What We Know
The following is a timeline of scheduled Tax Cuts and Jobs Act (TCJA) changes and sunsets over the next decade:
After the end of 2021:
- Businesses are now required to capitalize and amortize research and experimentation costs over five years, rather than expense immediately.
- The deduction for business net interest expenses will be limited to 30 percent of EBT, rather than 30 percent of EBITDA
After the end of 2022:
- Full expensing for short-lived business investments will begin phasing out.
- 2022 was the last year for 100 percent bonus depreciation, which will decrease by 20 percent each year until it phases out in 2027.
After the end of 2025:
- The reduction of individual tax rates will expire.
- The increase in the standard deduction, elimination of the personal exemption, and doubling of the child tax credit will expire.
- Limits on the individual state and local tax deduction and the mortgage interest deduction will expire.
- The increase of the individual alternative minimum tax exemption will expire.
- The newly created pass-through deduction (Section 199A) will expire.
- Three international-related provisions (GILTI, FDII and BEAT) will become more restrictive.
- The increased estate tax exemption will expire, reverting back to the pre-TCJA amount adjusted for inflation.
Considering what is scheduled to sunset from the TCJA, it is recommended that taxpayers look to gift their assets now through either company ownership or irrevocable life insurance trusts, consider necessary changes in their entity type, and use any tax attributes before the alternative minimum tax sunsets at the end of 2025.
Per the Corporate Transparency Act, which is effective Jan 1, 2024, beneficial owners are now required to report more transparency to the Financial Crimes Enforcement Network (FinCEN) with identifying information regarding the individuals who directly or indirectly own/control a company. Beneficial owners are any persons who exercise substantial control over a reporting company, or own/control at least 25 percent of the ownership interests of a reporting company. There are exceptions for large businesses.
What May Be
The following includes legislation that is either proposed or under consideration for 2024:
Biden Budget Proposal FY2024
Similar to the “Build Back Better Act,” key features would increase the corporate income tax rate to 28 percent, create a 25 percent billionaire minimum tax to unrealized capital gains for high-net-worth taxpayers, and increase the rate for certain international tax rates, among other provisions.
American Families and Jobs Act
This collectively includes three bills currently in the House of Representatives: The Tax Cuts for Working Families Act, Small Business Jobs Act and Build it in America Act.
Tax Cuts for Working Families Act
The bill includes a bonus guaranteed deduction of $2,000 for single tax filers, $3,000 for heads of household, and $4,000 for married join filers, with a phase-out by five percent above $200,000 for single filers, $300,000 for the head of household filers and $400,000 for joint filers.
Small Business Jobs Act
This bill would increase the 1099 and 1099-K reporting thresholds, expand qualified small business stock 1202 incentives and permanently increase Section 179 expensing thresholds.
Build it in America Act
This bill would retroactively restore certain tax incentives that expired after 2022: Sec 174 R&D expensing, 30 percent EBITDA on interest expense limitation, and return to 100 percent bonus depreciation
The bill would terminate the superfund tax on petroleum, repeal certain energy tax credits allowed under the Inflation Reduction Act and modify the current clean vehicle credit.
Key Action Items on Current Issues
Section 174 R&D Capitalization – The Internal Revenue Service (IRS) finally released interim guidance on Sept. 8, 2023, via Notice 2023-63, which addresses the capitalization and amortization of specified research or experimental (SRE) expenditures under Section 174, the treatment of SRE expenditures under Section 460 and the application of Section 482 to cost-sharing arrangements involving SRE expenditures. The allowable SRE expenditures include, with specifications:
- Labor Costs
- Materials and Supplies
- Cost Recovery Allowances
- Patent Costs
- Certain operation and Management Costs
- Travel Costs
The notice also outlines what is excluded from being SE expenditures, such as:
- General and administrative service department costs
- Interest on debt financing for SRE activities
- Various website and software costs
- Amortization amounts for specific expenditures
Taxpayers should take note that all Section 41 expenses are Section 174 expenses, but not all Section 174 expenses are Section 41 expenses.
Employee Retention Credit (ERC)
The IRS issued a moratorium in September that halted further acceptance of new ERC claims until at least Dec. 31, 2023. About a month later, the IRS issued ERC withdrawal guidelines for those concerned about their ERC claim. The IRS is also taking further steps now to rectify compliance reviews and correct claims.
To engage in the ERC withdrawal process, all of the following must apply:
- You claimed on an adjusted employment tax return (Forms 941-X, 943-X, 944-X).
- You filed your adjusted return only to claim the ERC, and you made no other adjustments.
- You want to withdraw the entire amount of your ERC claim.
The IRS has also warned taxpayers about potential red flags for ERC promoters, who may charge large percentage fees, promise to determine eligibility “within minutes” and advertise an “easy application process,” among other things.
Taxpayers should meet with a qualified tax advisor to review their ERC claim to determine if a withdrawal or an amended return are viable options for the taxpayer.
State and Local Changes
Georgia Pass-Through Entity Tax
The Georgia pass-through entity tax was amended through HB 412 on March 29, 2023, and it is effective for the 2023 tax year. The bill amends the income taxation of partnerships, removes the limitation on which partnerships may be elected and aligns Georgia’s treatment of pass-through entity election more with other states.
Georgia is currently abating penalties on 2022 pass-through entity returns, including late estimated tax, late payment of tax and penalties for payment with a check. Taxpayers should take note and avoid such penalties for 2023.
Georgia SB 56
Effective Jan. 1, 2024, SB 56 imposes a sales tax on the retail sale of specified digital products, other digital goods or digital codes sold to an end user. Taxable items would include digital books, magazines, music, and video games that meet the right of permanent use and conditional continued payment criteria. The bill would not apply to streaming or subscription services and electronically delivered software other than what is specified as a digital product remains exempt from sales tax.
- Several states are reducing corporate tax rates, including Arkansas, Iowa, and Kansas.
- New Hampshire has decoupled from Section 163(j) effective Jan. 1, 2024.
- Texas has increased its franchise tax exemption amount to $2.47 million effective Jan. 1, 2024.
New Jersey has passed some of the most significant reforms in years by adopting an economic nexus standard similar to those applied by many states for sales and use tax nexus purposes, as well as changing the definition of “entire net income.”
New Jersey Assembly Bill 4694 adopts the “convenience of the employer” rule, where compensation paid to nonresident employees for work performed outside of the state is subject to taxation in the employer’s location if the employee is working remotely for their convenience. In New Jersey, the rule is only imposed on nonresidents from states that have adopted the same rule.
