What’s Inside the Expansive Draft Tax Bill: Full Expensing, Interest Limits, ERC Crackdowns, and Energy Changes

Yesterday, Congress took a significant step toward advancing a bill that aims to reinstate full expensing under Section 174, among other expiring or expired tax provisions from the Tax Cuts and Jobs Act (TCJA). While much of the media attention around “The One, Big, Beautiful Bill” has focused on changes to individual tax rates, the elimination of taxes on tips, and the elimination of taxes on overtime, the business provisions contained in the bill are long overdue for many companies. Although this bill still faces numerous challenges before it can become law, and its passage is not guaranteed, its provisions provide insight into how these issues will be addressed.

Section 174
The proposed tax package would revert the treatment of domestic research and experimental (R&D) expenditures to how they were treated before the 2022 tax year, effective January 1, 2025. This change would allow companies to fully deduct their domestic R&D expenses and remains in effect for tax years starting after December 31, 2024, and before January 1, 2030. It is important to note that the treatment of foreign R&D expenses will remain the same, meaning they must continue to be amortized over 15 years.

Additionally, the bill proposes to revert the Section 280C Election to its previous treatment, permitting a reduced credit instead of an add-back for businesses claiming the Section 41 R&D Tax Credit. These provisions would take effect for tax years starting after December 31, 2024. Unfortunately, this means that the amortization requirements will still apply for the 2024 tax year and earlier.

Bonus Depreciation
The draft bill also reinstates 100% bonus depreciation for property acquired after January 19, 2025, and before January 1, 2030. Similar to past extensions of bonus depreciation, the January 19th date will be subject to binding contract restrictions, meaning contracts entered before that date will not qualify for the increased deduction.

While not included under the bonus depreciation allowance, the bill allows for immediate expensing of “qualified production property”. This expensing applies to manufacturing property used to produce tangible personal property. However, it will only qualify for new property, not for purchased property, and will only cover the portions of property directly related to manufacturing, ultimately excluding offices, lab areas, and other non-production areas.

Section 163(j)
The interest limitation under Section 163(j) is currently linked to Adjusted Taxable Income, which is tied to EBIT for years after 2022. Under this draft legislation, Adjusted Taxable Income would again be based on EBITDA for tax years between December 31, 2024, and January 1, 2030.

Employee Retention Credit
The Employee Retention Credit (ERC) remains a key focus for reducing fraud and recapturing funds. The proposed tax package increases penalties for fraudulent ERC promoters and disallows any new ERC claims filed after January 31, 2024. If enacted, this legislation would extend the statute of limitations to six years, providing the IRS with additional time to audit ERC claims.

Energy Provisions
The bill updates and modifies several energy tax provisions. These changes include earlier phase-outs of the Section 48 and 48E Tax Credits, the elimination of the 30C Alternative Fuel Refueling Station Tax Credit, and the removal of the 45L Energy Efficient Home Credit. However, the bill does not change any provisions related to the 179D Energy-Efficient Building Deduction.

Given the size and complexity of this bill, we’ve only just begun to scratch the surface of its provisions listed above. The bill still faces many hurdles before it can be enacted. McGuire Sponsel will continue to monitor its progress in the coming weeks. As this bill advances through Congress, we will take a closer look at each of the provisions mentioned.