Many tax incentives resulted from the Tax Cuts and Jobs Act (“TCJA”). Now we are faced with the very real possibility that some temporary extenders are set to lapse. Calvetti Ferguson has provided a summary to help identify which ones are likely to impact businesses.
Tax incentives from the Tax Cuts and Jobs Act
Research & Development Expenses
At the moment, research and development expenses are presently deducted, however starting in 2022, these expenses must be capitalized and amortized over five tax years. This applies even to situations where the taxpayer has abandoned, retired, or disposed of the property for which the research or experimental processes are paid. To make matters even worse, expenditures for foreign research will need to be amortized over 15 years. However, the R&D tax credit is still available. Note that it may be beneficial to capture as many expenditures as possible in 2021 so that they can be immediately expensed instead of deducted over time.
Bonus depreciation allows many taxpayers to expense certain shorter life property acquisitions by businesses all in the first year. Before bonus depreciation, taxpayers had to write off assets through depreciation over time. The allowable bonus depreciation for the year property is placed in service begins to decrease in 2023 and will be unavailable in 2027 and thereafter. It is therefore critical that a business utilize proper planning for a large capital project. Our tax professionals can help you determine when an asset can be placed in service for tax purposes and model out various scenarios to suit your needs.
Net Operating Losses
Beginning for the tax year 2021 and forward, net operating losses cannot be carried back. Instead, they must be carried forward and can offset up to 80% of the taxable income in the year to which the loss is carried. For tax years 2021 and forward, it is possible that a taxpayer with net operating losses that exceed taxable income, still end up paying income tax since only 80% of the income can be offset with net operating losses.
Employee Retention Tax Credit
The employee retention credit was expanded and is permitted through December 31, 2021. Congress will need to act to extend the credit.
Interest expense deduction rules for businesses with gross receipts of more than $25 Million tighten up after 2021. Instead of being based on 50% of EBITDA, interest expense for a business is limited to 30% of EBIT, which is a much tighter standard and could be a tough pill to swallow for many businesses that are still recovering from COVID challenges.
If you have questions about planning for expiring tax incentives, Calvetti Ferguson can assist.