Year-End Tax Planning
As we turn the page to 2022, there are several tax planning opportunities to be aware of specifically related to changes brought about from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and other COVID-19 relief provisions. In addition, planned phaseouts of a few of the Tax Cuts and Jobs Act (TCJA) provisions bear keeping an eye on. We will look at some of the more relevant items to consider and the new tax legislation we may be seeing soon.
Taxpayers are still able to take advantage of 100 percent bonus depreciation on eligible assets through the end of 2022. However, the bonus rate will decrease to 80 percent for qualifying assets placed in service in 2023. This rate will continue to decrease by 20 percent each year until it fully phases out to zero percent for assets placed in service in 2027. If you are planning to purchase a large piece of machinery or make interior improvements to a nonresidential building, the maximum first-year deduction will be obtained by placing these assets in service by December 31, 2022.
Business Interest Expense Limitation
The TCJA introduced a limitation to business interest expense of 30 percent of adjusted taxable income. The CARES Act temporarily increased the limitation to 50 percent of adjusted taxable income. For taxable years beginning in 2021, business interest expense will again be subject to the 30 percent limit set in place by the TCJA. In addition, for tax years beginning after December 31, 2021, the computation for adjusted taxable income has been revised. Taxpayers will no longer be able to add back depreciation, depletion, or amortization in the calculation, likely resulting in more taxpayers having their deductible business interest expense limited.
The CARES Act allows taxpayers to temporarily deduct 100 percent of business-related meals provided by a restaurant. This provision applies to expenses incurred in 2021 and 2022 but will revert to the 50 percent allowable deduction after December 31, 2022.
Net Operating Losses (NOL)
The CARES Act allowed for enhanced use of NOLs. For the 2019 and 2020 tax years, NOLs for both individuals and corporations could be carried back for five years and offset 100 percent of taxable income. NOLs generated in 2021 and later will again be subject to the rules set in place by the TCJA. These NOLs can no longer be carried back but can be carried forward indefinitely and can only offset 80 percent of taxable income.
Paycheck Protection Program (PPP) Loans
A second round of Paycheck Protection Program (PPP2) loans became available for taxpayers in the first quarter of 2021. Similar to the first round of the PPP, the forgiveness of any PPP2 loans is exempt from federal income tax. The taxability of the forgiveness for state income tax purposes varies.
Employee Retention Credit (ERC)
Eligible employers should take advantage of the ERC as it was not only extended into 2021 but also enhanced. Taxpayers will want to examine each quarter to determine if they qualify for the ERC as this can be a very beneficial credit. The maximum ERC available for 2020 was $5,000 per employee per year. The expanded ERC for 2021 allows for a maximum of $21,000 per employee per year. The bipartisan infrastructure bill that was recently passed eliminates this benefit for the fourth quarter of 2021, except for recovery startup businesses; however, the credit is still available through September 30, 2021, for all other eligible employers. The ERC reduces the amount of payroll tax owed on the quarterly Form 941s. The credit is fully refundable, so any overpayment will be refunded as cash to the company. For income tax purposes, the ERC is taxable by reducing deductible wage expenses by the amount of the credit received.
Tax Legislation: Current Proposals
Changes in tax legislation are becoming increasingly more likely as Congress continues to work on a spending and tax package that the Democrats hope to pass this fall. Recently, several significant tax provisions were scrapped from the bill including the increase in corporate, individual, and capital gains rates, the limitations on the Section 199A deduction, and the revisions to the estate and gift tax lifetime exemption. Below are the top relevant tax provisions included in the most recent proposal from the House of Representatives that may make it into the final bill. It should be noted that this is current as of the date this article was written (November 9, 2021):
- Expand the 3.8 percent net investment income tax (NIIT) to cover investment income derived in the ordinary course of a trade or business for individuals with taxable income exceeding $400,000. This would subject all pass-through earnings for “high-income” earners to either the 3.8 percent NIIT or the 3.8 percent self-employment tax whether from a passive or nonpassive activity.
- Subject individuals with income exceeding $10 million to a 5 percent surtax and individuals with income exceeding $25 million to an additional 3 percent surtax (on top of the 5 percent surtax).
- Increase the limit on itemized deductions for state and local taxes to $72,500 (up from $10,000) through 2031.
- Introduce a minimum tax of 15 percent for large corporations with adjusted financial statement income in excess of $1 billion.
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