A few impactful business tax provisions, many introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, are on the verge of expiring or just about to take effect — if they haven’t already. Below outlines those provisions and what you should be doing now to prepare.
The TCJA changed the deductibility of R&D expenses for businesses — from allowing taxpayers in 2021 and prior years to deduct R&D costs as they were incurred, to capitalizing and amortizing over a period of five years any U.S. R&D expenses incurred in tax years beginning after December 31, 2021. For foreign R&D that period jumps to 15 years. Amortization is straight line and does not follow MACRS.
Treated like an asset for tax purposes, the R&D expenses in 2022 and beyond are deemed “placed in service” halfway through the year. This means that in year one, only 10% of R&D costs are deductible. For example, for a $1 million U.S. based R&D expense incurred in 2022, the tax deductions would be as follows:
| 2022 | $100,000 |
| 2023-2026 | $200,000 |
| 2027 | $100,000 |
Any new R&D costs incurred in future years, such as 2023, would have to follow the same capitalization and amortization schedule. Manufacturers, software developers and others with a considerable amount of R&D will likely feel the most impact by this upcoming change.
Taxpayers not only have an unfavorable addback for R&D (at least in initial years) but also must spend additional internal time to track R&D if they haven’t been already. And since taxpayers with R&D will now have to track this information, it makes sense to see if you qualify for the R&D credit as one way to recuperate some cash flow. The R&D tax credit can yield approximately 4% to 7% of qualified R&D costs. Typically, R&D qualifies for the tax credit if it meets a four-part test:
The interest expense limitation limits the deductibility of interest a taxpayer can take to 30% of adjusted taxable income (ATI).
For tax years beginning before January 1, 2022, depreciation and amortization were added back to taxable income when calculating the taxpayer’s ATI. This adjustment was favorable to taxpayers, as it increased ATI and allowed a potentially higher interest expense deduction. However, for tax years beginning after December 31, 2021, taxpayers can no longer add back depreciation and amortization when determining their interest expense limitation.
While companies with minimal interest expense may not be impacted by this change, highly leveraged companies and those with significant depreciation/amortization deductions may find themselves subject to a greater limitation than before or subject to the limitation for the first time.
The coveted 100% bonus depreciation provision many businesses have enjoyed since 2017 is about to change. As outlined in the TCJA, bonus depreciation starts to decrease by 20% beginning in 2023, according to the placed-in-service date:
| After September 27, 2017, and before January 1, 2023 | 100% |
| 2023 Calendar Year | 80% |
| 2024 Calendar Year | 60% |
| 2025 Calendar Year | 40% |
| 2026 Calendar Year | 20% |
| 2027 and Subsequent | 0% |
If you are purchasing a large asset, such as a piece of new equipment, consider placing it in service before December 31, 2022, so it can qualify for 100% bonus. Don’t lose out on an extra 20% deduction due to timing.
When taking advantage of bonus depreciation, also consider how the additional depreciation will interact with the interest expense limitations. For taxpayers that have yet to file a 2021 return, consider accelerating as much depreciation expense as possible, as it will not impact the interest expense limitation calculation for 2021.
The ability for businesses to deduct 100% of the cost of food and beverages when provided by a restaurant — originally put in place to help restaurants struggling during the pandemic — will revert to 50% for business meals after 2022.
Contact Robert Venables at rvenables@cohencpa.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.