Congress often addresses expiring tax provisions in a year-end “Tax Extenders” bill. Historically, Congress has gone right down to the wire to pass the extenders bill, and hopefully we get one passed before the end of 2022. Absent Congressional action, however, there are some significant tax provisions that expire in 2022 and 2023.
One of the biggest potential changes is the treatment of research and experimentation expenditures. Prior to 2022, there was a choice between deducting a research expense in the year it was incurred or amortizing the expense over five years. Beginning in 2022, the option for immediate expensing has expired. We anticipate Congress will extend the availability of same year deduction because this provision has broad bipartisan support and inaction would have a negative, chilling effect on research conducted in the United States. Without the deduction, companies with large R&D departments may consider relocating research operations outside the country.
Another change is to the calculation of the limit on deductible business interest expense. Prior to 2022, deductible business interest expense was limited to 30% of a taxpayer’s Adjusted Taxable Income (ATI). ATI was calculated by starting with taxable income and adding back interest, income taxes, net operating losses, and depreciation & amortization. However, for tax years starting after 1/1/2022, the deductions for depreciation and amortization are no longer added back when computing ATI, thus reducing the computation base for the 30% limitation. Prior to 2022, the computation base was EBITDA, currently it is EBIT. Without legislative action, many businesses will find their interest expense significantly limited.
2022 is also the last year for 100% bonus depreciation. It will begin to phase-out in 2023 and will drop 20% per year until it hits zero in 2027. Even without an extension of the current bonus depreciation provisions, substantial bonus depreciation deductions are available for 2023 and 2024. Currently, eligible asset purchases in 2023 will provide an 80% up-front deduction plus ‘normal’ depreciation on the remaining 20%. Businesses considering significant asset purchases may consider accelerating those purchases to maximize their after-tax cash flow.
There are many other provisions set to expire at the end of 2022. Follow the link below for a list and more details on the provisions discussed above.
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