Possible year-end tax changes and reminders for tax professionals

This is an important time for tax professionals – the midterm election is over and we’re approaching busy season. Now that the election is over, it’s possible we’ll see some year-end tax legislation. In this article, we’ll highlight possible priorities for Congress and what the related new tax legislation may include. We’ll also review some key items tax practitioners need to be aware of as they approach busy season.

Possible year-end tax legislation changes

Upcoming congressional leadership changes will impact tax legislation negotiations in the lame duck session. Congress is currently focused on an agreement to fund the federal government for the balance of fiscal year 2023. A short-term continuing resolution, passed in September, expires December 16. It is uncertain if an agreement on an omnibus appropriations bill can be passed in this session or if another short-term continuing resolution will result.  Further uncertainty exists regarding the successful passage of new tax legislation, which may be included as part of an omnibus appropriations bill. However, the lame duck session provides some incentive to pass legislative priorities of this Congress before the new Congress begins in January.

Here are possible year-end legislation changes.

Retirement

The House of Representatives version of a retirement bill is called Secure Act 2.0. The Senate has its own iterations; the EARN Act and The RISE and SHINE Act. Some of the provisions include:

• Automatic enrollment in retirement plans: employers currently have the option of adding employees to their retirement plans. Employers with 401(k) or 403(b) plans would be required to automatically enroll new eligible employees.
• Increase in required minimum distribution age: the required beginning date would gradually increase from age 72 up to 75 by 2032.
• Higher catch-up limits: the contribution limit would increase to $10,000 for those who have reached age 62, 63 or 64 by the end of the year and participate in 401(k) or 403(b) plans. The limit would be $5,000 for those who participate in SIMPLE plans.
• Student loan payments: employees making student loan payments would be allowed to receive matching employer contributions into their retirement.
• Enhancement of Saver’s Credit
• Improves coverage for part- time workers

Tax extenders

The following actions on certain expiring provisions are frequently reported as priorities for possible year-end legislation:

• Restoring the research and development current expense deduction that expired at the end of 2021
• Reversing the change to the net business interest expense limitation calculation that was effective in 2022
• Reversing the change that reduces the bonus depreciation rate in 2023
• Extension of the expanded child tax credit expired at the end of 2021

The following provisions expired at the end of 2021. It will be interesting to see if any of these are renewed:

• Three-year recovery period for racehorses under MACRS
• Accelerated depreciation for business property on Indian reservations
• Indian coal production credit
• Indian employment credit
• Mine rescue training credit
• Temporary increase in limit on cover over of rum excise taxes
• American Samoa economic development credit
• Expanded child and dependent care credit
• Increased exclusion for employer-provided dependent care assistance
• Special earned income tax credit rules for individuals without qualifying children
• Treatment of mortgage insurance premiums as deductible mortgage interest
• The $300/$600 Charitable contributions for non-itemizers
• Increased percentage limits for charitable contributions of cash

Opportunity zones

Investing in Opportunity Zone Funds is one of the few ways we can help our clients save tax dollars after the tax year has ended. Capital gains that are invested in a Qualified Opportunity Zone Fund within 180 days of recognition can be deferred until the earlier of December 31, 2026, or disposition of the fund investment. In addition, the deferred gain is effectively reduced 10% if the investment is made for at least five years and an additional 5% if the investment is made for at least seven years. If the fund investment is held for at least ten years, there is no gain upon sale of the fund.

The problem is that with a deemed recognition date of December 31, 2026, it is too late to enjoy the 10% and 5% gain reduction. The proposed bill, which has strong bi-partisan support, cures this ill by expanding the deferral period until December 31, 2028, and reducing the 5% period form seven years to six years.

Don’t forget that partners and S shareholders have until 180 days after the due date of the entity return (March 15) to invest capital gains passed through and not invested in an Opportunity Zone Fund by the pass-through.

1099-K reporting

The threshold for reporting has dropped from $20,000 and 200 transactions to $600. There is pending legislation that would restore the required reporting to the previous levels.

Key considerations for tax practitioners this busy season

Amid upcoming changes, there are key items that you as the tax practitioner need to keep in mind as you serve your clients this busy season.

First, the three -year statute of limitations will begin expiring in 2023 for employers desiring to claim the Employee Retention Credit on amended payroll tax returns. Tax practitioners may want to work with clients to make certain they have received all the refunds that are properly due.

If no year-end tax legislation is achieved on the items discussed in this article, practitioners should consider:

• Bonus deprecation drops to 80% next year and continues to decrease by 20% per year until it is gone.
• Research and development costs are no longer immediately deductible. Costs must be capitalized and amortized over five years for US activities and over 15 years for foreign activities.
• The business interest deduction under section 163(j) is calculated at 30% before EBIT in 2022. In 2021 it was 30% before EBITDA. As a result, it may be some businesses have a reduced interest deduction for 2022.

Effective tax practitioners are always up to date on tax legislation and how it impacts your clients. Explore Becker’s tax CPE courses to stay on top this busy season.

The content contained in this article is for informational purposes only and is not tax advice. You should consult a tax advisor for advice applicable to your situation.

References

1. Luscombe, Mark A. “Tax Strategy: Prospects for year-end tax legislation.” Accounting Today. November 8, 2022. Tax Strategy: Prospects for year-end tax legislation | Accounting Today
2. Rubin, Richard. “Tax Breaks for Retirement, Corporate Research on Congress’s Lame-Duck Agenda.” The Wall Street Journal. November 15, 2022. Tax Breaks for Retirement, Corporate Research on Congress’s Lame-Duck Agenda - WSJ
3. Warburton, Moira. “U.S. Senate has a lot of negotiating on government funding bill, Schumer says.” Reuters. December 6, 2022. https://www.reuters.com/world/us/us-senate-still-has-lot-negotiating-do-government-funding-bill-schumer-says-2022-12-06/