Tax changes that take effect in 2023 could impact your business, especially when it comes to capital, R&D, and interest expense deductions. The influences behind these reforms are complex, but the two big drivers are provisions of the 2017 Tax Cuts and Jobs Act and the 2022 Inflation Reduction Act. Here are some quick highlights to watch out for going into tax season.
The 2017 Tax Cuts and Jobs Act
This has been in the news before, but some provisions of the 2017 Tax Cuts and Jobs Act were intentionally set to phase out in a few years’ time. In 2023 businesses will start feeling the effects of some of these planned reductions or expirations.
- R&D Expensing: Full expensing for corporate research and development ended in December of 2021. Originally, companies could deduct R&D expenses from the next year’s tax bill, but new regulations require them to spread the deduction over five years for domestic spending (15 years for international spending).
- Capital Expensing: The 2017 tax reform allowed businesses a full and immediate deduction for investments in machinery or vehicles. This year the maximum deduction drops to 80 percent, gradually decreasing to zero in 2026.
- Interest Expensing: Last year the business interest deduction formula changed to exclude amortization, effectively lowering cap on the amount of business interest that companies can deduct. Observers note that the timing may be uncomfortable for some businesses in combination with the recent wave of Federal Reserve interest rate increases which are driving up the cost of borrowing.
The 2022 Inflation Reduction Act
On January 1, a significant provision of the 2022 Inflation Reduction Act took effect along with the planned changes triggered by the 2017 Tax Cuts and Jobs Act. This change impacts corporate minimum tax. U.S. firms earning more than $1 billion in annual book income will now be subject to a 15 percent corporate minimum tax. As a result of this change, the average effective tax rate for corporations will rise to 19.3 percent from 18.7 percent.
The Consolidated Appropriations Act of 2023
Often referred to as the “omnibus” bill, this year-end roundup legislation included retirement savings provisions that are worth a closer look for individual tax planning purposes. Some take effect this year, while others will phase in gradually. These are just a few examples of adjustments that also loosened assorted rules on things like charitable distributions and 529 rollovers.
- Small Business Tax Credits: To incentivize smaller companies to establish retirement savings plans for their employees, startup credits increase to 100 percent of administrative costs (up from 50 percent) for businesses with 50 or more employees.
- Catch-Up Contributions: Individuals aged 60 to 63 can start making bigger 401(k) catch-up contributions as of January 1, 2025, indexed for inflation. This year the catch-up limit increases to $7,500, up $1,000 over the 2022 $6,500 limit. Upfront tax savings on catch-up amounts may be lower for those who make the maximum plan contribution every year.
- Required Minimum Distributions: As of January 1, 2023, the age at which you are required to start taking distributions from IRAs and other qualified plans goes up from 70 and six months to 73. In 2033 the required distribution age goes up to 75. The law also softens penalties for failing to take full required minimum distributions.
Continue the Conversation
This summary addresses just a few of the tax changes that are still unfolding from legislative activity over the past five years. It is important to take a full inventory of your tax situation before making any changes. Clayton & McKervey advises clients in the manufacturing & distribution, industrial automation, and architecture & engineering sectors on tax strategy, succession planning, and financial reporting. We would welcome the opportunity to talk with you about your current business outlook. Contact us today to learn more.