With 2022 drawing to a close, this article examines the current tax landscape including important considerations for 2023 planning and compliance.
Interest Limitation – Section 163J
Beginning after Dec. 31, 2017, the Tax Cuts and Jobs Act (TCJA) limited the amount of interest some business taxpayers are able to deduct on their tax returns. Interest deductions are limited to:
- business interest income for the tax year; and
- 30 percent of adjusted taxable income (ATI) (50 percent of ATI for 2019 and 2020 in response to the COVID-19 crisis),
A taxpayer’s adjusted taxable income for the purpose of the 163(j) limit is the taxpayer’s tentative taxable income for the tax year with certain adjustments.
So, what’s new?
- Beginning in 2022, ATI is similar to EBIT (earnings before interest and taxes).
- For tax years beginning before January 1, 2022, ATI is similar to EBITDA of the taxpayer (earnings before interest, taxes, depreciation, and amortization).
- The major difference is depreciation and amortization are no longer a part of ATI.
Taxpayers operating in a large capital expenditure environment need to place careful consideration on this change, as it may have a significant impact on their taxable income.
NOTE: There are exceptions to the business interest limitation if taxpayers meet certain requirements. One exception includes certain small businesses whose average worldwide gross receipts are $27 million or less for 2022, electing real property trades or businesses, electing farming businesses, and certain regulated public utilities.
Research and Experimental Expenses – Section 174
Beginning in 2022, the TCJA requires research and experimental expenditures performed in the United States to be amortized ratably over five years and over fifteen years for foreign research.
Under present law, research and experimental expenditures are deductible in the year paid or incurred or at the taxpayer’s option, amortizable over a period not less than 60 months beginning in the month that benefits are first realized from the expenditures.
Taxpayers need to be aware of the change and prepare accordingly since it could have a dramatic impact on their tax liability. In addition, taxpayers with foreign-based research expenditures may consider moving research activities back to the United States to obtain the benefit of the 5-year amortization period. A 15-year amortization period will otherwise apply.
Net Operating Losses and Limitations
A net operating loss (NOL), arising in a tax year beginning after 2020, may only offset 80 percent of taxable income. However, the loss carryforward period is unlimited. Taxable income for the percentage limitation is computed without regard to certain deductions, including capital losses, qualified business income and foreign-derived intangible income. There is no carryback period.
NOTE: NOLs arising in tax years beginning in 2018, 2019, and 2020 have a five-year carryback period and an unlimited carryforward period. The 80 percent taxable income limitation does not apply to NOLs arising in these years. Losses in tax years beginning before 2018 are generally carried back two years and carried forward 20 years, with no taxable income limitation.
Bonus Depreciation
The opportunity to take a 100% deduction on capital expenditures placed into service in the current tax period is coming to an end. The bonus depreciation adjustment sunsets as follows:
- 2023 – 80% deduction available
- 2024 – 60% deduction available
- 2025 – 40% deduction available
- 2026 – 20% deduction available
NOTE: section 179 expensing is still an option for taxpayers to take accelerated deductions on capital expenditures placed into service, but this deduction is subject to total capital expenditure limits. Be sure to contact your advisor to discuss.
2022 Inflation Reduction Act: Corporate Alternative Minimum Tax
Corporations are subject to a 21-percent income tax on their taxable income. However, corporate taxpayers with significant income may reduce the effective income tax rate and even completely avoid paying income tax by utilizing deductions, exemptions, losses, and tax credits. To prevent corporations from paying little or no tax, a corporate AMT was applied to tax years beginning before 2018. The corporate AMT required the re-computation of a taxpayer’s regular taxable income, which was modified by certain AMT tax preference items and various AMT adjustments. These preference items and adjustments generally involved alterations to various deductions or exclusions allowed in computing regular taxable income. In essence, the corporate AMT recaptured some of the benefits provided by these tax breaks. The corporate AMT was repealed for tax years beginning after 2017 by the Tax Cuts and Jobs Act.
For tax years beginning after 2022, a 15-percent corporate AMT is imposed on the adjusted financial statement income of an applicable corporation with a three-year average annual income in excess of $1 billion. To determine if this threshold is met, corporations under common control are generally aggregated and special rules apply in the case of foreign-parented corporations. The corporate AMT does not apply to S corporations, regulated investment companies, and real estate investment trusts.
A corporation’s adjusted financial statement income is the net income or loss reported on the corporation’s applicable financial statement with adjustments for certain items. Special rules apply in the case of related corporations included on a consolidated financial statement or filing a consolidated return. Applicable corporations are allowed to deduct financial statement net operating losses, subject to limitation, and can reduce their minimum tax by the AMT foreign tax credit and the BEAT tax. They can also utilize a minimum tax credit against their regular tax and the general business credit.
For tax guidance and questions related to this article, please contact Courtney Venard at cvenard@vlcpa.com or Ryan Redleski at rredleski@vlcpa.com
