Delayed legislation at the state and federal level muddies the waters for business leaders.
By Andre Shevchuck, Partner, and Paul Fong, Managing Director
2021 was an unusual year in just about every way — and the tax landscape was no exception. As we move forward in 2022, there are still a number of unanswered questions that are affecting businesses throughout the United States. Here is a snapshot of where some of the most important potential new legislation stands, and how it is impacting our clients:
- The biggest story is the continuing delay in the passage of the Build Back Better Act (BBB), which includes numerous changes to the tax code. At this point it is difficult to predict when it will be passed — and what its final form will be — but we at BPM are keeping an eye on how the legislation is progressing.
- One source of confusion caused by the delay in passing the BBB Act is how companies can expense their research and development costs. Prior to the 2017 TaxCuts and Jobs Act (TCJA), businesses were allowed to immediately expense R&D costs under Internal Revenue Code Section (IRC) 174(a) or have the option to amortize R&D costs over a five-year period under IRC 174(b) for tax planning purposes. Under current tax law, effective Jan. 1, 2022, all taxpayers must capitalize their U.S.-based R&D costs for a period of five years — and 15 years for foreign-based R&D spend. The BBB Act sought to delay the R&D cost capitalization requirement to 2026, but it failed to be signed into law before the Jan. 1, 2022, effective date.
- Despite this delay, there is strong bipartisan support around efforts to spur economic growth and compete with foreign R&D incentives. Speculation remains that Congress will submit a retroactive “fix” to allow businesses to continue the immediate expensing of R&D costs. However, until that legislation is passed, the capitalization requirement will have critical impacts on future cashflow that must be accounted for.
- Meanwhile, important changes may be coming for California’s Pass-Through Entity (PTE) Elective Tax, also known as the SALT workaround. The bill as originally passed in July 2021 includes limitations that prevent businesses from fully utilizing the benefits of the program as intended. The first is a provision that the PTE Credit cannot reduce any taxpayer’s liability below the tentative minimum tax (TMT) threshold — a supposed safeguard that is unnecessary given that income tax has already been paid at the entity level. The other is a rule that taxpayers who own a share of a disregarded entity, such as a single-member LLC, cannot make use of the PTE Elective Tax. California’s 2022 Budget proposes fixes to remedy these quirks in the legislative language. BPM is watching the situation and will alert clients if the proposed changes ultimately become law.
- Additionally, after a major reversal in state revenue outlooks, California is proposing legislation that would restore the use of net operating losses for certain taxpayers sooner than anticipated. This may help reduce 2022 California tax liabilities for certain taxpayers, and provide planning opportunities. As always, get in touch with your BPM tax team to determine which strategy is optimal for your particular circumstances.
At BPM, we understand how gridlock in Washington is significantly impacting your tax planning. No one knows when the BBB Act will be passed — or even if it will be passed at all. That said, we are continually monitoring the situation and are working proactively with our clients to move forward despite the uncertainty. If you have any lingering concerns, please follow up with your BPM team as soon as possible so we can help you solve any challenges these developments might create for your situation.