Build Back Better may be on the shelf for now but there are still tax changes taking effect in 2022. Following are highlights related to two of such changes that selected businesses should be aware of and planning for.
Research and experimental expenditures
• Effective for amounts paid or incurred in tax years beginning after December 31, 2021, taxpayers must amortize (vs. currently deduct) them over five years or fifteen years to the extent that the expenditures are attributable to foreign research.
• Amortization begins at the mid-point of the tax year in which the expenditures are paid or incurred regardless of when the taxpayer begins to realize income from such expenditures.
• Keep in mind for this purpose that research and experimental expenditures subject to amortization are more broadly determined than expenditures qualifying for the R&D tax credit. Amortization could be required for numerous costs not eligible for the credit.
Interest deductibility limitation
• Since 2018, business interest expense was subject to an annual limitation on deductibility with any disallowed portion carried over to subsequent years.
• Some taxpayers were exempt from the limitation because of their gross receipts level. In addition, many taxpayers were not limited because of the manner in which the calculation was performed and namely because depreciation, amortization and depletion were added back in arriving at the income subject to limitation.
• Effective January 1, 2022, certain taxpayers may find themselves subject to limitation who previously were not. The reason is that the limitation is determined on adjusted taxable income AFTER any deduction for depreciation, amortization or depletion.
• With respect to assessing 2022 tax estimates and projections, the possibility of an interest deductibility limitation needs to be considered. In addition, taxpayers subject to limitation have an opportunity to avoid interest disallowance but only by making an election not to claim bonus depreciation for the applicable and future years. Doing so will require forward thinking and analysis.
One other item that is not changing in 2022, but will be in 2023, impacts claiming federal bonus depreciation. As you may know, many fixed assets acquired and placed in service are eligible for an immediate federal deduction using 100% bonus depreciation. For an asset placed in service after December 31, 2022, such bonus depreciation percentage drops to 80%. It then reduces 20% annually until bonus depreciation is no longer available starting in calendar year 2027. Note this as your business considers the timing of any material CAPEX expenditures.
Tax laws are fluid and subject to change. For example, there is some bi-partisan Congressional support to delay or eliminate the requirement to amortize research & experimental changes. As always, we will track such changes and advise accordingly.
In the meanwhile, here are few reminders for 2022:
• Don’t forget that, while the employee retention tax credit in unavailable for 2022 (it expired on September 30, 2021), businesses should nonetheless look back to the first three quarters of 2021 (and perhaps 2020) to determine whether they may qualify for the credit via amended Form 941s (potentially $21,000 credit per qualifying employee) if they have not previously done so.
• Also, for 2022, as another reminder, the rate for business miles driven is 58.5 cents per mile, up 2.5 cents from the rate for 2021.
• For those with significant CAPEX in 2022, if bonus depreciation is not desirable due, for example, to state tax rules, Section 179 write-off may be a viable alternative (depending again on state tax rules). For 2022, up to $1,080,000 of qualifying CAPEX (equipment, furniture & fixtures, etc.) may be written off.
For further details on any of the provisions above, please contact your Sisterson tax advisor.
Please contact your Sisterson representative or firstname.lastname@example.org with questions.