17-Feb-22
Tax Extensions Coming to an End
Take-Away: At the end of each calendar year there is normally a last-minute scurry in Congress to extend sections of the Tax Code to provide relief to a handful of taxpayers. This year there does not seem to be much effort to extend and continue some tax breaks to businesses and individuals.
Background: Several tax provisions will expire at the end of 2021. Some might find there way back into the Tax Code if the Build Back Better bill ever becomes law, but some may permanently disappear. A few of the disappearing Tax Code provisions that might impact individuals and small businesses are summarized below:
2017 Tax Act:
R&D: Under current law a business can deduct the cost of spending on research and development (R&D) immediately. Starting in 2022, the business will need to spread those tax deductions over 5 years, a delay which will raise the cost of R&D investment, especially in a period of rampant inflation.
Deductible Interest: Prior to the 2017 Tax Act a business could deduct net interest expense, subject to a few small restrictions. The 2017 Tax Act introduced a new limit that prevented a business from deducting interest in excess of 30% of EBITDA, i.e. earnings before interest, taxes, depreciation and amortization. Starting in 2022, the interest deduction limit will be further narrowed to 30% of EBIT, i.e. earnings before interest and taxes. This is more restrictive than the typical ‘thin capitalization’ rules used in most other countries.
CARES Act:
Charitable Deductions: A traditional charitable income tax deduction is an itemized deduction, which means that it is not available to an individual who claims the standard deduction. The CARES Act created an above-the-line deduction for some charitable contributions- $300 of cash for a single filer and $600 of cash for joint filers. This charitable deduction was created for 2020 and extended only for 2021. Consequently, this above-the-line income tax charitable deduction disappears after 2021.
Cash Contribution Limitation: The Act suspended the limitations on individual income tax deductions for cash contributions to charitable organization, which was typically 60% of the individual’s taxable income. The Act also increased a corporation’s deduction limit from 10% to 25% of its taxable income. These provisions were extended in December 2020 for one year. Consequently, they expire at the end of 2021 and the lower limits or ‘caps’ reappear in 2022.
American Rescue Plan of March 2021:
Child Credit: This Act raised the Child Tax Credit for low and middle-income households to $3,600 per child under 6 years old, and $3,000 for children between 6 and 17, while making the tax credit fully refundable so that low-income earners could receive the full credit regardless of their income tax liability. The expanded credit, which was also partially sent out in advance monthly payments is schedule to end after 2021. The Child Tax Credit will revert to a $2,000 maximum payment, with up to $1,400 of the credit refundable depending upon the parent’s earned income.
Earned Income Credit: This Act temporarily expanded the Earned Income Tax Credit. The Act raised the maximum Earned Income Tax Credit available to workers without qualifying children to $1.500 from $540, and expanded eligibility based on income level and age, and included more younger workers. This expanded tax credit expires at the end of 2021.
Dependent Care Credit: The Act temporarily expanded the Child and Dependent Care Tax Credit, to assist individuals to reduce their income tax liabilities by a certain amount of their childcare expenses. The credit capped benefits at $6,000 for a single dependent or $12,000 for two or more dependents based upon the parents’ being able to claim expenses of up to $3,000 in the first situation and $6,000 in the second situation. The Act raised the expense limits to $8,000 and $16,000 and made the dependent care credit refundable while also expanding eligibility to claim the credit. These expanded credits would revert to the ‘old’ tax credit limits beginning in 2022.
Miscellaneous: Other less-known tax provisions come to an end in 2021, including many energy-related tax provisions that were intended to promote energy independence or mitigate pollution, all of which were in response to the Great Recession. Many were in the form of cost-recovery in the form of a 100% bonus depreciation and immediate write-off for short-lived assets. These, too, disappear starting in 2022.
Conclusion: Perhaps some of these beneficial income tax provisions will reappear once Congress gets back to work (did I just type that?) Until then, if ever, consider these tax opportunities as lost opportunities for 2022.