The Tax Cuts and Jobs Act (TCJA), enacted in late 2017, introduced dramatic changes throughout the tax code. While many of the new provisions were advertised as easing the tax burden on business, there were necessarily revenue offsets (read, tax increases) as well. The CARES Act of 2020 introduced special corporate tax relief provisions to help businesses cope with the economic downturn triggered by the pandemic. Taxpayers may not be focused on the expiration or modification of certain of these provisions with the passage of time. These developments can have material tax implications beginning in 2022 and continuing through 2026.
4 key tax law changes that may impact your bottom line
1. Section 163(J) interest expense limitation–changes to adjusted taxable income calculations.
Businesses can no longer exclude tax depreciation and amortization when calculating adjusted taxable income for interest expense limitation purposes. This change is effective for tax years starting after 12/31/21. There was hope that congress would extend the old rules by 12/31/22 but that didn’t happen. Section 163(j) imposes a limitation on the deductibility of interest expense for business. Roughly speaking, the limitation introduced by the TCJA is 30% of EBITDA (computed on a tax basis and referred to as “adjusted taxable income”). Beginning in 2022, depreciation, amortization and depletion are no longer added back when calculating adjusted taxable income. For many businesses, the deductions for amortization and depreciation significantly reduce taxable income. Their add-back for purposes of computing the interest limitation was key to lessening its negative impact. This 2022 change introduces a major tightening of the interest expense limitation in the U.S. Businesses may need to reconsider debt/equity ratios and where leverage is positioned in their global organizations as a result.
2. R&E expenses (including software development) are no longer immediately deductible-they must be amortized over five years starting in 2022.
This change is effective for tax years starting after 12/31/21. There was also an expectation that congress would extend this favorable expensing provision by 12/31/22, but that did not happen. The TCJA preserved the research credit. However, it requires specified research or experimental expenditures to be capitalized and amortized over a five-year period (a 15-year period for research conducted outside the U.S.) beginning in 2022. These R&E expenditures include software development costs which have, historically, been currently deductible. While vigorous lobbying efforts continue in Washington seeking retroactive modification of this provision, change does not appear imminent. This will have major impacts on businesses that invest heavily in R&E and software development including international tax provisions such as the foreign-derived intangible income deduction, the global intangible low-taxed income (GILTI) calculation and the foreign tax credit limitation. Businesses should consider the effect of R&E capitalization/amortization on their estimated 2022 tax liabilities and the changed economics of such investments going forward.
3. Bonus depreciation is being phased out – for tax years beginning 1/1/23.
While it was 100% bonus depreciation for tax years beginning prior to 1/1/23, there will now be a phased down bonus depreciation deduction over the coming years. For property placed in service after 2022 the bonus depreciation deduction is reduced as follows: 1) During 2023 – 80%, 2) During 2024 – 60%, 3) During 2025 – 40%, 4) During 2026 – 20%, and 5) After 2026 – 0% (with an additional year for long production-period property and noncommercial aircraft). This roll-back of the bonus depreciation provisions is easily overlooked given the years of full expensing that taxpayers have enjoyed. Businesses may wish to consider accelerating planned capex to take advantage of the bonus depreciation provisions while they remain. As with the R&E change referenced in #2, extension of the bonus depreciation provisions is the focus of intense lobbying by businesses that rely on the provisions to better the economics of capital investments.
4. Significant change in meal and beverage expense deductions.
Food and beverage expenses provided by restaurants were 100% deductible for 2021 and 2022. The general rule for such food and beverage expenses will now revert to being 50% deductible for tax years beginning 1/1/23 under section 274.
The U.S. tax code is constantly changing, and it remains extremely challenging for businesses to remain current. Our mission at LBMC is to help our clients stay abreast of tax changes that affect their businesses and help them develop strategies to respond appropriately. If you would like to discuss the above changes or the myriad of other changes applicable in 2022 or beyond, please contact your tax engagement partner or feel free to reach out to us at email@example.com or firstname.lastname@example.org
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.