Expired tax breaks could change your 2022 tax strategy: 2022: Articles: Resources: CLA (CliftonLarsonAllen)
- Forty tax provisions affecting individuals and businesses expired in 2021, which could have a significant impact on your tax plan.
- The limitation on business interests has returned to pre-pandemic levels, although small businesses may qualify for an exception.
- The Employee Retention Credit (ERC) remains available to businesses that have experienced a decline in gross receipts or have been closed due to a government order.
- Companies must now amortize their R&D expenses over a period of five years, which can discourage investment in new projects.
As your organization embarks on asset acquisition, funding, employment, operational, and organizational decisions this year, keep in mind some major tax changes for 2022. Many provisions expired in 2021, which which could have a significant impact on your tax plan.
Popular Tax Breaks for Businesses — What’s Changed?
Forty tax provisions affecting individuals and businesses expired in 2021 — six ceased after the third quarter and 34 expired at the end of the year. Some provisions were related to pandemic relief and were presumably due to expire at some point, while others are on the perpetual list of “fiscal extenders” that Congress has yet to make permanent.
Congress can decide to retroactively extend all, some, or none of the provisions, but this legislative practice can create uncertainty, anxiety, and confusion for owners who want to make tax-informed business decisions.
Review and discuss the full list of expired provisions with your tax advisor. Meanwhile, we’ve highlighted popular tax breaks for businesses that expired in 2021 – and the potential impact on your organization.
The limits of commercial interest return
The first provision deals with the ability of certain businesses — based on gross receipts or classification as a “tax shelter” that small businesses can easily fall victim to without even realizing it — to deduct their interest costs. Taxpayers with losses should consult their tax advisors and carefully consider their situation to avoid the tax shelter trap that could subject them to the limitation of section 163(j).
The limitation on business interests in Section 163(j) was part of the Tax Cuts and Jobs Act of 2017 (TJCA), enacted for tax years beginning in 2018. In response to the crisis of COVID-19, the Coronavirus Aid, Relief, and Economic Security (CARES Act) has temporarily eased the burden of this limitation. Taxpayers could choose to use an adjusted taxable income (ATI) limit of 50% for 2019 and 2020 (rather than the normal 30%) and use their 2019 ATI to calculate their 2020 business interest limit. he CARES Act relief has allowed many companies to fully deduct their interest.
For 2022, the commercial interest limitation is back to 30% of the ATI – and depreciation, amortization and depletion are no longer added into the calculation of the ATI after the tax year 2021. These changes may limit your business interest deduction even if you have not previously been subject to this limitation.
Employee Retention Credit (ERC) still available
Although the ERC has not yet been extended to 2022, employers who met the eligibility requirements have three years from when the original tax returns were to be amended to claim the credit. To be eligible, an organization’s operations must have been fully or partially suspended due to a government order. This means that a signed government order must have affected at least 10% of revenue or employee service hours compared to the same period in 2019.
Alternatively, if an organization experienced a significant decline in gross revenue in any quarter in 2020 – or in the first three quarters of 2021 compared to the same quarter in 2019 – it could also be eligible. This means that in 2020, there must have been a reduction in revenue greater than 50% compared to the same quarter in 2019. In 2021, an organization is eligible in any quarter where the reduction in revenue is greater than 20% compared to in the same quarter. quarter in 2019.
The current remaining opportunity for the third and fourth quarters of 2021 is for a company to qualify as a “recovery start-up company”. This means that if a business started after February 15, 2020, and had less than $1 million in gross revenue in each of the previous three years, that business could qualify for a credit of up to $50,000 for each of these quarters.
For any year in which a credit is claimed, the payroll expense for that year must be reduced by the amount of the credit. Employers amending 2020 tax returns to claim the credit should be prepared to also amend their 2020 federal tax returns. The same is true for employers claiming the 2021 credit.
Bonus depreciation is being phased out
While there were no changes to the premium amortization rules for 2022 (so technically not an expired provision), consider the upcoming changes for 2023.
The TCJA increased the first-year depreciation bonus to 100% for assets placed in service after September 27, 2017, through January 1, 2023. The bonus depreciation rate will be capped at 80% in 2023, 60% in 2024, 40% limit in 2025 and 20% limit in 2026.
Unless Congress changes the law, property acquired in 2027 will not be eligible for bonus depreciation. For goods with a longer production period and for certain aircraft, the gradual reduction is: 80% in 2024, 60% in 2025, 40% in 2026 and 20% in 2027.
The planned reduction in benefits could encourage owners to accelerate asset purchases this year.
Research and development costs must be amortized
For many years, companies were allowed to deduct research and development (R&D) expenses in the year the expense was incurred. More recently, under the TCJA, expensing of R&D costs was permitted until December 31, 2021. However, as of January 2022, this provision expired and companies must now amortize their R&D costs over a five-year period, starting in the middle. of their tax year.
For example: Company A incurs $100,000 in R&D expenses in December 2021 and Company B incurs the same $100,000 in R&D expenses in January 2022. Since the expenses are incurred before January 2022, Company A has entitled to a $100,000 deduction on its 2021 tax return. Company B, however, is only entitled to a $10,000 deduction (the costs are amortized over five years, but l depreciation starts in the middle of the year, so only half a year of depreciation is allowed) on their income tax return for the 2022 tax year.
With the shift to amortization of R&D costs, companies may lose their incentive to invest in R&D projects and will likely look elsewhere when developing tax planning strategies.
Business tax planning is essential
Given the uncertainty surrounding expired and expiring tax provisions, business owners may be forced to make organizational decisions this year without knowing the full tax implications of those decisions.
Work closely with your advisors to understand how these changes may affect your taxes and related cash flow over the next few years. Consider multiple scenarios in any analysis, especially if your business is considering major asset acquisitions, debt, or operational changes.
How can we help you
As tax laws continue to expire, expand and evolve, short- and long-term planning – as well as flexibility – becomes crucial. Proactive and personalized planning is the key to helping you manage your tax obligations and identify new savings opportunities. Our tax specialists can help you assess your options and make informed decisions.