The Bottom Line

What the pro-business tax agenda is chasing in a changing Congress 

Key Points
  • Corporate tax measures related to research and development expenses, business interest, and accounting for physical purchases including equipment, are high on a wish-list in what is going to be a tough legislative environment to preserve 2017 Tax Act measures.
  • Business taxes in the Trump legislation that Republicans want to extend may require a deal with Democrats on a childcare tax credit that the GOP maintains is costly.
  • Some Republicans want to focus on tax policy specifically for small businesses, especially if the economy enters a recession and as the IRS has been given a greater budget to pursue audits.
Sunrise hits the U.S. Capitol dome on September 30, 2021 in Washington, DC.
Chip Somodevilla | Getty Images News | Getty Images

Main Street could find itself stuck in gridlock next year in terms of advancing pro-business tax objectives.

For House Republicans, legislative priorities are likely to include extending business-friendly provisions of The Tax Cuts and Jobs Act, passed by the Trump Administration in 2017. Even so, a divided Congress means that major pro-business legislative changes will be difficult to enact. This is true despite Raphael Warnock's recent victory that gave the Democrats more of a margin in the Senate. Arizona Senator Kyrsten Sinema's decision on Friday to leave the Democratic Party and become an independent further complicates the legislative handicapping.

"With a divided government, I think it will be a challenge to do large pieces of tax legislation," said Dave Camp, a senior policy advisor within PwC's Washington National Tax Services practice, who is a former Republican member of Congress and chairman of the House Ways and Means Committee.

Rather, tax and policy professionals expect House Republicans to focus on a number of positioning moves next year — ones that will establish their pro-business agenda ahead of the 2024 presidential election.

"There are a host of provisions in the tax code that businesses would like to see changed or revised," said Rochelle Hodes, a principal in Crowe's Washington National Tax office. Even with their slim majority, Republicans have an opportunity to appeal to business constituents by proposing a number of pro-business measures, which could be viewed favorably in upcoming elections, she said.

Research and experimental (R&E) expenditures 

To be sure, some of what's on the table for 2023 will depend on the outcome of the current lame-duck session. Even measures that have bipartisan support could be held up, at least in the short term, by competing priorities.

"To have enough bipartisan support for them to pass may require passing other tax proposals including reinstatement of some of the child tax credit benefits for parents," said Stefan Gottschalk, Washington National Tax Director at the accounting and consulting firm Baker Tilly. 

If not addressed during the current session, one measure that will likely be discussed next year, relates to how R&E expenditures are deducted, Gottschalk said. Prior to 2022, the full amount of these expenses was deductible right away. Starting this year, businesses are required to amortize domestic expenditures over five years and foreign R&D expenses over 15 years.

"A lot of the organizations that represent business interests have been very vocal about opposition," Hodes said.

Rules around bonus depreciation 

Another area that seems to have bipartisan support concerns equipment purchase deductions. This year, U.S. companies can deduct 100% on eligible equipment purchases. In 2023, that percentage decreases to 80%, and it ratchets down thereafter, which businesses oppose, Gottschalk said. 

Businesses push for tax breaks as Congress negotiates end-of-year spending deal
Businesses push for tax breaks as Congress negotiates end-of-year spending deal

At the recent CNBC CFO Council Summit in Washington, D.C., several policymakers weighed in on the tradeoffs that will be needed for business taxes and childcare to be negotiated into a deal.

Outgoing Republican leader of the House Ways and Means Committee Kevin Brady of Texas said key corporate tax priorities from the 2017 tax act that are subject to phase outs, including the R&D expenses and bonus depreciation, have a chance in a lame duck session of Congress, but Republicans and Democrats are far apart on price tag. Brady estimated the cost of the bonus depreciation at $20 billion versus $120 billion for the full childcare tax credit.

"I am a very strong supporter of the R&D tax credit being reinstituted. I think it was one of the worst parts of the 2017 tax bill," said Democratic Senator Ron Wyden of Washington. "I have colleagues that feel very strongly about the childcare tax credit. I do too. … I would very much like to see these two linked," Wyden said, adding that one solution could be to offer shorter-term rather than permanent extensions for both.

Interest expense limitation rules

A third bipartisan measure under discussion relates to the deductibility of business interest. "The Tax Cuts and Jobs Act made significant changes to Section 163(j) by limiting the deductibility of business interest beginning after Dec. 31, 2017," Camp said. 

"While there was relief in the Cares Act, the business limitation came back at 30% of earnings before interest and taxes (EBIT) in 2022 for businesses earning more than $27 million. Business is seeking the use of the traditional earnings standard of earnings before interest, taxes, depreciation and amortization (EBITDA)," he said. 

Business deductions

One provision of the Tax Cuts and Jobs Act, slated to sunset in 2025, is the Section 199A deduction for businesses organized as a pass-through entity. This deduction allows non-corporate taxpayers to deduct up to 20% of their qualified business income, as well as up to 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income, according to the IRS.

"It's a very big deal for U.S. businesses. Something like 70% of all U.S. businesses would be affected," said Dustin Stamper, managing director in Grant Thornton's Washington National tax office.

Earlier this month, The National Federation of Independent Business, a small business advocacy group, announced a national multi-million-dollar advertising campaign to drum up support for making this deduction permanent. However, these efforts are unlikely to pass muster with a divided Congress, at least in the short-term. "I think the two sides are too far apart," Stamper said.

Global minimum tax

Republicans are also likely to grandstand with respect to a proposed 15% global minimum tax, a framework set forth by The Organization for Economic Cooperation and Development.

"There are some minimum tax rules in place, but they are somewhat in conflict with the version of global minimum taxes that we're reached agreement on with the rest of the world through OECD," Stamper said. "As the rest of the world potentially moves forward, it could put pressure on U.S. multinationals and the U.S. government to respond."

The Biden administration wasn't able to use the Inflation Reduction Act to bring the U.S. into compliance, Stamper said. "So now it's going to be a big issue of contention between the administration and the House Republicans. Based on their current positions, it's going to be hard to see how they come together and get something done."

Small business-specific efforts

John Gimigliano, head of legislative services in KPMG's Washington National tax practice, also expects to see House Republicans focus efforts on helping small businesses, especially if the economy enters into a recession as many business owners predict will occur next year. Passing legislation is going to be very hard, but he expects Republicans to host hearings and other forward-looking initiatives that could eventually result in legislation beneficial to small businesses.

Additionally, he expects the Republican-controlled House to focus on how best to allocate the substantial burst of funding the IRS received through the Inflation Reduction Act. One concern among small businesses, in particular, is that it will lead to more audits. Gimigliano expects this concern to be addressed by House Republicans, along with an effort to make sure the money is spent in "a way that's productive and not unfair to taxpayers."