Key insights
- Forty tax provisions affecting individuals and businesses expired in 2021, which could have a significant impact on your tax plan.
- The business interest limitation returned to pre-pandemic levels, though small businesses may qualify for an exception.
- The employee retention credit (ERC) remains available for businesses that had a decline in gross receipts or were shut down due to a government order.
- Companies must now amortize their R&D costs over a five-year period, which may discourage investment in new projects.
Have expired tax breaks affected your business?
As your organization embarks on asset acquisition, financing, employment, operational, and other organizational decisions this year, bear in mind some major tax changes for 2022. Many provisions expired in 2021, which could have a significant impact on your tax plan.
Popular business tax breaks — What changed?
Forty tax provisions affecting individuals and businesses expired in 2021 — six ceased after the third quarter and 34 elapsed at the end of the year. Some provisions were related to pandemic relief and arguably intended to expire at some point, while others are on the perpetual list of “tax extenders” that Congress has not yet made permanent.
Congress may decide to extend all, some, or none of the provisions retroactively, 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 business tax breaks that expired in 2021 — and the potential impact on your organization.
Limitations on business interest are reverting
The first provision relates to the ability of certain businesses — based on gross receipts or classification as a “tax shelter” for which small businesses can easily fall victim without even realizing it — to deduct their interest expense. Taxpayers with losses should consult with their tax advisors and review their situations carefully to help avoid the tax shelter trap that could subject them to the Section 163(j) limitation.
The Section 163(j) business interest limitation was part of the Tax Cuts and Jobs Act of 2017 (TJCA), enacted for tax years beginning in 2018. In response to the COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) temporarily eased the burden of this limitation. Taxpayers could elect to use a 50% adjusted taxable income (ATI) limitation for 2019 and 2020 (rather than the normal 30%) and use their 2019 ATI to compute their 2020 business interest limitation. The CARES Act relief allowed many businesses to deduct their interest in full.
For 2022, the business interest limitation is back to 30% of ATI — and depreciation, amortization, and depletion are no longer added back in computing ATI after the 2021 tax year. These changes may limit your deduction for business interest even if you haven’t previously been subject to this limitation.
Employee retention credit (ERC) still available
Although the ERC has yet to be extended into 2022, employers who met the eligibility requirements have three years from the time the original payroll tax return filings were due to amend those returns to claim the credit. To qualify, an organization’s activities 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 the receipts or employee service hours as compared to the same period in 2019.
Alternatively, if an organization experienced a significant decline in gross receipts in any quarter in 2020 — or in the first three quarters of 2021 compared to the same quarter in 2019 — they might also qualify. This means that in 2020, there must have been a greater than 50% reduction in receipts compared to the same quarter in 2019. In 2021, an organization is eligible in any quarter where the reduction in receipts is greater than 20% compared to the same quarter in 2019.
The current remaining opportunity for Q3 and Q4 of 2021 is for a business to qualify as a “recovery start up business.” This means that if a business began after February 15, 2020, and had less than $1 million in gross receipts in each of the prior three years, that business could qualify for up to $50,000 in credit for each of those quarters.
In any year a credit is claimed, the wage expense for that year must be reduced by the credit amount. Employers who amend 2020 payroll tax returns to claim the credit must be prepared to amend their 2020 federal income tax returns as well. The same applies for employers who claim the 2021 credit.
Bonus depreciation is phasing out
Although there were no changes to the bonus depreciation rules for 2022 (so technically, not an expired provision), consider upcoming changes for 2023.
The TCJA increased the first-year bonus deprecation to 100% for assets placed in service after September 27, 2017, through January 1, 2023. The bonus depreciation rate will be limited to 80% in 2023, 60% limitation in 2024, 40% limitation in 2025, and 20% limitation in 2026.
Unless Congress changes the law, property acquired in 2027 will not be eligible for bonus depreciation. For property with a longer production period and for certain aircraft, the phase-down is: 80% in 2024, 60% in 2025, 40% in 2026, and 20% in 2027.
The scheduled reduction in benefit may encourage owners to accelerate asset purchases into this year.
Research and development costs must be amortized
For many years, companies have been allowed to deduct research and development (R&D) costs in the year the costs are incurred. Most recently, under TCJA, the expensing of R&D costs was allowed through December 31, 2021. However, beginning in January 2022, that provision has expired, and companies must now amortize their R&D costs over a five-year period, beginning in the midpoint of their tax year.
For example: Company A incurs $100,000 of R&D costs in December 2021 and Company B incurs the same $100,000 of R&D costs in January 2022. Because the costs are incurred before January 2022, Company A is allowed a deduction of $100,000 on its income tax return for tax year 2021. Company B, however, is only allowed a deduction of $10,000 (the costs are amortized over five years, but the amortization begins with the midpoint of the year, so only half a year of amortization is allowed) on their income tax return for tax year 2022.
With the change to amortizing R&D costs, companies may lose their incentive to invest in R&D projects and will likely look elsewhere when developing income 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 effect 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 — particularly if your business is contemplating major asset acquisitions, debt, or operational changes.
How we can help
As tax laws continue to expire, extend, and evolve, both short- and long-term planning — as well as flexibility — become crucial. Proactive, personalized planning is the key to helping you navigate your tax liabilities and identify new opportunities for savings. Our tax professionals can help you evaluate your options and make informed decisions.