What Does a Lame Duck Congress Mean for Year-End Taxes?
As 2022 winds down, the same goes for our Senators and Representatives in Congress. And after a midterms election where Republicans took control of the House of Representatives and Democrats maintained control of the Senate, the 117th Congress begins what is known as a lame-duck session, before the new congressional session begins on January 3rd, 2023.
What is a Lame-Duck Session
A lame-duck session is the name given to a session of Congress after its successor is elected but before the end of the current session's term. As a governing body in limbo, it earned a nickname comparing it to a hobbled bird, not capable of accomplishing much.
There are a couple of notable reasons why the end-of-term Congress has earned this not-so-flattering nickname. One is that members of Congress that were not selected for reelection will be less motivated to move legislation forward, as they are no longer vying for reelection.
On the other hand, the members of Congress that have been re-elected, in theory, may be less likely to cater to voters or special interest parties that played a role in their re-election campaigns.
According to the Mercatus Center, a non-profit research organization at George Mason University, "Lame duck sessions seem to make members more independent. During a lame duck session, members are less likely to vote at all, and when they do vote, they are less inclined to follow the wishes of their party or their constituents."
Historically, lame-duck sessions carry a reputation for being less productive, but our upcoming congressional session has a busy agenda that awaits.
Long To-Do List for Congress
The end of the year is a particularly perilous time for hindered governing bodies, as more complex bills are likely to come up for a vote and year-end duties arise.
Some of the items that will and have been brought to the floor this year include:
- Government funding
- National Defense Authorization Act (NDAA)
- Respect for Marriage Act
- Debt limit
- Secure Act 2.0
- Electoral Count Act
- and probably even more
In addition to the bills and decisions that will make major headlines, there are several taxes and issues surrounding taxes that will be up for debate which will affect Americans' and business finances, as well as the accounting and tax world.
Child Tax Credit
The Child Tax Credit was originally a part of the American Rescue Plan Act, which was built during the height of the COVID-19 pandemic to provide relief to Americans and the U.S. economy. It has since been expanded and now provides $3,000 - $3,600 per child for families making under a certain amount of annual income.
This tax credit has been discussed as being rolled into a larger tax deal but according to Bloomberg, Democrats hope to expand the tax credit while Republicans would like to accept a lesser credit in return for extending expiring business tax breaks.
Section 174 of the IRC
One of the tax issues being discussed between Republicans and Democrats is reversing the recent changes to Section 174 of the IRC, which is currently preventing businesses from deducting research and experimental expenditures in the year they were incurred.
Reversing the recent changes would give businesses more flexibility in how they expense and conduct research and development.
Tax Cuts and Jobs Act Tax Changes
The changes to Section 174 of the IRC were part of the Tax Cuts and Job Acts (TCJA) of 2017. And that's just a small part of the TCJA that will be discussed during this year end's lame-duck session.
There are many ripples emanating from the TCJA in this year's lame-duck pond. According to Tax Foundation, an independent tax policy nonprofit, the TCJA was the most significant tax code overhaul in over three decades.
Also included in the TCJA is the 100% bonus depreciation tax deduction, which is scheduled to decrease to 80% in 2023. Bonus depreciation allows businesses to deduct a certain percentage of the cost of eligible assets the year they were bought, rather than over the next few years.
First introduced in 2002, under the Job Creation and Worker Assistance Act, bonus depreciation was originally set at 30%. Under the TCJA, the rate was raised to 100%.
In its current form, bonus depreciation will still be in effect until 2026, but the rate will be 20% less each year until it reaches 20% in 2026. There have been calls to keep the bonus depreciation at 100% in order to help businesses during a (seemingly forever) impending recession.
Typically at the end of each year, there are a number of temporary tax provisions which are extended known as tax extenders. These tax provisions can be extended for decades, such as the research and experimentation credit which was renewed 16 times from 1981 to 2015, before it was made permanent.
Last year, a tax extenders agreement was not made and some provisions expired and some other provisions were rolled into the Inflation Reduction Act.
In addition to the changes to research and experimental expenditures in Section 174 and bonus depreciation, there is also the Limit on Business Interest Expenses Based on EBIT.
Introduced with the TCJA and going into effect at the beginning of 2022, this provision limited business deductions for interest expenses to 30 percent of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), but now those deductions are limited to 30 percent of Earnings Before Interest and Taxes (EBIT). There are other smaller provisions that did expire last year that may be reviewed before the end of this year.
With a Democratic party motivated to strike deals before it loses control of the House, this could be a particularly productive lame-duck session in terms of taxes and other major legislation, but with so much on the docket it may be a challenge for Congress to get their all of their ducks in a row in time.
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