For the first time in a while, the end of the calendar year occurred without a surge of new tax legislation. Starting 2022 at status quo doesn’t necessarily make tax planning easier for the year ahead, as Congress continues negotiating significant tax changes in the Build Back Better Act (BBBA), which now could involve retroactive tax measures as of Jan. 1, 2022.
Below, we highlight some of the knowns and unknowns that may help your business formulate a tax plan for 2022 and navigate potential changes to come.
Capturing Past Tax Benefits
It is not too late to receive the benefits brought by 2020’s Coronavirus Aid, Relief, and Economic Security (CARES) Act. The legislation suspended for 2018, 2019, and 2020 the Section 461(l) limitation on excess business losses, which prohibits business loss deductions in excess of $500,000 for married taxpayers filing joint (MFJ) filers or $250,000 for single (S) filers. The legislation also temporarily restored the ability for businesses to carry back net operating losses (NOLs) incurred in the 2018, 2019, and 2020 tax years, without those losses being subject to the limitation.
Further, the CARES Act expanded the Section 163(j) business interest deduction percentage to 50% for the 2019 and 2020 tax years for most taxpayers. If your business didn’t apply the enhanced percentages to previously filed tax returns, you can amend those past tax returns to claim these benefits.
Employee Retention Tax Credit
Taxpayers may also amend quarterly payroll tax returns for 2020 and 2021 if they qualify but haven’t taken advantage of the refundable Employee Retention Tax Credit (ERTC). The provision benefits those that experienced business disruption because of the COVID-19 pandemic and helps to offset the cost of keeping employees through the third quarter of 2021. The ERTC is equal to 70% of qualified wages paid after Dec. 31, 2020, and before Sept. 30, 2021, with a maximum 2021 credit per employee of $21,000. To be eligible, your business must have experienced a 20% decline in gross receipts during any calendar quarter in 2021 compared to the same quarter in 2019, or must have been subject to a full or partial shutdown on account of government orders. Similar ERTC benefits are also available for calendar quarters in 2020, with a maximum 2020 credit per employee of $5,000. An ERTC refund analysis study would help ensure all eligible wages have been assessed and the credit has been applied correctly.
The Uncertainty That Remains
Provisions remaining in the BBBA contain measures that could play an important role in your tax planning. Complicating these planning activities is the open question about whether the BBBA has the support to become law, and if it will contain retroactive measures since the bill was not passed in 2021 as originally intended. The following are the BBBA provisions that could have the largest impact on 2022 tax strategies.
Delay to the R&D Amortization
The tax reform law known as the Tax Cuts and Jobs Act (TCJA) requires all research and development (R&D) costs to be capitalized and amortized starting in 2022. There is a provision in the draft BBBA legislation that would delay the capitalization and amortization requirement until after 2025. Companies may want to prepare for the impact that the amortization of research and development expenses will have if the requirement remains in effect for 2022.
Business Interest Expense Limitation Changes
A proposal in the draft BBBA legislation would affect partnerships and S corporations, by moving the calculation of the Section 163(j) limitation from the entity level to the individual level, which may significantly impact the amount of business interest expense that is ultimately deductible.
Excess Business Loss Limitation Up for Permanent Extension
There is a proposal that would permanently extend the excess business loss limitation under Section 461(l) that was also established by the TCJA. Presently, the limitation will expire after 2026. The BBBA proposal would also change the nature of excess business loss carryforwards so that the carryforwards would continue to be subject to the $250,000 limitation (for S filers) or the $500,000 limitation (for MFJ filers) during each carryforward year. Note that the limitation levels are indexed for inflation each year.
Taxpayers facing excess business loss limitations may want to consider strategies that delay business deductions, such as electing out of bonus depreciation or electing to capitalize R&D and internally-developed software costs, so that these deductions do not readily turn into excess business losses.
The Importance of a Holistic Tax Plan
For many tax strategies, timing is key. Considering when to take deductions and expenses requires a comparison across calendar years. We recently put together a guide with insights for 2021 and tax rates for 2021 and 2022 that may help your decision-making. You can view the guide here.
For questions about how potential tax changes affect your strategy, contact a member of our tax team.
Published on January 11, 2022