The Tax Bill Failure Shows Why Taxpayers Must Plan for the Expiration of the TCJA

In late January of 2024, it seemed almost a forgone conclusion that the Tax Relief for American Workers and Families Act (“TRAWFA”) would become law. The bill was drafted by a bipartisan House/Senate duo, it had broad bipartisan support, and it passed the House with an overwhelming majority. Despite this early momentum, once the bill reached the Senate, it quickly stalled out.

Provisions in the Tax Relief Act

Several of the provisions in the TRAWFA addressed provisions from the Tax Cuts and Jobs Act (“TCJA”) that have already expired. The bill would have retroactively extended 100% bonus depreciation, allowed businesses to continue to determine their business interest deduction limitation under IRC Sec. 163(j) using EBITDA instead of EBIT, and delayed the full implementation of capitalization and amortization for domestic research and experimental expenses until taxable years beginning after December 31, 2025.  

On their own, all of these provisions have strong bipartisan support. So, why did a bill that passed with an overwhelming majority of 357-70 fail to even make it to a floor debate in the Senate? And what lessons can be learned from the bill’s failure regarding the future of the TCJA?

Election Year Uncertainty

As the last few months have shown, election years, especially presidential election years, can be totally unpredictable. Both parties are more sensitive about giving the other any kind of win that can be touted on the campaign trail, particularly when both chambers have razor-thin majority margins. This hesitancy to make bipartisan compromise was reflected in the TRAWFA negotiations. Any chance for the bill to become law has now likely been pushed to post-election “lame-duck” legislation.

Expiring and Expired TCJA Provisions

This tax bill is just a precursor to the much larger looming tax fight in 2025 – the full expiration of the temporary provisions of the TCJA. While the reduction of the corporate income tax rate from 35% to 21% was permanent, most of the individual provisions in the TCJA are set to “sunset,” or expire, at the end of 2025, including:

• The 20% qualified business income (“QBI”) deduction for pass-through entities,
• The reduced individual tax rates and brackets,
• The doubled estate tax exemption,
• The SALT cap,
• The reduction of the alternative minimum tax, and
• The more generous provisions of global intangible low-taxed income (“GILTI”), foreign-derived intangible income (“FDII”), and the base erosion anti-abuse tax (“BEAT”)

Some provisions, such as the ones included in the TRAWFA, already expired or went into effect.

These provisions have proven popular for most taxpayers. Small businesses have been able to use the QBI to reduce their overall tax bill, and individuals have generally benefited from lowered tax brackets and the increased standard deduction. For many, the coming “tax cliff” will bring significant tax shock. Both parties seem to agree that keeping the more popular provisions of the TCJA makes sense for taxpayers, though they do not agree on to what extent these provisions should be extended or how extensions should be funded. The question is – when will Congress take action?

Lessons for the TCJA from the TRAWFA

The failure to pass the TRAWFA shows how difficult it can be to get even bipartisan and popular legislation through Congress. Possibly the biggest takeaway for taxpayers and practitioners isn’t the fact that the bill has failed to pass, despite its previous momentum. Instead, it is the fact that these provisions were allowed to expire to begin with. Due to Congressional inaction, taxpayers were forced to either go ahead and file under the assumption that the provisions would remain expired, or file an extension in the hopes that the provisions would be retroactively extended.

If Congress takes the same approach as it did with the provisions in the TRAWFA, it could wait until 2026 to take real action. Add in the fact that 2026 is a mid-term election year, and the likelihood of further inaction until as late as 2027 increases. Taxpayers and practitioners may once again find themselves in the position of deciding whether to file and potentially amend returns, or file extensions with the hope of retroactively extended provisions.

Planning for the Unexpected

Many practitioners advised their clients to file an extension for their 2023 returns in hopes that the bill would pass. If the bill had passed as originally expected, taxpayers who filed an extension would be spared the hassle of amending their returns. This caution was especially prudent for large partnerships, which may be subject to more stringent requirements when making changes to a previously filed return under the Bipartisan Budget Act (“BBA”) audit regime. Similarly, taxpayers should plan for provisions in the TCJA to be extended, while also preparing for the likelihood that they will expire.

For instance, taxpayers with pass-through entities should look to their advisors for guidance on how to prepare for the end of the QBI deduction, or how the end of the TCJA could impact their decisions to use a state pass-through entity tax option. High net worth individuals may need to consider using up their lifetime estate tax exemption while it remains doubled. In addition, taxpayers should seek guidance on whether or not they should accelerate income in 2025 to avoid higher tax rates beginning in 2026.

As the past year has shown, political fortunes can change quickly. What may seem certain or farfetched one week can lose all momentum or gain steam the next. Taxpayers will need knowledgeable and experienced tax advisors to provide them with flexible options for the expiration of the TCJA.