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Tax planning considerations for business owners facing higher tax bills 

Amid rampant inflation, the Great Resignation, economic uncertainty, and the new normal of the working world, many businesses will soon be adding another challenge to the list: higher tax bills brought about by changes to tax regulations. In this blog post, we take a closer look at some of the big tax changes on the horizon and how tax planning for business owners is perhaps more essential than ever.

No deal for extending portions of the Tax Cuts and Jobs Act

The 2017 Tax Cuts and Jobs Act (TCJA) permanently lowered the corporate income tax rate from 35% to 21%. However, it recouped some of these lost funds by phasing out other tax benefits or making smaller tax cuts temporary. Business groups and lawmakers have been expecting these changes to be addressed, but Congress has been unable to come to a deal, which could mean higher tax bills for a number of businesses. The changes below come as a result of Congress trying to shift costs to pay for the larger, more permanent tax cuts.

Amortization of research and development spending

One of the major changes affecting a number of businesses was the 2022 introduction of the amortization of research and development spending over five years—these costs were previously expensed in the year they happened. Experts say this will hurt research efforts and put the United States at a competitive disadvantage. (Note that this is separate from the R&D tax credit, which we’ll discuss later.)

Business net interest expenses 

Another limitation businesses have started to see is the deduction of business net interest expenses: previously, the deduction was 30% before interest taxes, depreciation, and amortization; now, it’s limited to 30% of earnings before interest and taxes. 

Bonus depreciation phasing out 

At the end of 2022, bonus depreciation (which allows businesses to deduct short-term investments in items like equipment and vehicles immediately) will start to phase out. Come 2023, businesses will only be able to deduct 80% of those expenses all at once, with the remaining 20% over several years; the time frame depends on the item. Every year, the amount organizations can deduct will be reduced by 20%.

International tax rates set to rise

At the end of 2025, we can expect more complex international tax rates to start to shift. Global intangible low-taxed income rates and other international tax treatments are likely to become more restrictive or rise by several percentage points. 

Personal tax changes at the end of 2025

There are also changes coming in a couple of years that may impact your personal tax rate:

  • The end of the reduced individual tax rates
  • The end of the increase in the standard deduction
  • The end of the doubling of the tax credit
  • Estate tax will revert to its pre-2017 levels, plus inflation

The problem with temporary tax policies

There’s an inherent irony when engaging in temporary tax policy: the goal of temporary tax relief is to provide an environment in which businesses feel encouraged to invest in the future. But this can only happen if businesses have a sense of security and stability in the tax code, which is negated by having temporary tax policies. Businesses are currently experiencing economic headwinds and widespread uncertainty, making it difficult for them to navigate tax changes in a way that encourages more investment.

Looking at all these changes can seem quite alarming, but it also means there will be significant incentives for Congress to come to a deal; leaving everything to expire would result in a substantial tax hike for nearly all taxpayers. According to the Tax Foundation, canceling the business tax hikes could add about 105,000 jobs and increase gross domestic product (GDP) by about 0.6%. However, it would cost about $751 billion over ten years, so policymakers will need to find some middle ground. 

Take advantage of tax credits still available to small businesses

The Employee Retention Credit 

The Employee Retention Credit (ERC) was initially a quarterly, refundable tax credit implemented as part of a series of Covid-19 rescue programs for small business owners. It was intended to help business owners retain staff during the pandemic by providing tax credits for qualifying wages per employee. The American Rescue Plan Act extended and expanded the ERC into the first three quarters of 2021, making it much more lucrative to business owners. But the IRS recently highlighted the potential for scams with the ERC. We’d recommend reading our blog to learn how to spot a scammer

Inflation Reduction Act

The Inflation Reduction Act (IRA) contains several tax credits for individuals and business owners, including a tax credit for qualifying electric vehicles of up to $40,000 (subject to certain limitations), an extension of wind and solar tax credits, and expansion and increased value of tax credits for carbon capture.

Learn more about the IRA’s provisions for business owners.

The IRA also includes a provision to double the research and development (R&D) tax credit from a maximum of $250,000 to $500,000. Although it’s unlikely that the average company will receive double the credit, it’s worth being aware of the change. 

Professional tax planning for business owners 

With tax regulations shifting constantly, it pays to have a plan and a professional on your side. Tax and accounting decisions are complicated, which is why the experienced team at FSA has been helping clients with tax preparation and planning for over 40 years. Contact our team to learn more.

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