Background
Certain provisions of the 2017 Tax Cuts and Jobs Act (“TCJA”) that had delayed implementation dates have now become effective tax law. Further, the temporary removal of the tax deductibility limitations on food and beverages from restaurants that was part of the 2021 Consolidated Appropriations Act (“CAA”) has ended. Below is a summary of key U.S. federal income tax law changes to consider for your 2022 corporate income tax filings and 2023 corporate estimated tax computations.
2022 Key Corporate Tax Law Changes
Capitalized R&E Requirements
For tax years beginning after December 31, 2021, the TCJA requires mandatory capitalization and amortization for all “specified research or experimental expenditures” (“Specified R&E”). Specified R&E is currently broadly defined to include “research or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer’s trade or business and includes any amount paid or incurred in connection with the development of software”. Specified R&E performed in the U.S. is now capitalized and amortized over the 5 year period beginning with the midpoint of the year in which incurred (i.e., 10% amortized in year 1, 20% amortized in each of years 2-5, and 10% amortized in year 6). Foreign based research must now be capitalized and amortized over a 15 year period.
Limited guidance has been released by the IRS regarding these new R&E capitalization requirements. The IRS has indicated that the change from R&E current year expensing to R&E capitalization and amortization is a tax accounting method change that requires additional tax return reporting and disclosure.
Changes to Section 163(j) ATI
The business interest expense deductibility limitation provisions of Section 163(j) that were enacted as part of the TCJA have become more restrictive in 2022. The new rules under Section 163(j) subject businesses to an annual limitation on the amount of tax deductible business interest expense based on the amount of taxpayer’s annual business interest income and a percentage (currently 30%) of taxpayer’s annual adjusted taxable income (“ATI”). For tax years beginning after December 31, 2021, deductions for depreciation, amortization, or depletion are not added back to annual taxable income when calculating taxpayer’s ATI.
2023 Key Corporate Tax Law Changes
Bonus Depreciation Phase Out
The 100% bonus depreciation extension for qualified property that was enacted as part of the TCJA has begun to phase out starting in 2023. The following table illustrates the phase out percentages by year:
- 100% bonus depreciation, when placed in service between 9/28/2017 and 12/31/2022.
- 80% bonus depreciation, when placed in service between 1/1/2023 and 12/31/2023.
- 60% bonus depreciation, when placed in service between 1/1/2024 and 12/31/2024.
- 40% bonus depreciation, when placed in service between 1/1/2025 and 12/31/2025.
- 20% bonus depreciation, when placed in service between 1/1/2026 and 12/31/2026.
- 0% bonus depreciation, when place in service after 12/31/2026.
Taxpayers who are looking to accelerate the tax benefits for their capital expenditures should consider placing in service qualified property before the end of 2023. Further, some small businesses may still be able to elect 100% immediate expensing for 2023 under the provisions of Section 179. However, the Section 179 immediate expensing election is not available for all taxpayers and is subject to annual purchase and expensing limitations.
Deductibility of Restaurant Food and Beverages
The 2021 CAA provided a temporary exception to the 50% deductibility limitation for amounts paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023, for food or beverages provided by a restaurant that are ordinary and necessary trade or business expenses. This temporary 100% deduction was designed to help restaurants recover from the financial losses that they may have experienced as a result of the COVID-19 pandemic. Food and beverages provided by a restaurant incurred in 2023 that are ordinary and necessary trade or business expenses are once again subject to the 50% deductibility limitation.
Recent Proposed Legislation
Recent proposed legislation introduced by Republicans on the House Ways and Means Committee packaged as the American Families and Jobs Act would:
- Delay until the end of 2025 mandatory capitalization of research expenditures under Section 174, retroactive to January 1, 2022;
- Reinstate 100 percent bonus depreciation, effective January 1, 2023; and
- Reinstate the allowance for depreciation and amortization for the 30% ATI limitation on business interest expense deductions, retroactive to January 1, 2023, and, if elected, retroactive to January 1, 2022.
However, it is uncertain at this time whether this proposed tax legislation will pass both chambers of Congress and become enacted tax law.
Contact Us
Please reach out to us if you have any questions regarding the new corporate income tax law requirements discussed in this article.
Disclaimer
The information included in this article is current as of July 2023 and contains general information only. The information included in this article discusses selected recent U.S. federal tax law changes and is not intended to be a comprehensive list of all recent tax law changes that may impact your business. This article should not be taken as professional tax or accounting advice by PFM LLP. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. PFM LLP shall not be responsible for any loss sustained by any person who relies on any information included in this article.
