There is very little federal tax legislation on the table for 2023—but that doesn’t mean that companies should let their guard down when it comes to tax changes.
In the coming years, companies are set to be affected by changes coming from several major pieces of legislation from the past six years: the Tax Cuts and Jobs Act of 2017, coronavirus relief in the CARES Act and the Consolidated Appropriations Act, the Biden Administration’s Inflation Reduction Act and the CHIPS Act.
Currently on the docket in the House of Representatives is the American Families and Jobs Act, which is a collection of three separate bills: the Tax Cuts For Working Families Act, the Small Business Jobs Act and the Build It in America Act.
These past and current pieces of legislation each focus on different areas and have provisions that raise, lower, and modify key tax figures. The result is that decision-makers need to stay on top of the changes and be proactive about anticipating how they impact your company.
We’ve put together the pieces of each law that should be on your radar now.
Tax Cuts and Jobs Act (TCJA) of 2017
It’s time to start planning for the end of the TCJA.
While it may feel like you’ve only just begun to enjoy the tax provisions of TCJA in the nearly six years since implementation, the law was written to have several provisions expire or “sunset” after 2025, unless extended by additional legislation. This will have a significant impact on companies, and the smart ones will start their planning now.
Immediate Expensing of Qualified Property
Bonus depreciation has been around for a long time in some form; however, it was expanded under the TCJA. Bonus depreciation allows businesses to fully expense the cost of qualified property in the year of acquisition rather than depreciating it over several years. TCJA allowed for 100 percent bonus depreciation through 2022, with the stipulation that beginning in 2023 there would be a gradual reduction in the bonus depreciation percentage until it expires entirely after 2026. The bonus for 2023 is 80 percent.
Section 199A Qualified Small Business Income Deduction
As a compromise to the reduced corporation tax rate to 21 percent, the TCJA provided owners of pass-through entities relief in the form a 20 percent deduction against their business income. This, coupled with the individual income tax rates also set to expire back to pre-TCJA percentages, will significantly impact S-corporation and partnership owners. Unless later extended or made permanent, this 20 percent deduction will no longer be available after 2025.
More Restrictive International-related Provisions
Domestic corporations claiming the foreign-derived intangible income (FDII) deduction on exported product will see the deduction lowered from 37.5 percent to 21.875 percent after 2025. Domestic corporations with foreign subsidiaries will only be able to claim a 37.5 percent reduction against global intangible low-taxed income (GILTI) under Code Sec. 951A, versus the 50 percent allowed today.
The CARES Act and the Consolidated Appropriations Act (CAA)
The Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Consolidated Appropriations Act (CAA) rescued the United States from the worst of the financial impacts of COVID-19, and could be credited with avoiding economic catastrophe. In the moments they were passed, they introduced a range of tax provisions aimed at alleviating financial burdens for individuals, businesses, and organizations impacted by the pandemic.
With COVID-19 largely in the past now, today, businesses need to know which pieces of the legislation have expired.
Employee Retention Tax Credit (ERTC)
The ERTC was an asset to businesses during the pandemic, keeping employees retained and companies afloat. While the positive impact on revenues and expenditures was welcomed at the time, it was not extended past 2021. Many companies rightfully, and perhaps not so rightfully, claimed credits for both 2020 and 2021 and are still in the process of receiving those refunds. However due to mounting concern over the integrity of the program, the IRS temporarily halted the acceptance of new ERC claims on September 14, 2023.
On October 19, 2023, the IRS announced a special process for employers to withdraw their ERC claims if they believe they do not qualify for the program. Taxpayers may withdraw their application if the claim has not yet been processed, is not under examination, or has been paid but not yet deposited.
If you have questions about your ERTC claim, Windham Brannon can help you with a second look at your claim through risk assessments and credit calculations to confirm your eligibility.
Charitable Contribution Deductions
Under the CARES Act, corporations could deduct up to 25 percent of taxable income for charitable donations, a large increase targeted at enhancing giving that gave businesses added credit to their bottom lines. The limits expired in 2022 and have been revised back to the previous limit of 10 percent.
Meals and Entertainment
As a boost to restaurants coming back after COVID shutdowns, the CARES Act allowed a temporary 100 percent expensing of food and beverage expenses paid to restaurants during 2021 and 2022. However, beginning in 2023 the deduction will once again be limited to the pre-CARES 50 percent. The non-deducibility of entertainment did not change.
The Inflation Reduction Act (IRA)
The most significant recently enacted legislation, the IRA, focused mainly on the environment, included wide-ranging tax provisions that impact primarily large corporations beginning Jan. 1, 2023.
The biggest tax change applies to C-corporations with average income over $1 billion for the three years prior. It creates a corporate alternative minimum tax on companies that is equal to the excess of 15 percent of annual adjusted financial statement income (AFSI). While it is certainly a big change for businesses, luckily only about 150 of America’s most wealthy businesses will be affected by it.
Another major corporate tax implication in the IRA applies to corporate stock buybacks, adding a one percent excise tax to all corporate stock buybacks of public U.S. companies. Private company stock buybacks are not affected.
Potentially benefiting all business was the expansion of the179D deduction, also known as the Energy-Efficient Commercial Buildings 179D Tax Deduction. Prior to 2023 architects, engineers, and design-build contractors were eligible to receive allocations on projects they designed for federal, state, and local government-owned buildings. Beginning in 2023, they can now also receive allocations for their design work for tax-exempt entities. In addition, the IRA significantly expanded the benefit of the program from up to $5.00/square foot.
Additionally, the IRA housed a number of clean energy-related tax credits that with major impacts on the energy sector.
Small businesses also netted a tax win in the IRA in the form of an increased payroll tax offset. Starting in 2023, qualified small businesses are eligible to offset federal payroll tax liabilities of up to $500,000. That increased from the previous $250,0000. The provision is particularly notable for startups, which have high R&D expenses, and high payroll.
CHIPS Act
The Biden Administration’s second major piece of legislation, the CHIPS and Science Act, passed into law tax provisions that were equally as significant—however only for companies that are focused on scientific manufacturing.
Beginning in 2023, the law implements a 25 percent advanced manufacturing tax credit that applies to any companies investing in semiconductor manufacturing and processing equipment, expected to save companies a total of $24 billion through 2028.
For those companies that the credit applies to, it is certainly critical to evaluate the credit’s impact on projections.
American Families and Jobs Act
No new significant tax legislation has even come close to passing in 2023. There is currently a collection of three bills in the House of Representatives that contain any tax changes. While they have passed the House Ways and Means Committee, in their current form this legislation is unlikely to become law.
The Tax Cuts for Working Families Act (H.R. 3936) proposes a bonus “guaranteed deduction” in addition to the current standard deduction as enacted by TCJA. The bonus amount would be $2,000 for single taxpayers, $3,000 for heads of household and $4,000 for married joint filers. The amount would phase out based on income by 5 percent above $200,000 for single filers, $300,000 for head of household filers, and $400,000 for joint filers. This bonus deduction would be in effect for 2024 and 2025 only.
The Small Business Jobs Act (H.R. 3937) would increase the Form 1099 reporting threshold for contractors and subcontractors from the current $600 to $5,000. As noted by a small business owner from Peachtree City, Georgia at a Ways and Means Committee field meeting, this threshold has been unchanged since 1954. The Act would also return the form 1099-K reporting threshold for goods and services sold online through third-party network transactions back from $600 to $20,000 and reinstate the additional threshold of 200 annual transactions.
The Small Business Jobs Act would also expand the Section 1202 “qualified small business stock” exemption by changing the holding period requirement providing a new 50 percent exclusion for stock held at least 3 years, and a 75 percent exclusion for stock held at least 4 years. In addition, a provision would allow for owners in S corporations to qualify, as well as allow investors to add their holding period for qualified convertible debt to the holding period required to qualify for the exclusion.
The Small Business Jobs Act would also permanently increase the Section 179 expensing limit from $1 million to $2.5 million and raise the acquisition threshold from $2.7 million to $4 million, adjusted for inflation.
The Build It in America Act (H.R. 3938) focuses on retroactively restoring certain tax provisions that expired at the end of 2021. The Act aims to repeal or delay the immediate expensing of R&D expenditures under Section 174 that went into effect January 1, 2022. As well as return the calculation on limited interest expense under Section 163(j) to the previous EBIDTA calculation allowing for an addback of depreciation and amortization that was eliminated effective 2022. There would also be a return of 100 percent bonus depreciation.
The Build It in America Act would also terminate the superfund tax on petroleum and repeal certain energy tax credits allowed under the Inflation Reduction Act, including the clean energy production credit, the clean electricity investment credit and the credits for previously owned clean vehicles and qualified commercial clean vehicles.
There may not be any major new legislation on the horizon, but there is no shortage of corporate tax impacts resulting from other laws from the past several years. The key to staying ahead is to anticipate these changes now and know what each one will mean for your company. Windham Brannon’s team of tax professionals can guide you as you position your tax situation for the remainder of 2023 and beyond, as well as help you remain compliant and up to date with current tax law. For more information, contact your advisor today, or reach out to Nicole Suk.
