Tax practitioners across the U.S. can enjoy the holiday season and maybe have that extra glass of eggnog this year knowing we will not have a massive legislation to digest before the new year begins! Last weekend Congress conceded that there are not enough votes to pass the massive Build Back Better Act (BBBA). Senate Majority Leader Chuck Schumer announced the Senate will vote on the Act in January despite Senator Joe Manchin’s opposition to the bill. Staffers continue to meet with the Senate parliamentarian to determine which portions of the bill they may have to drop so the legislation can pass under the reconciliation process.
Manchin has said he wants a new bill that goes through Senate committees and focuses on rolling back the 2017 Trump tax cuts. He could not support the temporary nature of some of the social programs and has said the real cost of the bill is much larger than advertised if the programs were permanent.
Without this legislation there are two items of particular importance to many people.
1. Research and Development Expenses
The Tax Cuts and Jobs Act required taxpayers to capitalize qualified research expenses and amortize those costs over five years beginning in 2022. The BBBA would have pushed that requirement out until 2026.
This requirement is especially impactful for taxpayers taking advantage of the research and development credit, as costs that are qualified for credit purposes will now be required to be capitalized rather than expensed as incurred.
Below is an example of the estimated tax impact in year one for a C Corporation with $1 million in qualified research expenditures.
|Before Change||After Change|
|Tax Before Credits||$ 210,000||$ 378,000|
|R&D Credit Generated||$ 65,000||$ 65,000|
|Tax Liability After Credits||$ 145,000||$ 313,000|
In this example, the taxpayer would be required to pay an additional $168,000 of taxes in the first year.
Little guidance has been issued on this specific piece of legislation to date, however as the example indicates, the credit becomes a less useful cash planning tool than what it has been in years’ past. It is possible a stand-alone piece of legislation could be passed to fix this issue; however, taxpayers should not plan for that as we head into 2022.
2. Child Tax Credit Payments
The IRS sent the last advance child tax credit payments on December 15. The BBBA would have extended those payments through December 2022. Even if Congress comes back after the new year and can quickly pass legislation, it will take the IRS time to reinstate those payments.
We will update you with any new developments in next week’s blog. If you have any questions, please contact us.