Tax provisions that may impact you and your business

The Tax Cuts and Jobs Act (TCJA) of 2017 made several sweeping changes to the tax code. However, many provisions were designed to be temporary and, thus, contained a “sunset,” or expiration date. This article will review several provisions that have either recently expired or are scheduled to expire in the coming years.

Beneficial business interest deduction rules

The business interest deduction limit under section 163(j) is generally limited to 30% of the taxpayer’s adjusted taxable income (ATI) for the tax year. ATI is calculated by taking the taxable income for the year and then adding and subtracting specific amounts, such as deductions for interest and net operating losses.

Prior to the tax year 2022, depreciation, amortization and depletion were added back to taxable income to calculate ATI. Adding these back typically resulted in a higher ATI, which increased the total amount of business interest that could be deducted.

For the 2022 tax year and thereafter, the TCJA removed the requirement to add back deductions for depreciation, amortization and depletion when calculating adjusted taxable income (ATI). As a result, some businesses may find that their business interest deduction is reduced compared to previous tax years when they file their 2022 tax return. However, excess business interest may be carried forward to future years.

100% first-year bonus depreciation

One hundred percent bonus depreciation is a tax provision set by the TCJA that allows businesses to fully deduct the cost of certain qualifying property in the year it is placed in service rather than depreciating the cost over several years.

Under the TCJA, 100% first-year bonus depreciation is available for qualified business assets acquired and placed into service after Sept. 27, 2017, and before Jan. 1, 2023. This generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify. Additionally, certain qualified improvement property qualifies for 100% bonus depreciation.

Unfortunately, the one hundred percent bonus depreciation deduction will begin to phase out after 2022, decreasing by 20 percentage points each year until it reaches zero in 2027. Bonus depreciation is limited to 80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026.

Section 174 expenditures

Section 174 provides certain tax benefits for companies that incur “Research and Experimental Expenditures” in connection with the taxpayer’s trade or business. R&E expenditures generally include all costs incurred in developing or improving a product.

While many provisions of the TCJA went into effect immediately, changes to Section 174 were only effective after Dec. 31, 2021.

Prior to the TCJA, taxpayers could deduct the full cost of R&E expenditures in the year they were incurred. Now, however, these costs must be amortized over at least five years. Fundamentally, this means businesses will see an increase in taxable income the first year those expenses are incurred.

“Qualified Business Income” deduction

The TCJA introduced a new tax deduction called “Qualified Business Income” (QBI) for non-corporate taxpayers, such as trusts or estates with QBI income, partnerships, S corporations and sole proprietorships, for tax years starting after Dec. 21, 2017, and before Jan. 1, 2026. This deduction is equal to 20% of the taxpayer’s QBI (excluding net capital gains) or 50% of the W-2 wages paid by the entity, whichever is lower. However, the deduction cannot exceed the taxpayer’s taxable income minus net capital gains.

This provision is scheduled to expire on Dec. 31, 2025.

This article is intended to provide a brief overview of recently expired or expiring provisions of the Tax Cuts and Jobs Act of 2017 that will likely impact business entities. It is not a substitute for speaking with a professional.

Christopher W. Solomon, CPA, is a tax partner at Heard, McElroy & Vestal, LLC. For more information, please contact us by calling (800) 241-0151 or emailing hmv@hmvcpa.com.