Defeat of H.R. 7024 Threatens Restoration of Taxable Income Adjustment

The potential consequences of the Senate failing to pass H.R. 7024, the Tax Relief for American Families and Workers Act of 2024, are numerous, as this crucial legislation addresses several important tax issues. One of the most significant for businesses is the proposed addback of depreciation, amortization, and depletion when determining adjusted taxable income under Internal Revenue Code (IRC) Section 163(j).

IRC Section 163(j) limits the deductibility of business interest expenses to 30% of adjusted taxable income (ATI). The Tax Cuts and Jobs Act (TCJA) of 2017 temporarily allowed businesses to add back depreciation, amortization, and depletion when calculating their ATI for tax years 2018 through 2021. This provision provided much-needed relief for businesses, particularly those in capital-intensive industries, by allowing them to deduct more of their interest expenses during this period.

However, starting from the 2022 tax year, the addback of depreciation, amortization, and depletion expired, effectively reducing the amount of interest expenses businesses could deduct. This change will have a significant impact on businesses, as it increases their taxable income and, consequently, their tax liability.

H.R. 7024 seeks to address this issue by extending the addback provision for depreciation, amortization, and depletion when determining ATI under IRC Section 163(j). This extension would provide continued relief for businesses, allowing them to maintain a higher level of interest expense deductibility and keep their tax liabilities manageable.

If the Senate fails to pass H.R. 7024, businesses will face a sudden and substantial increase in their taxable income, as they will no longer be able to add back depreciation, amortization, and depletion when calculating their ATI. This change will hit capital-intensive industries, such as manufacturing, construction, and energy, particularly hard. These businesses often rely on debt financing to fund their operations and investments, and the reduced interest expense deductibility will strain cash flows and hinder the ability to invest in growth and job creation.

The sudden increase in tax liability could force some companies to cut costs, delay investments, or even lay off employees to stay afloat. This outcome would not only be detrimental to the affected businesses but also to the broader economy, as it could slow down economic growth.

Immediate Impact on This Year’s Tax Returns

Many businesses have filed a tax extension in the hope that H.R. 7024 would pass before the filing deadline, and depreciation, amortization, and depletion would be restored to Section 163(j). That looks less and less likely as debate in the Senate has stalled and election year politics have intervened. As a result, businesses must decide when to file under the current restrictive rules. It is dangerous to assume that the bill will pass or that a later bill will raise the Section 163(j) deduction limits retroactively. It is unlikely that the IRS would view this tax position as a “reasonable basis,” and it may trigger an IRS accuracy-related penalty of 20% of underreported tax (plus 8% interest).

Please consult with a qualified accountant or tax advisor to determine the best course of action for your business.

For more information on this and other tax topics, please contact Gray, Gray & Gray at 781.407.0300.

Spread the Word

Recent Post

Contact Us Today!

Discover how we can give you the power to do more.

Scroll to Top