Important Expiring Tax Provisions
In January 2022, Congress’s Joint Committee on Taxation published its annual list of expired or expiring tax provisions. This most recent publication covers expiring federal tax provisions from 2021 through 2031. It includes a list of 40 tax provisions that expired at the end of 2021 and over 50 additional provisions that are set to expire over the next 10 years.
With the start of the tax preparation season for 2022 quickly approaching and tax planning for 2023 already underway for many taxpayers, here is a summary of several expiring or recently expired tax provisions that could significantly impact businesses and individuals over the coming years.
Expired Tax Provisions Impacting Businesses
Before addressing those tax provisions that have yet to expire, let’s first review a few of the tax provisions that expired at the end of 2021 that are likely to have the most significant impact on federal income tax returns for 2022.
- Amortization Requirement for Research and Development – Since 1954, Section 174 of the Internal Revenue Code has allowed businesses to expense qualified research spending in the first year of service. However, as of the beginning of 2022, this option is no longer available. Taxpayers are now required to amortize research and development (R&D) expenses over five years rather than being able to deduct them from taxable income immediately. Amortization begins at the midpoint of the tax year in which the expenditure is paid or incurred. Some businesses may qualify to claim the R&D tax credit by amending returns, potentially creating a significant opportunity to save on taxes. To learn more, read this article about how the R&D Tax Credit May Find Significant Savings.
- Adjustments to the Calculation for Adjusted Taxable Income – Included with the passing of the Tax Cuts and Jobs Act (TCJA) in 2017, changes to IRC Section 163(j) limited annual business expense deductions based on a percentage of adjusted taxable income. As of January 1, 2022, depreciation, amortization, and depletion can no longer be added back when determining adjusted taxable income. This will reduce the annual interest expense deductions for many businesses.
2022 Expiring Tax Provisions Impacting Businesses
- 100% Bonus Depreciation Phase Out – The 100% bonus depreciation deduction, implemented in 2017 with the passing of the TCJA, allows businesses an immediate tax deduction for investments in qualifying short-lived assets, such as vehicles, furniture, and manufacturing equipment. This phaseout of 100% bonus depreciation is set to begin after 2022. Unless the law changes, the bonus percentage will decrease by 20% each year, starting in 2023, and will be completely phased out by 2027. For 2022, bonus depreciation will be reduced to 80%.
- Temporary 100% Deduction for Business Meal Expenses – In 2020, the Taxpayer Certainty and Disaster Relief Act created a temporary exception to the 50% limit on the amount businesses may deduct for qualified meals. This exception allows businesses to deduct 100% of meal expenses from restaurants incurred in 2021 or 2022. However, this temporary increase is set to expire on December 31, 2022, unless Congress decides to renew it.
- Temporary Delay of Designation of Multiemployer Plans as in Endangered, Critical, or Critical and Declining Status – Under Federal pension law, if a multiemployer pension plan is determined to be in critical or endangered status, the plan must provide notice of this status to participants, beneficiaries, the bargaining parties, the Pension Benefit Guaranty Corporation and the Department of Labor. The American Rescue Plan Act of 2021 allowed multiemployer plans in critical or endangered status to make a special “freeze election” to use their funding status from the preceding year for specific purposes. This temporary, special “freeze election” is set to expire at the end of 2022.
2025 Expiring Tax Provisions Impacting Individuals
While still several years away, it is important to be aware of and start planning for the mountain of tax provisions set to expire in 2025. Currently, 23 tax provisions from the TCJA relating to individual income taxes are set to expire on December 31, 2025. This would result in tax hikes for most taxpayers unless some or all of these provisions are extended. Included below are some of the provisions that will likely impact individuals the most. For a complete list of the 23 expiring provisions, see the list published by the Joint Committee on Taxation.
- Reduction of Individual Income Tax Rates – After December 31, 2025, the individual income tax rate schedule is set to revert to the pre-TCJA brackets and rates. As a result, many households will likely see their taxes significantly increase in 2026.
- Increased Child Tax Credit – The TCJA doubled the tax credit to $2,000 and made limits to the refundable amount of up to $1,400 per child. The American Rescue Plan Act of 2021 temporarily expanded this credit for 2021 from $2,000 to $3,600 per child under age six and $3,000 per child up to age 17, but the federal tax credit will revert to previous payment levels starting in 2022. The child tax credit will eventually drop even further, to $1,000 per child, beginning in 2026.
- Increased Alternative Minimum Tax Exemption and Phaseout Threshold – The TCJA increased the individual Alternative Minimum Tax (AMT) exemption amounts for tax years 2018 through 2025. These increased exemption amounts are reduced by 25% of the taxpayer’s alternative taxable income above $1 million for joint returns and surviving spouses and $500,000 for other taxpayers except estates and trusts. The increase to the AMT exemption amount and the phaseout threshold is set to expire at the end of 2025.
- Increased Standard Deduction – Under the TCJA, the standard deduction totals have nearly doubled that of 2017. If this increase to the standard deduction isn’t extended, individual tax rates will revert to their 2017 amounts for 2026. Income brackets will also return to their previous ranges, adjusted for inflation. The personal exemption will also be reinstated.
- Qualified Business Income Deduction – Section 199A, also known as the qualified business income deduction, is a 20% deduction for income that individuals receive from a “pass-through” business. Unless later extended or made permanent, this 20% deduction will no longer be available after 2025.
- Expiration of Limits on the State and Local Tax Deduction and the Mortgage Interest Deduction – Under the TCJA, the state and local tax deduction is limited to $10,000 per household, while the mortgage interest deduction is limited to interest paid on $750,000 of home acquisition debt. If allowed to expire, the state and local tax deduction would essentially be unlimited and mortgage interest deduction would be limited to interest paid on $1 million of home acquisition debt and $100,000 of home equity debt.
- Expiration of the Increased Estate Tax Exclusion – The TCJA doubled the estate tax exclusion to $11.2 million per person in 2018. This exemption amount is adjusted annually for inflation and currently sits at $12.06 million for 2022 and will increase to $12.92 million for 2023. However, after December 31, 2025, this exclusion will revert to the $5.49 million per person used before 2018, adjusted for inflation.
While only a handful of tax provisions are set to expire in 2022 and 2023, the numerous individual provisions under the TCJA that are set to expire at the end of 2025 hold particular importance for future tax planning purposes. There is certain to be much debate over the coming years concerning the future of these tax provisions and whether or not Congress will agree to extend them or allow them to expire. Either way, the time to start planning is now.
Contact an Adams Brown advisor to discuss your tax situation.