As 2021 winds down and Congress continues to wrestle with the Build Back Better Act (“BBBA”), you should be aware of opportunities that will expire with the new year and changes that are already in place for 2022.
Charitable Deductions for Non-Itemizers
When the Tax Cuts and Jobs Act (“TCJA”) nearly doubled the standard deduction, many taxpayers no longer benefitted from the deductibility of charitable contributions. That was one of the factors contributing to an overall decline in charitable giving.
As the COVID pandemic raged, and to encourage support for organizations helping those affected, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) included a provision allowing married couples who don’t itemize to deduct up to $600 of charitable contributions in 2020. Single taxpayers were permitted a deduction of $300.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended that provision for 2021. To take advantage, however, the contribution has to be made by December 31.
Business Interest Deduction Limitation
Among the TCJA changes more unfriendly to taxpayers was the new limitation on the deductibility of business interest expense. Currently, interest expense is deductible to the extent of 30% of a business’s Adjusted Taxable Income (“ATI”) – their earnings before interest, taxes, depreciation, and amortization (“EBITDA”). The definition of ATI changes as of January 1, 2022 to exclude only interest and taxes (“EBIT”).
To help companies survive through the COVID epidemic, the CARES Act changed the threshold from 30% to 50%. The expiration of the enhanced threshold, coupled with the change in the definition of ATI from EBITDA to EBIT, will only exacerbate the pain.
Amortization of Research and Experimentation Expenses
Another TCJA change which MAY be on the way for 2022 is the inability to deduct research and experimentation costs. Currently, such expenses incurred after December 31, 2021 have to be capitalized and amortized over 5 years. The BBBA would push the effective date of this provision to years beginning after December 31, 2025 - IF it passes - but that timeline could change if passage is delayed until next year.
In the meantime, and to the extent possible, businesses might want to consider accelerating available deductions into the remainder of 2021, just in case.
Qualified Opportunity Fund Investments
Nothing is changing with respect to Opportunity Zones and Qualified Opportunity Fund (“QOF”) investments and the BBBA has no provisions affecting them. However, one of the major advantages of QOF investments will expire when the ball drops on New Year’s Eve. Investing capital gains in a QOF allows taxpayers to defer recognition of those gains until December 31, 2026. Also, if the investment is held for 10 years any gain (including depreciation recapture) is realized tax-free. Finally, the deferred gains could be reduced by up to 15% depending on when the investment was made.
The opportunity for a 15% reduction ended in 2019. Taxpayers can still get a 10% reduction if they invest gains by the end of 2021.
Bonus Depreciation
While not requiring any action in the next two weeks, 100% first-year bonus depreciation will start to disappear after 2022. The amount goes down to 80% in 2023, declining 20% per year until it expires on January 1, 2027. Now would be a good time to start planning capital expenditures for 2022 to take full advantage of this tax-saving provision.
Count on Friedman
The tax rules seem to change with each passing day. From hidden provisions in old law to new legislation to IRS guidance, you can count on your Friedman LLP advisor to keep you current.