Lawmakers are nearing agreement on a bipartisan tax package that would temporarily restore some popular business tax breaks.
The Tax Cuts for American Families and Workers Act of 2024 would restore three key business-friendly benefits that stimulate investment and economic growth, and allow companies to spend more on things like research and development, equipment investments and interest expenses.
Seizures are mostly temporary extensions of past policies. However, experts are already split on whether they should be on the table in 2025, when bigger tax talks are expected to take the stage.
“You often hear proponents of these business tax breaks talk about how it’s going to put money in the pockets of American workers,” said David Mitchell, senior fellow for tax and regulatory policy at the Washington Center for Equitable Development, a think tank that studies economic inequality. This was reported by Yahoo Finance. “They say it’s going to increase productivity and eventually it’s going to trickle down to the workers, and you just don’t see that.”
On the other hand, proponents of the trio of business incentives say they will stimulate growth across the board.
“By reducing that cost of capital, they encourage investment for small businesses, large businesses, any business in any industry,” William McBride, vice president of federal tax policy at the Tax Foundation, told Yahoo Finance. “Many studies by economists have shown that this policy has been very effective in increasing business investment.”
What are the business tax breaks on offer?
If passed, they will be available to qualified companies, business owners and investors for the upcoming tax season and can be applied retroactively to past investments. While some business aid received bipartisan support, Rep. Jason Smith (R-Mo.) brokered a deal with Ron Wyden (D-Ore.) changing business deductions for the expanded child tax credit.
Deduction for research and experimental expenses: Companies can deduct local R&D investment costs immediately instead of spreading them over five years. The provision will be in force until the end of 2025 and retroactive to 2022.
100% bonus depreciation: The act would allow businesses to recoup the full cost of machinery and equipment until the end of 2025. 100% bonus depreciation began to phase out in 2023. The new provision will apply retroactively until 2023.
Deduction for business interest expense: The tax bill would restore a more generous way to calculate business interest expense deductions.
Taken together, the incentives are intended to stimulate investment, remove competitive barriers for U.S. businesses, and ultimately increase employment opportunities. Not to mention it’s simpler to track for small businesses.
“Most R&D costs are actually the salaries of scientists and researchers, and the standard policy in every country is to allow full deductions for the year they are incurred so companies don’t have to lock up working capital,” McBride said. “They are also particularly useful for smaller companies that do not have an army of tax lawyers to deal with the complexities of tax law.”
But Mitchell argues that lawmakers are overly optimistic that the stimulus will boost capital growth and that the growth will flow to workers in the form of improved wages.
“The evidence is pretty clear that benefits won’t just go down because of the claim that bonus depreciation will help workers,” Mitchell said. “Shareholders and executives tend to absorb any tax revenue before it is distributed to workers or consumers.”
Companies that often use interest rate cuts do not adjust their investment strategies to policy changes, Mitchell wrote in a research paper. Case in point: Trump’s tax cuts in 2017 really tightened up how much interest expense companies could deduct. A study by three Princeton researchers examined how this affected private sector investment and found no meaningful decline.
“Companies continue to make decisions regardless of this [interest] business discount,” Mitchell said.
But many companies make other considerations based on tax laws. And one of the main influences is where investments are located.
“A lot of the conversations I have with companies is that it probably doesn’t affect the amount of R&D investment a company makes, but it does affect where they do it,” said Ray Beeman, director and head of the Washington Council at Ernst & Young. This was reported by Yahoo Finance. “Firms invest in R&D based on necessity and competitiveness, but this affects the marginal decision on where to invest R&D.”
Mitchell argued that giving businesses retroactive tax breaks is unreasonable because “you can’t attract investments that have already happened.”
While that’s true, Beeman explained that retroactive credits help Congress incentivize a company’s future behavior. “Congress has made tax increases retroactive in many cases,” he said.
Business groups such as the U.S. Chamber of Commerce and Industry Roundtable, a Washington-based lobbying group, have expressed support for the proposed bill.
“Failure to act will only exacerbate the damage from automatic tax increases for companies investing in research and development and buying new equipment,” said Neil Bradley, chief policy officer of the US Chamber of Commerce. they should do it to help grow our economy and raise wages.”
While experts don’t see the value or validity of the business tax cuts, they agree that a significant deal like this is a step in the right direction.
“Putting a bipartisan bill together will always require compromises,” Mitchell said. “So it’s worth trading business tax provisions for the child tax credit, a powerful and proven way to reduce childhood poverty.”
Rebecca Chen is a Yahoo Finance reporter and previously worked as a certified public accountant (CPA) in investment tax.
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