The Chair of the House Ways and Means Committee has recently introduced three tax bills. These bills are slated for consideration by the Committee during the week commencing June 12. These bills are anticipated to serve as the initial framework for negotiations in crafting a tax bill or bills that could potentially be enacted in 2023.

The bills introduced on Friday, June 9, 2023 are:

H.R. 3936, “Tax Cuts for Working Families Act”[1]
H.R. 3937, “Small Business Jobs Act”[2] and
H.R. 3938, “Build It In America Act”[3]

H.R. 3936, “Tax Cuts for Working Families Act”

The initial bill renames the standard deduction as the guaranteed deduction and proposes a temporary increase in its amount. In the report on the bill, the Joint Committee on Taxation describes the increase as follows:

The proposal adds a new bonus guaranteed deduction for taxable years beginning after December 31, 2023, and before January 1, 2026. The bonus guaranteed deduction is allowed in addition to the basic guaranteed deduction and additional guaranteed deduction (i.e., the guaranteed deduction is the sum of the basic guaranteed deduction, the additional guaranteed deduction, and, if applicable, the bonus guaranteed deduction).

For taxable years beginning in 2024, the amount of the bonus guaranteed deduction is $2,000 for an unmarried individual (other than a head of household or a surviving spouse) and a married individual filing a separate return, $3,000 for a head of household, and $4,000 for married individuals filing a joint return and a surviving spouse. For taxable years beginning in 2025, these amounts are indexed for inflation. The bonus guaranteed deduction does not apply to taxable years beginning after December 31, 2025.[4]

The credit also phases out at higher income levels:

The bonus guaranteed deduction is phased out at a five-percent rate for taxpayers with modified AGI above certain thresholds. This threshold is $200,000 for an unmarried individual (other than a head of household or a surviving spouse) and a married individual filing a separate return, $300,000 for a head of household, and $400,000 for married individuals filing a joint return and a surviving spouse. Modified AGI means AGI increased by any amount excluded from gross income under sections 911 (foreign earned income exclusion), 931 (exclusion of income for a bona fide resident of American Samoa), or 933 (exclusion of income for a bona fide resident of Puerto Rico). In 2024, after application of the five-percent phaseout the bonus guaranteed deduction is fully eliminated at $240,000 of modified AGI for an unmarried individual (other than a head of household or a surviving spouse) and a married individual filing a separate return, at $360,000 for a head of household, and at $480,000 for married individuals filing a joint return and a surviving spouse.11 Figure 1 below, illustrates the amount of the guaranteed deduction under the proposal in comparison with the amount of the standard deduction under present law allowed to different categories of taxpayers by modified AGI for 2024.[5]

This particular provision constitutes the sole provision within this bill, making it notably shorter compared to the other two bills by a significant margin.

H.R. 3937, “Small Business Jobs Act”

The second bill is the “Small Business Jobs Act” and, per its table of contents, contains the following provisions:

Increase in threshold for requiring information reporting with respect to certain payees.
Restoration of reporting rule for third party network transactions.
Modifications to exclusion for gain from qualified small business stock.
Increase in limitations on expensing of depreciable business assets.
Establishment of special rules for capital gains invested in rural opportunity zones.
Reporting on qualified opportunity funds and qualified rural opportunity funds.

Among the provisions within this bill, the changes to the information reporting rules are anticipated to have the most extensive impact across various sectors and stakeholders.

The first change significantly increases the threshold for filing most information reporting returns for payments made after December 31, 2023. The Joint Committee’s report on this bill describes the changes as follows:

The proposal increases the information reporting threshold under sections 6041 and 6041A to $5,000 in a calendar year, with the threshold amount (including the threshold for reporting of direct sales) to be indexed annually for inflation in calendar years after 2024.

The proposal also makes a conforming change to the dollar threshold in section 3406 with respect to information reporting required under sections 6041 and 6041A to align with the new $5,000 reporting threshold. Under the proposal, both the information reporting thresholds and the backup withholding thresholds are for transactions that equal or exceed $5,000 (indexed for inflation for calendar years after 2024).[6]

The second information reporting change in the bill seeks to retroactively reverse the modifications made to reporting third-party network transactions, which were initially scheduled to take effect for payments in 2022 but were deferred by the IRS for one year.

The proposal reverts to the previous de minimis reporting exception for third party settlement organizations. A third party settlement organization is not required to report unless the aggregate value of third party network transactions with respect to a participating payee for the year exceeds $20,000 and the aggregate number of such transactions with respect to a participating payee exceeds 200.

The obligations of a merchant acquiring entity are unchanged. For example, if a business that provides a web-based rental platform for short-term travelers is considered a third party settlement organization, it does not have to provide a Form 1099-K to property owners participating on its web-based platform who have received payments of $20,000 or less. Alternatively, if a company is considered a merchant acquiring entity, it must issue a Form 1099-K to all participating payees who have received payments of any amount starting with the first dollar.[7]

The other provisions descriptions are found in the Joint Committee Reports.

H.R. 3938, “Build It In America Act”

The largest bill in the package is the Build It In America Act, which combines the temporary deferral of three revenue-raising business provisions from the Tax Cuts and Jobs Act with the repeal of certain key items from the Inflation Reduction Act of 2022.

However, the inclusion of the repeal of provisions enacted last year has led most observers to believe that a bill containing those provisions is unlikely to pass the Senate. Likewise, in the previous year, Democrats had emphasized the requirement of adding an extension of an enhanced Child Tax Credit as part of a bill that would defer the effective date of those business provisions to gain their support. This further contributes to the perception that significant modifications would be necessary for this bill to gain passage in the Senate.

Nevertheless, if anything from this bill does become law, the most likely would be the three business tax revenue raiser deferral provisions.

The proposal in question provides for a temporary suspension of the application of section 174, specifically for research or experimental expenditures paid or incurred in taxable years commencing after December 31, 2021, and before January 1, 2026. During the period of the suspension, the proposal introduces rules (under new section 174A) that closely resemble the rules outlined in the previous law's section 174, governing such expenditures.

The Joint Committee Report on this bill outlines the temporary suspension of IRC §174 as follows:

The proposal temporarily suspends the application of section 174 for research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2026. For expenditures to which the suspension of the application of section 174 applies, the proposal provides rules (in new section 174A) similar to the rules of prior law section 174.[8]

The description continues describing provisions added in new IRC §174A:

The proposal provides that research or experimental expenditures paid or incurred by a taxpayer during the taxable year in connection with the taxpayer’s trade or business are deductible. Alternatively, a taxpayer may elect to either (1) capitalize part or all of its research or experimental expenditures and recover them ratably over the useful life of the research (but in no case over a period of less than 60 months), or (2) capitalize part or all of its research or experimental expenditures to a capital account.

Similar to present law section 174, research or experimental expenditures include software development costs.

The proposal requires a taxpayer to reduce the amount taken into account as research or experimental expenditures (whether expensed or capitalized) by the amount of the research credit allowable under section 41. Taxpayers instead may elect to claim a reduced research credit amount under section 41.[9]

Special rules for taxpayers using the percentage of completion method under IRC §460 are described nest:

For purposes of recognizing taxable income under the percentage of completion method of section 460, a taxpayer that pays or incurs a research or experimental expenditure under a long-term contract must include the amount paid or incurred as a cost allocated to the contract for the taxable year. For example, a taxpayer that pays or incurs $100 of research or experimental expenditures under a long-term contract must include that $100 as a cost allocated to the contract in that year for purposes determining the percentage of completion under section 460, regardless of whether it deducts the full $100 or instead claims a smaller amortization deduction in that year.[10]

The act provides a provision that clarifies the treatment of the change to amortization of such expenses beginning in 2026:

The proposal treats the requirement to capitalize and amortize research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2025 as a change in the taxpayer’s method of accounting for purposes of section 481. This change is treated as initiated by the taxpayer, is treated as made with the consent of the Secretary, and is applied prospectively on a cut-off basis with no corresponding catch-up adjustment to taxable income under section 481(a).[11]

The Committee Report describes proposed modifications to treatment of these expenses for alternative minimum tax purposes:

For research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2025, the proposal coordinates the applicable rules (that is, the present law section 174 rules that the proposal temporarily suspends) with the application of the alternative minimum tax rules for individuals, including the optional election under section 59(e), and the rules for making certain basis adjustments. Under these coordination rules, neither the adjustment to an individual’s alternative minimum taxable income under section 56(b)(2) nor the election under section 59(e)(2)(B) to capitalize and amortize research and experimental expenditures over 10 years apply to specified research or experimental expenditures. In addition, the proposal clarifies that the basis of property is reduced by amortization deductions allowed under section 174(a). For purposes of recognizing taxable income under the percentage of completion method of section 460, a taxpayer that pays or incurs a specified research or experimental expenditure under a long-term contract in a taxable year must include the amortization deduction under section 174(a) as a cost allocated to the contract in that year.[12]

The description of the research and experimental expenditures changes concludes by describing two elective transition rules:

The proposal provides two elective transition rules. The first election allows a taxpayer that adopts a method of accounting under section 174 before the date of the proposal’s enactment for the taxpayer’s first taxable year beginning after December 31, 2021, to treat the application of the temporary rules as a change in method of accounting initiated by the taxpayer for the taxpayer’s immediately succeeding taxable year with a catch-up adjustment to taxable income under section 481(a) made on a modified cut-off basis.32

The second transition rule allows an eligible taxpayer to make a late election under section 59(e)(2)(B) to capitalize and amortize research or experimental expenditures over 10 years by filing an amended income tax return within one year of the date of enactment.33 An eligible taxpayer is any taxpayer that does not elect the application of the first transition rule, and that filed an income tax return for the taxpayer’s first taxable year beginning after December 31, 2021, before the earlier of the due date for that return and the date of enactment.[13]

The change to the computation of adjusted taxable income, extending the period for which the limitation is based on earnings before interest, taxes, depreciation and amortization (EBITA limitation) is described as follows:

The proposal temporarily extends the EBITDA limitation under section 163(j) to apply to taxable years beginning before January 1, 2026. Thus, under the proposal, adjusted taxable income is computed without regard to the deduction for depreciation, amortization, or depletion for taxable years beginning before January 1, 2026.[14]

While this proposal is effective for taxable years beginning after December 31, 2022, the Joint Committee Report describes an elective transition rule to apply the EBITA limitation to 2022:

The proposal provides an elective transition rule that allows a taxpayer to elect to apply the extension of the EBITDA limitation under section 163(j) to taxable years beginning after December 31, 2021.[15]

The report also describes the extension of the 100% bonus depreciation rules for 2023-2025:

The proposal extends the allowance of a 100-percent bonus depreciation deduction for property placed in service after December 31, 2022, and before January 1, 2026 (January 1, 2027, for longer production period property and certain aircraft), as well as for specified plants planted or grafted after December 31, 2022, and before January 1, 2026. The proposal retains the present law 20-percent bonus depreciation deduction that is allowed for property placed in service after December 31, 2025, and before January 1, 2027 (after December 31, 2026, and before January 1, 2028, for longer production period property and certain aircraft), as well as for specified plants planted or grafted after December 31, 2025, and before January 1, 2027.[16]

The proposal does have some bad news once this extension of the 100% amount ends. Previously the amount of bonus depreciation decreased by 20% per year once the 100% rate no longer applied. However, now the rate generally drops to 20% for 2026 and 2027. Under the prior law, the rate for 2026 would have been 40%, not 20%.

All other provisions are described in the Joint Committee Report.

[1] HR 3936, “Tax Cuts for Working Families Act, June 9, 2023, https://www.congress.gov/118/bills/hr3936/BILLS-118hr3936ih.pdf (retrieved June 10, 2023)

[2] HR 3937, “Small Business Jobs Act”, June 9, 2023, https://www.congress.gov/bill/118th-congress/house-bill/3937?q=%7B%22search%22%3A%5B%22HR+3937%22%5D%7D&s=2&r=1 (retrieved June 10, 2023)

[3] HR 3938, “Build It In America Act”, June 9, 2023, https://www.congress.gov/118/bills/hr3938/BILLS-118hr3938ih.pdf (retrieved June 10, 2023)

[4] Joint Committee on Taxation, Description of H.R. 3936, the “Tax Cuts for Working Families Act” (JCX-25-23), June 9, 2023, https://www.jct.gov/publications/2023/jcx-25-23/ (retrieved June 10, 2023)

[5] Joint Committee on Taxation, Description of H.R. 3936, the “Tax Cuts for Working Families Act” (JCX-25-23), June 9, 2023

[6] Joint Committee on Taxation, Description of H.R. 3937, the “Small Business Jobs Act” (JCX-26-23), June 9, 2023, https://www.jct.gov/publications/2023/jcx-26-23/ (retrieved June 10, 2023)

[7] Joint Committee on Taxation, Description of H.R. 3937, the “Small Business Jobs Act” (JCX-26-23), June 9, 2023

[8] Joint Committee on Taxation, Description of H.R.3938, the “Build It in America Act”(JCX-28-23), June 9, 2023, https://www.jct.gov/publications/2023/jcx-28-23/ (retrieved June 10, 2023)

[9] Joint Committee on Taxation, Description of H.R.3938, the “Build It in America Act”(JCX-28-23), June 9, 2023

[10] Joint Committee on Taxation, Description of H.R.3938, the “Build It in America Act”(JCX-28-23), June 9, 2023

[11] Joint Committee on Taxation, Description of H.R.3938, the “Build It in America Act”(JCX-28-23), June 9, 2023

[12] Joint Committee on Taxation, Description of H.R.3938, the “Build It in America Act”(JCX-28-23), June 9, 2023

[13] Joint Committee on Taxation, Description of H.R.3938, the “Build It in America Act”(JCX-28-23), June 9, 2023

[14] Joint Committee on Taxation, Description of H.R.3938, the “Build It in America Act”(JCX-28-23), June 9, 2023

[15] Joint Committee on Taxation, Description of H.R.3938, the “Build It in America Act”(JCX-28-23), June 9, 2023

[16] Joint Committee on Taxation, Description of H.R.3938, the “Build It in America Act”(JCX-28-23), June 9, 2023