Expired and expiring tax provisions that may affect 2022 federal income tax returns

Several important changes may affect federal income tax returns for 2022 and future years unless Congress acts. Most importantly, without any further legislation the following will occur: 

• Research and expenditures must be amortized under section 174, rather than expensed, beginning in 2022.
• Depreciation, amortization, and depletion are not added back to the calculation of adjusted taxable income beginning in 2022 for the section 163(j) limit for business interest.
• 100% bonus depreciation begins to phase out in 2023.

There are also several other temporary tax breaks for businesses and individuals that expired at the end of 2021 that typically get extended by Congress on a regular basis (extenders). 

Section 174 amortization of research expenditures

One of the most dramatic changes that occurs for the 2022 tax year without any legislative change is the deduction of research and experimentation (R&E) expenses. Before 2022, a taxpayer had the option to expense and immediately deduct R&E expenses when paid or incurred or amortize them over five years (10 years for the alternative minimum tax). Software developmental costs also could be treated like R&E expenses and either deducted immediately or amortized over five years (or three years from date placed in service). 

For tax years beginning 2022, R&E expenditures may no longer be expensed and immediately deducted. Instead, they must be amortized over five years (15 years for foreign expenditures). Amortization must continue even if the underlying property is disposed, retired, or abandoned during the amortization period. This includes software development costs without the option to expense them.

The option to immediately expense R&E expenditures has been an important tool for businesses for a long time. Moreover, the amortization requirement is a departure from generally accepted accounting principal (GAAP) rules that requires most research and development costs to be expensed immediately. There have been several bipartisan proposals in Congress during this past year to either repeal or at least delay the change for R&E expenses.

Business interest limit under section 163(j)

Another change in tax law that some taxpayers may have forgotten involves the calculation of the business interest deduction limit under section 163(j). The deduction is generally limited to 30% of the taxpayer’s adjusted taxable income (ATI) for the tax year. The limit was temporarily increased to 50% for 2019 and 2020 for all taxpayers but partnerships, and 50% for partnerships for 2020 only. 

ATI is calculated by taking the taxable income for the tax year as if section 163(j) does not apply, and then adding and subtracting certain amounts from it for the year. Examples of amounts added back include deductions for interest, net operating losses, and for tax years beginning before 2022, depreciation, amortization, and depletion. Thus, for tax years beginning before 2022, ATI is similar to EBITA—earnings before interest, taxes, depreciation, and amortization (except taxes are not added back).

For tax years beginning after 2021, the deductions for depreciation, amortization, and depletion are no longer added back to taxable income to determine ATI. Thus, ATI is similar to EBIT (earnings before interest and taxes) beginning in the 2022 tax year. As a result, some businesses may find that their business interest deduction is reduced compared to previous tax years unless there is a legislative fix to extend or remove the change in the ATI calculation for depreciation, amortization, and depletion.

Phase out of 100% percent bonus depreciation

One of the most valuable tax benefits available to businesses is a bonus depreciation deduction allowed for a percentage of the cost of qualified property placed in service during the tax year. Qualified property is tangible personal property depreciable under the Modern Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years of less. The cost of the property is its adjusted basis after considering any section 179 expense election. Any remaining cost (if any) after the section 179 expense election and bonus depreciation is deducted using regular MACRS depreciation.

Bonus depreciation has been available for some time with various percentage rates. The Tax Cuts and Jobs Act (TJCA) expanded the deduction to allow a 100% bonus depreciation deduction for qualified property placed in service through 2022. However, the bonus rate is scheduled to phase out 20% a year beginning in 2023. Thus, the bonus rate for qualifying property (other than long production property and certain noncommercial aircraft) is:

• 100 percent for property placed in service after September 27, 2017, through 2022,
• 80 percent for property place in service in 2023,
• 60 percent for property place in service in 2024,
• 40 percent for property place in service in 2025, and
• 20 percent for property place in service in 2026.

Without a legislative change, a taxpayer planning on purchasing property that would qualify for bonus depreciation might want to purchase the property soon. This would give the taxpayer an opportunity to place the property in service before the bonus rate starts to decrease. This may be especially true with continuing delays in shipping goods and labor shortages that have occurred during the past few years. 

Other expired tax benefits

In addition to the above changes, there are a number of tax provisions that expired at the end of 2021 and may not be claimed for 2022 unless Congress acts to extend them. For businesses, these include so-called extenders include:

• Three-year recovery period for racehorses under MACRS,
• Accelerated depreciation for business property on Indian reservations,
• Indian coal production credit,
• Indian employment credit,
• Mine rescue training credit,
• Temporary increase in limit on cover over of rum excise taxes, and
• American Samoa economic development credit.

For individuals, tax provisions that expired at the end of 2021 include:

• Expanded child tax credit,
• Expanded child and dependent care credit,
• Increased exclusion for employer-provided dependent care assistance,
• Special earned income tax credit rules for individuals without qualifying children,
• Treatment of mortgage insurance premiums as deductible mortgage interest,
• Charitable contributions for non-itemizers, and
• Increased percentage limits for charitable contributions of cash.