Watch Out for These Potential Tax Changes

Business Interest Limitations

Under the 2017 tax overhaul, the ability to deduct business interest income was limited to 30% of adjusted taxable income. For tax years beginning after Dec. 31, 2021, business interest deductions have been hampered by a rule requiring business taxpayers to include any amounts deducted for depreciation and amortization as part of their adjusted taxable income before calculating the amount of business interest that can be deducted. 

The maximum deduction for business interest would still be limited to 30% of adjusted taxable income under the new rules. However, the new rules allow the business taxpayer to use their adjusted taxable income before any reductions for depreciation and amortization for tax years 2024 and 2025.

The new rules would expand the tax base for calculating the 30% business interest deduction to earnings before interest, taxes, depreciation and amortization, again resulting in a potentially higher adjusted taxable income to be used in the business interest deduction calculation.

The proposed legislation would take this a step further. Business taxpayers would be allowed to apply EBITDA as their adjusted taxable income number to their returns for tax years beginning after Dec. 31, 2021, to calculate the amount of their business interest deduction.

It is unclear at this point whether the IRS will require that they file an amended return for any prior years or if they will allow them to apply for the added deduction and tax savings via another method.

Employee Retention Tax Credit

The proposed changes would be partially paid for by adjustments to the employee retention tax credit, which was established in early 2020 at the onset of the COVID-19 pandemic.

In recent years, the level of fraud connected with some claims under the credit has increased, although in some cases this fraud has been perpetrated by third-party firms claiming expertise with the provision.

The proposed legislation includes a number of features to help combat this fraud. In addition, the legislation would terminate the period for making employee retention tax credit claims as of Dec. 31, 2024, which is earlier than the current deadline of April 15, 2025.

In late 2023, the IRS put a freeze on the acceptance of new claims. Additionally, the IRS has established an amnesty program for taxpayers who realize that they have filed a claim that they may not be entitled to. They can withdraw the claim or pay back any money received.

Child Tax Credit

While not a business tax credit, the child tax credit may apply to some clients. The proposed legislation would expand the child tax credit to allow the amount of earned income exceeding $2,500 by 15% as before, multiplied by the number of qualifying children. This would allow the credit to be applied on a per-child basis rather than on a per-taxpayer basis.

The maximum credit would be expanded from $1,600 to $1,800 for 2024. Additionally, for the 2024 and 2025 tax years, the new rules would allow taxpayers to use either income from a prior tax year or the current tax year to calculate the credit, in essence removing any penalty for having a lower current-year income. The income limits to claim the credit remain at $200,000 for a single filer and $400,000 for a joint filer. 

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