As the political season progresses, the list of achievable goals for the current Congress grows shorter by the day. Despite the rhetoric from both parties suggesting otherwise, the reality is that with razor-thin majorities in both chambers and less than six months before the November elections, the chances of substantial progress diminish by the day.
So, what are the key issues likely being deferred to the next Congress? Among the most significant are several tax provisions crucial to the equipment leasing and finance industry. Despite past considerations for extension, these provisions remain mired in legislative gridlock, having cleared the House but facing substantial hurdles in the Senate.
Interest Deductibility - Interest Deductibility has been limited since tax reform was passed in 2017, but that limitation got stricter in 2022. Today, interest deductions are limited to 30% of adjusted taxable income (ATI), and ATI approximates earnings before interest and tax, whereas from 2018 through tax years beginning before Jan. 1, 2022, ATI approximated earnings before interest, tax, depreciation and amortization, a more lenient measure.
100% Expensing - This year, companies can depreciate 60% of an asset’s value in the first year of ownership. 2024 is the second year of a five-year phase out—20 percentage points per year—of 100% expensing. For an interesting look at the interactions between 100% expensing and “normal” depreciation, the Congression Research Service has a good paper on the matter here.
Research and Development Credit - While not typically a focus of ELFA advocacy, the R&D tax credit plays a vital role in the broader legislative package currently stalled in Congress. This credit supports companies engaged in the development of innovative business components, ranging from products to processes and software.
The reason that advocates have been pushing so hard on getting these provisions extended now, is that if they are current tax law next year, they will be “baked in” to the baseline for the consideration of tax changes next year. Being “baked into” the baseline makes it easier for Congress to extend a provision because it costs less money to extend a provision. With numerous provisions of the Tax Cuts and Jobs Act set to expire at the end of next year, including individual tax rate adjustments, a lot of taxpayers face a significant tax increase absent congressional action. It’s an understatement to say that there will be many more tax-reducing provisions competing for a limited appetite to either add to the debt or raise taxes in other areas.
Now could the Congress decide to channel their inner Dan Campbell* and pass these provisions in a lame-duck session of Congress (the legislative equivalent of going for it on fourth down) instead of punting? Sure! Is it likely? Not so much. The challenge is coming up with reasonable election outcomes that increase the likelihood of these provisions being passed in a lame-duck session of Congress. Most foreseeable scenarios would mean either party would see it to their benefit to decide the issue with the makeup of the next Congress rather than the current one. The challenge for those that favor these provisions is that the likelihood of them being brought back to their 2021 or 2022 status in a tax package next year is unknown at best and probably best described as a real challenge. ELFA is keeping a close eye on these issues and will keep you informed as developments occur.
*Dan Campbell is the head coach of the Detroit Lions. He is known for going for it on fourth down when most other coaches would punt.
