On-Demand: Business and Individual Federal Tax Update
January 25, 2023
Join EisnerAmper to learn about the recent key tax developments impacting individuals and businesses.
We've all seen yet another batch of new laws come out of DC, some toward infrastructure, some climate change, but as always, tax never gets untouched when it comes to new laws, so we're going to be going over some new tax provisions. But to kick things off, I'm going to pass the mic to my colleague Ben Aspir, who's going to walk us through the personal tax update. And then after that I'll take over for the business segment. Ben, floor is yours.
Ben Aspir:Thanks Tom. And before we take a deep dive into the individual tax provisions, some of the changes that have happened over the past year and some of the changes that are going to happen in future years, I thought we'd do an overview of a recap of the recent legislation from the last five, six years and in front of you, you'll see why many tax professionals have a lot more gray hairs over the last few years, all the significant changes that have happened.
So starting out back at the end of 2017, the Tax Cuts and Jobs Act passed at the end of '17 and that was basically the biggest change that the tax code in close to over 30 years. And with that, Asher Daniel was the state and local tax cap that we're all painfully familiar with the qualified business deduction that changed the rules on net operating losses. It overhauled the international tax regime in the US. And then the next, almost three years later, the pandemic hit and Congress needed to pass relief. So they passed the CARES Act, which implemented the PPP program, the employer retention credit. It eased the rules on withdrawals from retirement plans to help people that were affected by the pandemic. The stimulus checks, which a lot of us are familiar with, those were also implemented as part of the CARES Act.
And then the third one was the Consolidated Appropriations Act that passed in December of 2020 that extended the employee retention credit for the first two quarters of 2021. It allowed meals and entertainment a hundred percent deduction through 2022. And with that one of the major provisions of the Appropriations Act of 2021, it allowed people that took the PPP funds to also claim the employer retention credit. Next on the list is the American Rescue Plan. And what that plan did in 2021, it expanded the child tax credit. Temporarily, it significantly expanded the Dependent Care credit and it extended the aforementioned employer retention credit for the last two quarters of 2021.
Then in November of '21, we had the Infrastructure Investment in Jobs Act that repealed the employer of retention credit for the fourth quarter of '21 other than certain businesses, certain startups, and it implemented some crypto reporting rules. And lastly, the Inflation Reduction Act of 2022, which was passed in the summer of this past summer and it was actually the remnants of the Build Back Better Act, which was not enacted, but there were pieces that the Congress could agree on and that had many energy tax credits, clean energy incentives. There were some business provisions as Tom's going to cover later on, and it really was the remnants of the Build Back Better Act, which was not enacted in full. So that was a compromise.
So if you're all keeping track, there's been some significant changes over the past years and this reminds me of, looking at all these changes that have happened over the last five plus years. The late Will Rogers comedian said, "What's the difference between death and taxes? Is death doesn't get worse every time Congress meets." So that's what came to mind when I first saw all those changes.
So to talk about the individual tax side, these are the tax brackets for 2022. And if you go down the line between the single filers and the married, filing, joint, it basically doubles right, for a couple. But where what's called the marriage penalty kicks in is if you look down at the 32% bracket. So the lower end doubles from 170 to 340, but the top threshold of the 32% bracket does not. Well, I'm sorry, it's the 35% bracket, I apologize. So if you look it doubles on the lower end, but the 35% rate kicks in at $647,000. It really should kick in at a million dollars and double. So that's commonly referred to as the marriage penalty.
The standard deduction is part of the Tax Cut and Jobs Act was significantly increased and as you see here there it's index for inflation. So for someone married filing single for '22, it's almost 13,000 and for a couple filing jointly it's 26,000. And as a result of this, it's going to be a lot more filers that are going to be claiming the standard deductions that have itemizing just because the standard deduction has increased significantly. A lot of this is also as a result of the state and local tax cap that taxpayers can only deduct up to $10,000 of real estate and income taxes.
Moving on, there were a lot of expiring tax provisions that were not extended or were only meant to be temporary cover relief. Like I mentioned, the expanded Child Tax Credit, that was an additional $1,600, potentially a child that expired as of the end of '21. That is not in effect. It goes back to the regular rules of the Child Tax Credit in 2022. The same thing for the Child Independent Care Credit. It was very generous temporarily in 2021 for an additional $5,000 a kid up to $10,000, that's gone for 2022.
The CARES Act had increased the percentage limits for charitable contributions of cash. And what I mean that is in the CARES Act, it allowed a tax payer to offset up to a hundred percent of their adjusted gross income. They basically allow them to donate cash up to a hundred percent and basically wipe out the income. So that goes back down to the regular levels. The deduction for anyone that purchased the house and put down less than 20% usually have to pay mortgage insurance premiums. That was deductible through 2021. That was actually an tax extender that was not extended by Congress. So unfortunately that tax deduction expired.
Next, charitable contribution, this was a temporary provision for taxpayers that didn't itemize, they were able to deduct if they're filing jointly up to $600 without having to itemize their tax deductions. And just while I'm on the topic of our charitable contributions, Tom and I were just talking about this before, the IRS, anyone... Cryptocurrency has been a topic for discussion lately. And so someone asked the IRS, "If I donate more than $5,000 of crypto, do I need a qualified appraisal? If I could just use the amount that the exchange, the value, can I just use the value from the crypto exchange?" The IRS said, "No, you can't use the value from the crypto exchange. You have to get a qualified appraisal if more than $5,000 of cryptocurrency is donated and it to should be attached to the return."
And lastly, the recovery rebates or the stimulus checks 2021 saw a third round of stimulus checks of $1,400 for those that were eligible. And if someone for whatever reason didn't receive the check, they were able to claim a recovery rebate credit on their 1040. So that's gone for 2022.
So one change that sort of flew under the radar, and this was enacted as part of the Inflation Reduction Act, it is formerly known as the non-business energy credit. So if you did certain energy efficient improvements to your house previous to the Inflation Reduction Act, there was a $500 lifetime limit. So it wasn't a very lucrative credit, but what the Inflation Reduction Act did, starting in 2022 it expanded the credit pretty significantly. So it got rid of the $500 lifetime credit and it replaced it with a $1,200 annual limit.
So if you put in energy efficient windows, doors, insulation, think of HVAC system. So anyone's thinking of doing work on their house and putting in energy efficient improvements should really consider this. It could be a lucrative credit to claim on their 1040. And then after 2024, I believe the purpose of this is that better tracking of whose claim the credit. So if you purchase windows or a door that's energy efficient, they're going to have an identification number and you have to put that number on a form. I'm assuming the IRS is going to come up with and in order to claim the credit, the revised credit is extended through 2022, over 2023 through 2020-32.
We're going to move on to polling question number two.
Astrid Garcia: Poll #2
Ben Aspir:Thanks Astrid. So 67% got the correct answer. The above the line charitable contributions are not allowed for '22 that expired at the end of 2021.
Moving on, so one of the biggest changes that happened recently is the Secure Act and it stands for setting every Community up for retirement enhancement and the Secure Act 2.0. It was really to build upon the original secure act that passed in 2019, which has some tax provisions, but the 2.0 is significantly expanded. There are 92 plus provisions in the 2.0. I'm not going to make you suffer through all them today, all 92, we're just going to highlight about a dozen or so provisions that we feel are going to affect most people. And the purpose of the 2.0 was to encourage people to save for retirement, to improve the rules and also lower the setup costs for taxpayers and employers to set up retirement plans.
So firstly, penalty fee withdrawals for certain emergency expenses. So generally there is a penalty on top of the tax you have to pay unless you meet one of the eight exceptions. So they added an additional exception from the 10% withdrawal exemption. And if there are certain emergency expenses, a taxpayer can withdraw up to a thousand dollars per year penalty free. They still have to pay tax on it if they meet the emergency provisions. And the taxpayer may also repay it within three years and not have to pay tax on it if it's properly repaid within three years.
Expanded automatic enrollment. Again, so the purpose of the 2.0 was to get more people to put into the retirement plan save for retirement. And this only applies to new plans set up. It doesn't apply to existing plans and it also doesn't apply to small employers that have 10 or less employees. This is effective as of 2025 and the default rate will need to be between 3% and 10% on the automatic enrollment and employees will be of course allowed to elect out of it if they don't want to participate in the retirement plan.
An interesting provision from the 2.0 was also the conversion of 529 plans to Roth IRAs. So limited circumstances, tax payers may be able to roll over 529 plan to a Roth. They have to be in the 529 plan for at least 15 years. So it's pretty high hurdle to clear to get to it. And the annual limits for rollover have to be within the annual Roth IRA limits and the maximum that can be rolled over from the 529 to a Roth is $35,000.
Additional provisions in the 2.0 act is employer matching contributions can be extended to those paying student loans. So this is interesting. So as of 2024, employers can match, do a match on let's say a 401k based on the amount that an employee is paying on their student loans. Let's say they paid back $10,000 and they want to do 5% of that. They can use that for purposes of an employee match. Let's say for the 401K rules and they could use that and they could put 5% of whatever the employees paying back towards their towards the 401k plan. They're also going to create a national lost and found database and it's going to be a searchable database on the website for the Department of Labor where if they need to contact the plan administrator for details on the benefits, how to make withdrawals, they'll have a essential database where they can look up the plan administrator.
So they also change the age for required RMDs, required mandatory distributions. And what RMDs are basically is the government wants people, they want to encourage them to save for retirement. So they're putting the money in general pre-tax, they're not paying tax on it, but the government eventually wants their tax money. So what they do is once a taxpayer reaches a certain age, they're forced to take, based on certain formula, at least a minimum amount from their retirement account and pay tax on it. So recently the old rules were if you were 70 and a half, so that was increased a couple years ago to 72. We have to start beginning RMDs and then so if you were born in 1950 or earlier, the RMD started at 72. If you're born between '51 and '59 it's 73. And then from 1960 or later, the required minimum distributions don't start until the age 75. And as of 2024, Roth counts in employer sponsor plans are exempt from RMDs require minimum distributions while the participant is still alive.
They're also higher catch up contribution limits. So generally if a taxpayer is 50 or older, they can make additional catch up contributions to their retirement plan. So this increases the catch-up contributions for certain taxpayers between the ages of 60 through 63. I don't know why they picked this specific age group, but basically for anyone that's in a non simple plan, the catch-up contributions will increase to $10,000 or basically one and a half times the regular catch-up amount. And for those in a simple plan at ages 60 to 63, it will increase from $3,000 to the greater $5,000 or one and a half times the regular catch-up contribution amount. And as of 2024, all catch-up contributions to non simple plans must be must Roth. So their post-tax for any participants that have their wages or compensation that are in excess of $145,000.
The excess business loss limitation, so the loss limitation was enacted as part of the Tax Cuts and Jobs Act at the end of 17 and that was supposed to expire after 2025. The Rescue Plan Act extended it a year to 2026 and then the Reflation Reduction Act extended it through the end of 2028. And what the Excess Business Loss basically limits, it's a new concept in the last few years. It limits if someone has a loss from their business, it limits the amount their allow offset against other non-business income. And I'll walk through a brief example to illustrate how it works. So it's an annual limit based on your filing status. It's indexed by inflation. So for '22 it's 270,000 if you're single. And it is for your married filing joint, it's 540,000. For 23 years you see it's indexed 289 for single and $578,000. And the amount that's disallowed under the excess business loss rules converts to a net operating loss and it's carried forward indefinitely and it can offset up to 80% of taxable income based on the net operating loss rules.
To walk through an example on the excess business loss. So, in 2022, Jane reports the net tax loss of $350,000 from Jane's partnership. Jane does not have any other sources of business income. Note that she has the $350,000 loss. Jane files her 1040 under single status, so she's limited to the annual threshold of 270,000. In 2022 Jane's only other source of income is investment income of $400,000. So how does this excess business loss come into play? So Jane's excess business loss is $80,000. How do we get there? Her $350,000 loss less the annual limit, so it's $80,000. So Jane can only deduct 270,000 of a loss from ABLC against that other non-business income. So the 270 could offset the $400,000 and the $80,000 excess converts to a net operating loss and carries forward to 2023. And before we move on to Tom in the business section, we're going to go on to the next polling section.
Astrid Garcia:Poll #3
Ben Aspir:Thanks Astrid. So the correct answer is false. It was temporarily suspended as part of the CARES Act, but it is in effect for 2022. So almost 78%. Got it right. I'm going to turn it over to Tom to talk about the business tax side of the update.
Tom Cardinale: Thanks Ben. And before I move on to the business side, we've received several regular tax questions, especially regarding retirement contributions and RMDs. We will do our best to answer them post presentation. We get basically like an Excel summary of all questions with everyone's email. So we will do our best to answer whatever we can touch on today.
So on the business side of the tax update, we're going to talk just four general areas. The first one being probably the hottest item that is reverberated through the entire accounting industry and probably impacts if you're a business, this may impact you and you think it doesn't, but the R&D cost treatment is drastically changed for '22 that you need to be mindful of. Then we're going to go through some new business tax provisions of the Inflation Reduction Act, go through some of the time triggered provisions from the Tax Cuts and Jobs Act, even though that was five years ago.
Many of these business updates are actually more important regarding the Tax Cuts and Jobs Act because they had no impact back in '17 or '18, but they put in these, like I said, these time triggers that starting in '22 or '23 you need to do this. And back then we really did not give it a lot of attention because if it was so many years down the road, but now it's all coming to the forefront and we need to be prepared for that. And then we're just going to go through a medley of various business items, some expiration, some expired credits and deduction changes.
So again, the major item of discussion for the business side is research and development costs. The Tax Cuts and Jobs Act had that trigger that included R&D that's qualified Section 174, which is the code section for R&D. Must be capitalized for tax purposes starting at the beginning of '22. In the past you were gained a double benefit if you had business R&D, you could claim a tax credit and many states also have such a credit and you could also claim the deduction of the R&D costs in full. So it was a double benefit. You got a tax credit, you got a tax deduction.
But for any cost incurred regarding R&D, after starting January 1, '22, you now need to capitalize that for tax purposes over a five year period. If it's US based R&D and if it's foreign based R&D, if you're outsourcing the R&D, you have to capitalize it over 15 years, very impactful tax hit. To make matters worse in year one of the R&D costs, you have to apply what we call the mid-year convention. This assumes that all of the costs incurred are mid-year or July 1st of '22. So you actually have to cut that capitalized deduction in half in the first year. So if you have US-based R&D, you're only going to get 10% of that in the first year and they're remaining 90% in the following four years.
Sold or abandoned R&D, many biotech companies, pharma companies, they'll actually do a lot of the R&D work and then they'll sell it, they'll sell that IP to another industry, could be a competitor. But just because they sold it doesn't mean they get to recover the remaining tax basis of that R&D. They would need to still capitalize it over the remaining life. But as big as a change as this is, the R&D credit is not impacted by this, this is purely a deduction, a timing difference relating to the deduction but not the credit.
So when you talk about, well, is it us or foreign? That's where you really have to dig deep because just because you send an R&D payment to a vendor located in the US, you have to be careful because it could just be a billing shop that just collects all the fees, but the R&D work is really done offshore. The IRS is going to use a look through approach. So as you're going through your general ledger looking at R&D, you want to make sure that it's sourced, you want to make sure it's accurate sourced either in the US or foreign.
And keep in mind when you think of R&D, it's not so much a product. A lot of people think R&D, oh, I don't build a product, I'm not making it new or anything innovative so it doesn't apply to me. But R&D regarding this capitalization rule can apply to internal development costs, software development, it could apply to website development. If you're creating a new interactive website for your company that's considered R&D, although it may not be eligible for the credit, it still would fall under section 174. So you want to be careful and don't assume that this is not going to apply to you because it's very important.
For many of my corporate friends out there that do tax provisions, this new rule is going to have a new deferred tax asset on your deferred tax roll forward of your income tax provision. So as a simple example, if you add 1 million of R&D costs in '22, what's your current deduction? We talked about that before. If it's US based R&D, you're only going to get a hundred thousand dollars in 2022 as a tax deduction. It's five years at the mid-year convention, your future deductions is 900,000. That's your gross deferred benefit before applying the tax rate. You take that 900,000, let's assume a 21% fed rate, 7% effective state rate. So you have a 28% blended rate, you now have a $252,000 deferred tax asset on your balance sheet if you're a corporation. So this is spawned a new regime of deferred tax assets that we need to keep track of.
I also wanted to throw in there that in the M&A side, it's still been very active. I am involved quite a bit with tax due diligence engagements and I've seen companies get kind of tripped up between buyer and seller on this R&D because the seller, if they have R&D, they're fronting all of the cost of the R&D, but they're only going to get a small portion of the tax deduction. The buyer is going to inherit that deduction even though they don't have to pay a thing. So it's become kind of a negotiation of the purchase price could be working capital adjustment, it could just be a negotiation between buyer and seller, but this could trip up some M&A transactions even though it should be considered an immaterial item.
Okay, we're going to move on to our polling question number four.
Astrid Garcia: Poll #4
Tom Cardinale: And we do have one R&D question from Randy. He says, "For R&D capitalization, if previously the R&D was for internally developed software that was capitalized for three years and amortized for 36 months, do we now need to capitalize the internally developed software costs to five years?"
It depends. If this is first of all in the US, then yes, the answer is yes, but only starting from January 1, '22. It's not grandfathered in. If you already have R&D or capitalizing over a certain period, you can continue to use that same period. But for any new development costs in the US starting January 1, '22 and forward would be five years for US based.
Another quick question, "What is the account that is credited? When you book the deferred tax asset?"
You book the profit and loss deferred tax benefit, that's your offset. The only exception is if you're considered a loss company, and this is more of an accounting question, are you able to reasonably recognize or have a more likely than not chance to recognize that deferred tax asset because you're hopefully a profitable company? Then you would have a valuation allowance and just undo that initial journal entry, but you would debit, defer tax asset and credit, defer tax benefit on your P&L.
Tom Cardinale: Okay, about half of you got it right. Very good. A little bit of a tricky question, right? Because I said five years. So you look at 500,000, you automatically think just 20%, a hundred, but because of that mid-year convention, the first year deduction is only going to be 50,000 or 10%. So good job to all you that got that correct.
Okay. Now switching gears to the Inflation Reduction Act. Ben went over some of the personal tax provisions, but they also threw in some business tax provisions signed into law in August as we previously talked about. And these are the basic four items that were included. A new corporate excise tax on certain stock buybacks doesn't apply to everyone, it's only certain companies. A new or reinstated, I would argue it's probably a new corporate AMT standing for alternative minimum tax. The good news is 99.9% of you at a minimum aren't going to be subject to that, but it's just still good to know that this is out there in the business tax world now.
IRS funding, I'll hopefully get everyone's mind at ease and set the record straight because there's been a lot of fear over this funding and what it means for you personally or your business, but you'll have very little to worry about once I give you the details. And some business tax credit enhancement, especially as we're in this discussion of clean energy, part of the Inflation Reduction Act is increasing more clean energy incentives, especially for businesses that build, say new factories or buildings using energy efficient means.
So we'll first start off with this new excise sax on certain stock buybacks. If you trade in the markets, you'll hear sometimes a company has an allotment of funds, whether it's a few billion dollars, 10, 20 billion to use for stock buybacks. Which puts upward pressure on the stock. So many in Congress are like, well if they have all this extra money to buy back stock, we should probably ding them for it a little bit and to help raise some revenues. So this new 1% excise tax applies on the buybacks occurring on or after 1/1/23. So just starting a few weeks ago. It's only public companies. If you're a private company, you will be fine. You may have heard of inverted foreign corpse where they'll land a parent company overseas, but then the real operations are done in the US, or US subs of a publicly traded foreign corp.
It can include certain private corpse but are on a regulated foreign exchange, London, Tokyo, et cetera. And stock issuances, not stock options, but stock issuances can offset the repurchases. So you would net that every quarter. So stock compensation, newly issued stock comp two executives can be used to offset the buyback. Does not apply to repurchases, taxes dividends, or purchases as part of a tax-free reorg, or repurchases of stock contributed to employee benefit plans. So this is an excise tax. It's not an income tax, it's a new excise tax we've already had for forever an excise tax filing regime with the federal government. It's on form 720 and it's filed quarterly, so that's where you would now report the net stock buybacks if you're a qualified public company.
Now we move on to the new AMT, Alternative Minimum Tax. Some have dubbed at the Amazon minimum tax because Amazon is likely going to be the number one target and have this as their biggest liability. I've heard Berkshire Hathaway mentioned a company with massive book income, but much more tax deductions and taxable income's much lower. So in the end, just to put everyone's mind at ease with this provision, this is only going to affect about 150 companies globally because the adjusted book income for these corpse looked at on a global basis needs to have average profits. And that's not revenues, that's profits, that's income of 1 billion or more prior three average. That's income, not revenues. So it's about 150 companies, it'll take effect in '23.
For foreign-owned US Corps, the average profit of the foreign parent needs only to be a hundred million, not 1 billion provided that the global group still meets the 1 billion income tests. And we won't get into all the nuances of, well, how do you compute it? Like I said, most everyone in this call is not going to be subject to it, but you generally would follow your gap income, but then consider only certain tax adjustments, whether it's depreciation, bonus depreciation, and a foreign alternative minimum credit. And then the excess AMT would be your regular liability plus any BEAT tax paid. The BEAT tax is the base erosion anti erosion tax only if you have intercompany transactions between a sub in the US and a foreign parent or vice versa. And if you have significant intercompany transactions, the BEAT could apply only if the transactions are excessive. So that's how the AMT is computed.
There was also several new business credits applied, and a lot of this is a little confusing because the new credits are replacing old credits. So the names get a little bit murky, but the IRA did focus on energy efficient for businesses. So if companies are creating a new factory with solar panels or any energy efficient beginning after '22, they beefed up some of those credits. So the prior investment tax credit and production tax credit, these were already in place. They used to have phase outs of the credit, those were all removed. And the credit is generally six to 30% of cost for the ITC, the investment tax credit or two and a half cents per kilowatt hour for the production tax credit. It covers qualified investments through the end of '24.
Then these next three are more kind of newer credits, as you know from the IRA, clean electricity production and the invest, or clean electricity investment credit. These are basically replacing the items in the first bullet, the ITC and the PTC starting in '25. So again, similar credits, more expanded qualifications that will cover more businesses that are investing in energy efficient property. So it's just something to keep in mind of. But a new benefit they add to these credits is if applicable, you can carry them back. If you're not able to use the credit in the current year, whether you have a tax loss on your business return, you can carry it back three years. Most credits used to be a standard carryback of one year. So they've made it up to three years now.
And kind of touching back on the R&D, if you're a newer business, especially pre-revenue business, we see this a lot in biotech and pharma where it's almost all spend in the beginning, R&D, but there's no revenues. As part of the inflation reduction Act they basically bolstered the payroll tax credit that you could apply to R&D. It used to be $250,000. So if you were a lost company and had a taxable loss in your corporate return, you're not going to get the benefit of a credit. So what you can do is you could elect to apply the R&D tax credit to your payroll taxes because almost every company is going to have payroll and you could offset your FICA. So this was from the Tax Cuts and Jobs Act when this came out, but it was recently bolstered from 250,000 cap to 500,000. And you can now offset the one and a half percent employer portion of the Medicare, it was previously just FICA.
But you need to be what they consider a small business or a pre-revenue business. So what does that mean? It's both of these items. You have to have 5 million or less in your current year gross receipts, and you had to have zero gross receipts for any tax year before the five year period of the elected year. So if we elected it in '22, going back to 2017 or prior, you had to have zero gross receipts.
This has been an unbelievable talking point as part of the IRA and that's the bolstered IRS funding. You probably heard the talk, 87,000 new agents are coming after you. Everyone in America's going to get audited now everyone's in trouble. It's all hype, you have nothing to worry about. Basically the thing to note about the IRS funding is that this 80 billion allotted is over a 10 year period. It's not immediate. They're not going to get an 80 billion check. Go hire 87,000 agents. It's 80 billion through 2031, fiscal '21. Half of that funding, a little over half will be towed enforcement only. So about four and a half billion per year for the next 10 years will be towed enforcement.
But regarding the agents, you have to keep in mind, and there was already an independent study done for the IRS because they do have an aging workforce. It was estimated at 52,000 IRS employees out of their 83 grand total are scheduled to either retire or resign in the next six years. So because of that, 52,000 people at a minimum just need to be replaced. And that's not all agents either. A lot of it's just internal customer support technicians. It's not just all agents. So out of that 87,000 that's over a 10 year period. So they're looking for an average of just under 9,000 per year, but most of that is just going to replace the people that are leaving. And then at the end of the day, after the 10 year period is up, there might be between five and 10,000 new agents over that 10 year period. So it's going to be a longstanding implementation. And there's already talk in the new congress to remove this funding. So they didn't even get this 80 billion in, like I said, it's over a 10 year period.
But some of this money is actually going to customer support. And this is a very telling statistic. In 2019 IRS support only answered 59% of received phone calls. But then during the pandemic years, look at this, they answered only 18 and 19% of the calls. That's just awful. That's just unbelievably awful. And the IRS would say, well, we don't have the money, we need the people. We get a lot of tax questions, we don't have the money. So this became an easy argument for them to try to get some more money for that. So if there is going to be a repeal of the money funded to them, I wouldn't be surprised if they at least left this 3.2 billion allotment for customer support.
Okay, I'll turn it over to Astrid for our next poll question.
Astrid Garcia: Poll #5
Tom Cardinale: Okay, question from Warren, "There was legislation to delay the implementation of the requirement to capitalize R&D, but that did not happen. Many think this will be retroactively rescinded. What is the latest world thoughts on this?"
I would say yes, there has been talk about it and it got very close. If you remember the Build Back Better Act that Ben referenced earlier, it did include a delay in that R&D for I think it was three or four years. But because that act did not ultimately pass, some of the provisions were then just rolled into the Inflation Reduction Act, but not this R&D provision. So they let it expire or not expire, they just let the original provision come through. So I would say there is absolutely nothing on the table that's going to make it retroactive to '22 and we're already in the filing season as well. So we just don't think there's enough time. If they do repeal it, maybe they could do it for '23 or '24.
Tom Cardinale: All right, let's see who's been listening. All right, very good. A lot of you. 720. The excise tax form is filed on 720. 007, 911 got more votes than I thought. Very good. And keep in mind people, you don't have to answer the question right, you'll still get credit. So I just wanted to see who's paying attention.
So now we move on to another area, and this is again, one of those time triggered provisions that people didn't talk about five years ago, but that was a huge deal and that's the interest expense limitation, which can of technically apply to any business. It used to be only certain businesses, but now it applies to every business. It's based off tax basis EBITDA, right? Earnings before interest, taxes, depreciation, amortization. So that used to be the rule up through '22 where if you had 30% of your tax basis EBITDA, that was your annual interest expense limitation. So if you were a highly leveraged manufacturing company with tight margins due to just competition, this was a meaningful item. And if you didn't get the deduction, any excess would just be carried over indefinitely.
So in '21 and prior that 30% limitation of EBITDA applied, but now in '22 or later, they got rid of the DA, the depreciation and amortization. If you're a company with a big asset with big CapEx or goodwill from a prior asset acquisition, the loss of that amortization deduction is huge. So you can only use EBIT now and that's it. And then you take 30% of that and that is your cap to deduct your annual interest expense. The carryover still has an indefinite life, but the removal of depreciation and amortization is a big deal and is impacting many of our companies. And circling back to my tax provision, friends, keep this in mind when you're doing your massive Excel computations of your temporary differences is to remove the depreciation and amortization.
Okay, another part of the Tax Cuts and Jobs Act back in '17, everyone hailed the reinstatement of a hundred percent bonus appreciation, we love a hundred percent bonus, get to write off qualified business equipment 100% as if it were just a regular supply. That was great, but guess what? That Tax Cuts and Jobs Act included sunset provisions. That after '22, so '22 is the last year for a hundred percent bonus, it's going to cascade down 20% a year all the way down to zero in '27. So this did survive. There was talk to extend this also on top of the R&D capitalization. Well, it's extended a few years, but it ultimately failed and was not included in the final enacted law.
So keep in mind that when you're planning out your CapEx, '22 is the last year for bonus, we're now in '23, so we can get an 80% write off. But also keep in mind on your state level, many states do not realize bonus states have balanced budget amendments, et cetera. So they can't afford giving such big bonus depreciation deductions. So pay attention to your state and make sure that they couple with it. I think about two thirds to three quarters of them decoupled so they don't recognize it, but a few of them do. If you have long production period property, certain aircrafts, usually things that take, I think it's like two years or longer to produce. You just need to add one year to the above schedule.
And just a few miscellaneous items. Some of it connected with Tax Cuts and Jobs Act, others pandemic relief. It's just various items. A couple years ago, again, as part of pandemic relief, they temporarily increase your C-Corp contribution limit to 25% of your income. So if you had a million dollars of corporate income, you could fully deduct up to $250,000 of charitable contributions. The old rule is 10% and that 10% limitation is back. So in 2021, it was 25%, and now we are right back to that 10% income limitation.
The CARES act for some companies out there, again, this is related to the pandemic, they gave you an option to defer paying the employer portion of FICA taxes and then pay them in two installments. One at the end of 12/30/21 and then the second half was due a few weeks ago. I just want to throw this out there to make sure and confirm everyone paid it on time. If you were subject, because the IRS may have a surprise for you if you paid it late. They would consider any late payment kind of as nullifying the entire agreement that even if you made the first payment on time, and they can impose some severe penalties and interest on that. So I just wanted to throw that out there.
Business meals, as part of the pandemic relief, they temporarily allowed 100% deduction on business meals for two years, for 2021 and 2022. So if you're taking a client out, prospect, taking your colleagues out or bringing meals on site to your business, that's all 100% deductible through '22. But unfortunately we are back to the standardized rule of 50% deduction in '23 and going forward.
The BEAT tax, I touched on this earlier, the BEAT, the base erosion, anti avoidance tax is relating to companies that have foreign related parties, companies that have intercompany transactions, whether it's intercompany management fees, whether it's royalties, purchases of goods. I know there's some inventory exceptions, but if there's considered excessive intercompany transactions, '22, the tax rate is 10% and it's now going to be going down to 5% next year for '23 and '24.
And just to go over some inflation adjustments, we've all seen the big hit in inflation this year, but in turn, the IRS has taken notice also. And some of these adjustments are in line with the current inflationary environment. So for '22, the small business exemption is now 27 million of average receipts in a three year period. This is key because it used to be only 5 million and then it was drastically increased to 25 million from the Tax Cuts and Jobs Act. And then they've been including some pretty fair inflation adjustments to it.
But if you hit that 27 million or less in average receipts, there's a few kind of nuisance tax items you wouldn't be hit with one. The interest expense limitation I went over earlier, the limitation and the 30% of EBIT, that would not apply to you if you're a small business. And you could use the cash method of accounting, 263 relates to inventory unit cap. So if you're under that average receipt threshold, those do not apply to you.
The IRS business mileage rate, they changed it mid-year last year, I think it was high fifties in the early part of '22, and they changed it to 62 and a half cents as part of just the spike in inflation. And that is now going up to 65 and a half cents for '23. So pretty meaningful adjustment there on a percentage basis.
Section 179 used to be a million dollars. The current year limit will now be 1,000,080. Section 179 is kind of a fifth wheel because of bonus depreciation. It allows an immediate write off of qualified business equipment, but because the bonus depreciation is now at 80% and going to cascade down to zero, the 179 option now has a little more meaning. So you may want to look at that and back to the state level. Also, many more states allow the 179 deduction but not the bonus. So this one from more of a federal and state level could be a more viable option to write off your business assets.
Qualified transportation, fringe benefit exclusion. As you know, qualified transportation is generally taxable as a fringe, W-2 fringe to your employees, if you're providing them say an allowance for public transportation or whatnot. But there is an exclusion of, it used to be $265 per month for each employee, it's now $280. So if you provide that to your employees for qualified transportation, that would not be includable in their W2 wages.
And the FSA, the employee contributions annual limit, if you're going to be using a flexible spending account, whether to pay for doctor visits, dental visits, et cetera, you could get this pre-tax and it's put aside in the pool for your employee. That contribution limit is 2,850. So just a few inflation adjustments to be mindful of.
All right. And with that, I'll see if we have any further questions. It looks to be pretty empty. Oh, here's a... David asked, "Excise taxes are fully tax deductible year incurred pay by a business tax rate." Yes, yes, they are. Excise taxes are deductible. They're considered kind of an above the line other tax, but keep in mind that federal corporate income taxes are still non-deductible to a company.
Chris asked, "For the new R&D deduction 20% year rule, does this also apply to maintenance spend as well or just spend on new products? i.e. Same as you can take the R&D credit for research into new products, but not the maintenance." Yeah, I don't know what you mean by maintenance. Maintenance generally would be kind of a separate fully deductible item. R&D must relate to physiological or scientific improvements to your product or your process. So I don't know if it's just general maintenance that would not be applied. I would carve that out separately as an allowable deduction.
And with that Astrid, I'll hand it off to you for some final housekeeping items. Thank you, everyone.
Transcribed by Rev.com