Tax News Update    Email this document    Print this document  

Summaries of 'American Families and Jobs Act'

House Ways & Means Committee Chairman Jason Smith (R-MO) and other committee Republicans introduced three bills on June 9 — the "Tax Cuts for Working Families Act," "Small Business Jobs Act" and "Build It in America Act" — that, when combined into the "American Families and Jobs Act," fulfill the chairman's commitment to develop a tax-based economic package that is an outgrowth of field hearings the committee conducted earlier this year in West Virginia, Oklahoma and Georgia. The bills focus on providing tax relief to small businesses, working families, investors in rural communities, and larger companies to encourage investment in plant and equipment in the United States and to shore up supply chains by allowing an election out of the final foreign tax credit regulations when companies "near shore" through operations in the Western Hemisphere.

The committee has announced a markup of the three bills on Tuesday, June 13, at 10 a.m. In addition, the Committee plans to mark up the "United States-Taiwan Initiative on 21st Century Trade First Agreement Implementation Act." Chairman Smith did not announce a markup for the "Defending American Jobs and Investment Act," which the chairman released on June 2 and would impose retaliatory taxes on companies whose headquarters are in countries that adopt the undertaxed profits rule under OECD Pillar Two, and other "discriminatory" and "extraterritorial" taxes.

Also, the Joint Committee on Taxation released descriptions of all three bills (attached below) and revenue estimates for the "Small Business Jobs Act" and "Build It in America Act" (attached below).

Among other things, the bills introduced today would retroactively restore three adverse Tax Cut and Jobs Act (TCJA) provisions that took effect in 2022 and 2023, relating to R&D, interest expense and full expensing of plant and equipment.

Following is a summary of the provisions in the three bills:

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

Standard Deduction: The bill replaces the term "standard deduction" with "guaranteed deduction." The guaranteed deduction is increased by a bonus amount ($4,000 for joint returns/$2,000 for individual returns) for tax years 2024 and 2025. This bonus deduction is adjusted for inflation and phased out based on modified adjusted gross income (starting at $400,000 for joint returns/$200,000 for individual returns).

H.R. 3937, Small Business Jobs Act

Independent contractor service recipient 1099 reporting: The bill increases the general reporting threshold for services performed by an independent contractor or subcontractor from $600 to $5,000, with the amount adjusted for inflation, effective for payments made after December 31, 2023.

Third-party network 1099 reporting: The bill also returns the annual sales threshold for goods and services sold online through third-party network transactions to $20,000 (from $600) and reinstates the additional threshold of 200 annual transactions, effective for calendar years beginning after December 31, 2021.

Modifications to qualified small business stock exclusion: The bill expands the exclusion from gain from sales of qualified small business stock by providing for a new holding period (50% exclusion for stock held at least three years, 75% if held at least four years, and 100% if held at least five years), expanding qualification to S corporations, and allowing investors to add their holding period for qualified convertible debt to the holding period required to qualify for the exclusion. The proposal is effective for stock acquired after the date of enactment, and debt instruments originally issued after the date of enactment.

IRC Section 179 business expensing: The bill increases the maximum amount a taxpayer may expense under IRC Section 179 to $2.5 million, reduced by the amount by which the cost of qualifying property exceeds $4 million. These amounts are adjusted for inflation for tax years beginning after 2024. This provision is applicable to property placed in service after December 31, 2023.

Establishment of rural opportunity zones: Taxpayers may temporarily defer including capital gains in their gross income where they are reinvested in a qualified rural opportunity fund and may permanently exclude capital gains from the sale or exchange of an investment in a qualified rural opportunity fund. Certain rural persistent poverty community population census tracts may be designated as qualified rural opportunity zones for 10 years from the date of designation. Reporting requirements for qualified opportunity zones are reinstated and also apply to qualified rural opportunity zones with penalties for non-compliance. Various effective dates apply.

H.R. 3938, Build It in America Act

• Title I: Investment in America

Research & experimentation (R&E) expenses: Under current law, R&E costs are required to be amortized and deducted over a five-year period if conducted within the U.S., and over a 15-year period if conducted outside the U.S., starting with tax years beginning after December 31, 2021. The bill delays the date when taxpayers must begin amortizing these costs until tax years beginning on or after January 1, 2026, retroactively to tax years beginning after December 31, 2021 (when the amortization requirement went into effect), though taxpayers may elect to continue amortizing R&E expenses.

Interest expense limitation: Under current law, interest expense deductions generally are limited to 30% of EBIT (earnings before interest and taxes), starting with tax years beginning after December 31, 2021. For prior tax years, the 30% limitation was determined based on EBITA (earnings before interest, taxes, depreciation and amortization) rather than EBIT. The bill extends the application of the EBITDA limitation threshold to tax years beginning on or after January 1, 2026, retroactively to tax years beginning after December 31, 2022 (when the limitation was changed from EBITDA to EBIT) and, if elected, beginning after December 31, 2021.

Bonus depreciation: Under current law, 100% bonus depreciation begins to decline by 20 percentage points each year, starting with tax years beginning after December 31, 2022. The bill extends the 100% bonus depreciation deduction for qualified property placed in service or specified plants planted or grated before January 1, 2026. The provision retains 20% bonus depreciation for property placed in service after December 31, 2025 and before January 1, 2027.

• Title II: Supply Chain Security

Superfund tax: The bill terminates the superfund tax on crude oil after December 31, 2022.

Liberalization of the foreign tax credit rules: The bill provides for the creditability of certain foreign taxes without regard to current foreign tax credit (FTC) regulations. The stated intent of the provision is to secure the supply chain and encourage moving operations closer to the United States by providing an election to determine foreign income taxes paid or incurred to certain Western Hemisphere countries without regard to current FTC regulations that might otherwise prevent creditability of those taxes.

Two separate elections are provided, each available for tax paid by controlled foreign corporations and deemed paid by a US shareholder. First, an election to determine whether certain taxes are income taxes for US foreign tax credit purposes would be made without regard to any specified regulation. Second, an election is provided for owners of disregarded entities that would assign items of foreign gross income by reason of the receipt of such remittance based on current and accumulated earnings and profits in lieu of being assigned on the basis of the tax book value method described in specified regulations.

The taxes within scope of the elections are referred to as "Western Hemisphere tax," defined as any tax paid or accrued to any possession of the United States, any foreign country (specifically excluding Cuba and Venezuela) located in North, Central or South America (specifically including West Indies).

The elections are effective for the "applicable period." Both elections expire for tax years before 1 January 2027 and can be accessed for tax years beginning either after 31 December 2021 for the first election or after 31 December 2019 for the second election.

Both elections apply to tax years beginning before January 1, 2027 and, in the case of the first election, beginning after December, 31 2021 or, in the case of the second election, beginning after December 31, 2019.

Excise tax on purchase of farmland by countries of concern: The proposal imposes a 60% excise tax on purchases of American farm and ranch land where the buyer is owned 10% or more by a business entity domiciled in or a citizen of a "country of concern." A country of concern is one "that is engaged in a long-term pattern of conduct significantly adverse to the national security of the United States … " Where a business entity has less than 50% ownership by a parent entity from a country of concern, the tax is pro-rated based on the ownership percentage.

• Title III: Repeal of "Special Interest" Tax Provisions

Repeal of certain Inflation Reduction Act clean energy credits: The bill repeals certain Inflation Reduction Act (IRA) clean energy credits, including the clean electricity production credit (Sec. 45Y) and clean electricity investment credit (Sec. 48E) set to take effect in 2025. The bill also repeals the credit for previously owned clean vehicles, and the credit for qualified commercial clean vehicles. For previously owned clean vehicles and commercial clean vehicles credits, a transition rule is provided for vehicles acquired pursuant to a written binding contract in effect on the date of introduction of the legislation and placed in service within a year of the date of introduction of the legislation.

The bill makes changes to the clean vehicle (EV) credit, generally returning the pre-IRA credit amount and manufacturer vehicle limitation, while retaining the current adjusted gross income and manufacturer standard retail price limitations. The provision also specifies that no credit is available for any vehicle placed in service after December 31, 2024, if critical minerals contained in the battery were extracted, processed, or recycled by a foreign entity of concern, if less than 100% of the value of the components contained in the vehicle battery were manufactured or assembled in North America, or if vehicles have batteries that contain less than 80% critical minerals extracted or processed in the United States or in any country with which the United States has a free trade agreement (and defines "free trade agreement" as an international agreement approved by Congress).

———————————————

———————————————
ATTACHMENTS

HR 3936

HR 3937

HR 3938

JCT revenue estimate, HR 3937 

JCT revenue estimate, HR 3938