic.

The cost of the restored business and low-income credits will be covered exclusively by the cancellation of the employee retention credit, which tax writers said would bring in $70 billion to $80 billion over the next 10 years. No additional employee retention credit claims will be accepted after Jan. 31 of this year.

“American families will benefit from this bipartisan agreement that provides greater tax relief, strengthens Main Street businesses, boosts our competitiveness with China, and creates jobs,” House Ways and Means Committee Chair Jason Smith (R-Mo.) said in a Tuesday morning statement.

Senate Finance Committee Chair Ron Wyden (D-Ore.) said the proposal could help as many as 15 million children who are close to the poverty line and would increase the stock of low-income housing across the country.

“At a time when so many people in Oregon and all across America are getting clobbered by rising rents and home prices, the improvements this plan makes to the Low-Income Housing Tax Credit will build more than 200,000 new affordable housing units,” he said in a statement.

“By incentivizing R&D, this plan is also going to promote innovation and help sharpen our economic competitiveness with China.”

Senate Majority Leader Chuck Schumer (D-N.Y.) touted the plan on the Senate floor Tuesday afternoon.

“I support this bipartisan tax framework,” he said. “I hope our Republican Senate colleagues are willing to work with us to keep this process going.”

What the final legislative vehicle for the tax deal could be, and whether it will make it into law before tax season starts on Jan. 29, remains to be seen.

Lawmakers are rushing to pass a bill by Jan. 19 to avert a partial government shutdown as House conservatives line up against a deal struck by Schumer and Speaker Mike Johnson (R-La.).

The funding battles and looming election could sap the political will necessary to advance a significant change to major tax provisions.

But some rank-and-file senators are already sounding enthusiastic about the deal’s prospects.

“I have been strongly pushing to incentivize American R&D since first introducing bipartisan legislation in 2020 to restore the R&D deduction, and with the clear growing bipartisan support in both the Senate and the House, I will keep working with my colleagues and the business community to get this deal done,” Sen. Maggie Hassan (D-N.H.) said in a statement.

The main provisions of the deal extend only as far as the end of 2025, when major portions of the U.S. tax code put in place by the 2017 tax law are scheduled to revert to their previous levels.

Those include changes in tax rates for individuals and households, the level of the standard deduction, the cap on state and local tax deductions, the limitation on personal exemptions, and the repeal of the alternative minimum tax, among others.

In the current proposal, only the Taiwan double taxation provision, along with expanded capital investment and subcontracting write-offs for small businesses, are permanent changes to the tax code.

While tax writers seek to find a vehicle for their proposal before the start of tax season, an agreement reached over the weekend to pass a stopgap funding measure to keep the government running into March may end up providing them some extra time and legislative opportunities.

“I am encouraged by the bipartisan conversations that have taken place since the Schumer-Johnson agreement was reached,” House Appropriations Committee ranking member Rosa DeLauro (D-Conn.) said in a statement Sunday.

“There is a mutual understanding that the only way to finally end the saga of 2024 funding is to write government funding bills that can earn the support of both Democrats and Republicans in the House and in the Senate,” she added.

The announcement of the tax proposal came jointly from the Republican-led Ways and Means Committee in the House and the Democratic-led Finance Committee in the Senate, representing a rare moment of bipartisan harmony in a divided and frequently discordant Congress.

While the standoff over a trade between the CTC and business deductions lasted more than a year, with Democrats frequently singing the CTC’s praises and Republicans talking up the business deductions, there has been support for both sets of policies on both sides of the aisle.

“I also had legislation during 2017 in the Tax Cuts and Jobs Act that doubled the child tax credit from $1000 to $2000. I really think we can find common ground just, for example, on the child tax credit,” Smith said at the end of 2022.

Businesses and industry groups are welcoming the news of restored deductions on research costs, interest payments, and depreciation scheduling with open arms.

“Reviving immediate research and development expensing, full expensing for purchases of equipment, machinery and technology, and a more sensible business interest deduction would increase domestic investment, bolster U.S. innovation and create American jobs,” Business Roundtable chief lobbyist Joshua Bolten said in a Tuesday statement.

But the actual economic efficacy of some of the business credits has long been a subject of debate and is not as clear cut as industry groups aver. This is particularly the case with the research and experimentation (R&E) credit.

One 2012 study by the Treasury Department “estimated that only 82 percent of the present value of the average current-year R&E credit would eventually be used,” implying that the remaining 18 percent was simply a giveaway to companies.

Another study cited by the Congressional Research Service found that the R&E credit grew less effective when used by larger and larger companies within the Organization for Economic Cooperation and Development, falling from a 1.4 benefit-to-cost ratio for companies with fewer than 50 employees to a 0.4 ratio for companies with more than 250 employees.

Updated at 4:02 p.m. ET

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