Lawmakers are inching closer to a deal on a bipartisan tax package that would temporarily restore some popular business tax breaks.
The Tax Relief for American Families and Workers Act of 2024 would reinstate three major business-friendly benefits intended to spur investment and economic growth, allow companies to deduct more for things like research and development, equipment investments, and interest expense.
The deductions are mostly temporary extensions of former policies. Even so, experts are already at odds on whether they should be on the table in 2025 when a much larger tax negotiation is expected to take the stage.
"You often hear proponents of these business tax breaks talk about how this is going to put money in American workers' pockets," David Mitchell, senior fellow for tax and regulatory policy at the Washington Center for Equitable Growth, a think tank researching economic inequality, told Yahoo Finance. "They say it's going to increase productivity and that's going to eventually trickle down to workers, and you just don't see that."
On the other side, proponents of the trio of business incentives say they will stimulate growth across the board.
"By reducing that cost of capital, they encourage investment across the board for small business, big business, any business in any industry," William McBride, vice president of federal tax policy at the Tax Foundation, told Yahoo Finance. "Lots of studies by economists showed that this policy has been very effective in boosting business investment."
What are the proposed business tax breaks?
If passed, they are available to qualified companies, business owners, and investors for the upcoming tax season and can be retroactively applied to past investments. While some business reliefs received bipartisan support, Jason Smith (R-Mo.) brokered the deal by exchanging business cuts for an expanded child tax credit with Ron Wyden (D-Ore.).
Deduction for research and experimental costs: Companies could immediately deduct domestic R&D investment expenses, instead of spreading them over five years. The provision would run until the end of 2025 and be retroactive to 2022.
100% bonus depreciation: The act would allow businesses to again expense the full cost of machinery and equipment until the end of 2025. The 100% bonus depreciation started to phase out in 2023. The new provision would apply retroactively to 2023.
Deduction for business interest expenses: The tax bill would restore a more generous way to calculate business interest expense deductions.
Taken together, the incentives are intended to spur investments, remove competitive barriers for US businesses and ultimately augment employment opportunities. Not to mention they are simpler for small businesses to track.
"Most of the cost for research and development is actually salaries for scientists and researchers, and the standard policy in every country has been to allow full deduction in the year they incurred so companies don’t have to lock up their working capital," McBride said. "They are also particularly beneficial to smaller companies that don’t have an army of tax lawyers that can deal with the complexities of the tax law."
But Mitchell argues that lawmakers are overly optimistic that the incentives will boost capital growth, and that the growth will trickle down to workers in the form of improved wages.
"On the claim that bonus depreciation will help workers, the evidence is pretty clear that the benefits just simply don't trickle down," Mitchell said. "Shareholders and executives tend to gobble up any tax windfall before it can be shared with workers or consumers."
(Photo by Alex Wong/Getty Images) (Alex Wong via Getty Images)
Companies that often take advantage of the interest deduction don’t adjust their investment strategies to policy changes, Mitchell wrote in a research piece. Case in point: the 2017 Trump tax cuts actually tightened how much interest expense companies could deduct. A study by three Princeton researchers examined how that affected private sector investment and found no meaningful reduction.
"Companies continue to make their decisions that they're going to make regardless of this [interest] business deduction," Mitchell said.
But many companies do base other considerations based on tax laws. And one major impact is where the investments should be located.
"Many conversations I've had with companies is that it probably doesn't impact the amount of R&D investment that a company does, but it impacts where they do it," Ray Beeman, principal and leader of Washington Council at Ernst & Young, told Yahoo Finance. "Companies obviously invest in R&D out of necessity and competitiveness, but it impacts the marginal decision of where to make the R&D investment."
Mitchell contended that giving retroactive tax cuts to businesses is unjustified as "you can't induce investment that has already happened."
While that may be true, Beeman explained that retroactive credits helps Congress incentivize company’s future behavior. "Congress has many, many times done tax extenders retroactively on things," he said.
Business groups such as the US Chamber of Commerce and Business Roundtable, a lobbying association based in Washington D.C., have voiced their support for the proposed legislation.
"Failing to act will only compound the harm of recent automatic tax increases on companies that are investing in research and development and buying new equipment," Neil Bradley, chief policy officer at the US Chamber of Commerce, said, "the very activities we need them to do to help grow our economy and lift wages."
While experts don’t see eye to eye on the value or validity of business tax cuts, they agreed that thrashing out a substantial deal like this one is a step in the right direction.
"Putting a bipartisan bill together will always require compromises," Mitchell said. "So trading the business tax provisions for the child tax credit, a powerful and proven way to reduce childhood poverty, is worthwhile."
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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